Press Release

DBRS Morningstar Finalises Provisional Ratings on FT RMBS Prado VIII

RMBS

May 06, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by FT RMBS Prado VIII (FT Prado VIII or the Issuer):

-- Class A Notes at AAA (sf)
-- Class Z Notes at AAA (sf)
-- Class B Notes at A (high) (sf)

The ratings on the Class A and Class Z Notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in March 2055. The rating on the Class B Notes addresses the timely payment of interest once most senior and the ultimate repayment of principal on or before the legal final maturity date. DBRS Morningstar does not rate the Class C Notes.

FT Prado VIII is a securitisation of residential mortgage loans secured by first-lien mortgages originated by the Union de Créditos Inmobiliarios S.A., E.F.C (UCI or the Seller) in Spain. The Issuer used the proceeds from the issuance of the Class A, Class Z, Class B, and Class C Notes to fund the purchase of the mortgage portfolio from the Seller. UCI provided a separate additional subordinated loan to fund the reserve fund. The securitisation took place in the form of a fund, in accordance with Spanish securitisation law.

The originator and servicer of the transaction is UCI, which is jointly owned by Banco Santander SA (Santander) and BNP Paribas SA. Santander is the account bank and BNP Paribas, Securities Services (Spanish Branch) is the principal paying agent.

DBRS Morningstar’s ratings are based upon a review of the following analytical considerations:

-- The transaction’s capital structure and the available credit enhancement. The Class A Notes benefit from (20.4%) subordination provided by the Class Z, Class B, and Class C Notes. The Class Z Notes benefit from (10.0%) subordination provided by the Class B and Class C Notes. The Class B Notes beneit from (4.5%) subordination provided by the Class C Notes. The notes beneit from an amortising reserve fund with a target amount equal to 2.0% of the outstanding balance of the mortgage portfolio, funded through the subordinated loan, which could amortise up to a level of 0.25% of the original portfolio balance. The reserve fund provides liquidity support and is available to cover senior expenses as well as interest on the Class A, Class Z, and Class B Notes. At maturity, the reserve will be available to cover principal payments on the notes.

-- The Class A target amortisation amount is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the non-defaulted collateral. If a turbo amortisation event occurs then all collections will be applied towards payment of Class A Notes principal until it is paid in full after the payment of the senior fees, the interest due on the Class A, Class Z, and Class B Notes (if a Class B interest deferral event has not occurred), and the replenishment of the reserve fund. The Class Z target amortisation amount (once the Class A Notes have been redeemed in full) is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the non-defaulted collateral. If a turbo amortisation event occurs then all collections will be applied towards payment of the Class Z Notes principal until it is paid in full after the payment of the senior fees, the interest due on the Class Z and Class B Notes (if a Class Z interest deferral event has not occurred), and the replenishment of the reserve fund. The Class B target amortisation amount (once the Class A and Class Z Notes have been redeemed in full) is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the non-defaulted collateral. If a turbo amortisation event occurs then all collections will be applied towards the payment of the Class B Notes principal until paid in full after the payment of the senior fees, the interest due on the Class B Notes, and the replenishment of the reserve fund.

-- The turbo amortisation event will occur when the cumulative default ratio is greater than or equal to 1% one year after the closing date, 2% two years after the closing date, 3% three years after the closing date, 4% four years after the closing date, and 5% five years after the closing date.

-- DBRS Morningstar analysed the final portfolio, which was equal to EUR 480 million as of 28 April 2021, using the European RMBS Insight Model (the Model) to estimate the defaults and losses of the portfolio. DBRS Morningstar divided the portfolio into two sub-pools. The first sub-pool comprises 89.1% of the portfolio by loan balance. The second sub-pool, which comprises the remaining 10.9% of the portfolio, includes non-VPO loans. Both sub-pools were assigned a Spanish Underwriting Score of 2.

-- The main characteristics of the final portfolio include (a) the 67.9% weighted-average original loan-to-value (LTV) and 62.3% weighted-average current LTV; (b) the top three geographical concentrations of Catalonia (39.0% of the portfolio by loan balance), Madrid (27.3%), and Andalusia (16.8%); (c) the weighted-average loan seasoning of 4.5 years; (d) the weighted-average remaining term of the portfolio is 25.7 years, with 5.0% of the loans having a remaining term greater than 30 years; and (e) none of the mortgage loans securitised have been in arrears for more than 30 days in the past or have been restructured. Finally, at closing, no loans under payment moratoria were sold to the Issuer.

-- The loans are primarily floating-rate mortgages linked to 12-month Euribor (34.0%) or Índice de Referencia de Préstamos Hipotecarios (IRPH) (11.4%). Approximately 40.1% of the portfolio comprises fixed-rate loans with a compulsory switch to floating while 14.5% of the portfolio comprises fixed-rate-for-life loans. The current weighted-average interest rate of the loans that are fixed to floating rate is 2.4%. The fixed-rate loans with a compulsory switch to floating will revert to 12-month Euribor after the end of their fixed-rate period. Fixed-rate-for-life loans have a weighted-average interest rate of 2.8%. The notes are floating-rate liabilities indexed to three-month Euribor. The Issuer has entered an interest rate cap with BNP Paribas to mitigate the interest rates mismatch between the fixed-rate loans and the three-month Euribor paid on the notes. Under the Cap Agreement, the Issuer will pay an initial premium to BNP Paribas and the Bank will pay to the Issuer the positive difference between the strike rate (3%) and the current three-month Euribor rate on each payment date during the first five years of the transaction’s life. In addition, the three-month Euribor rate was capped at 2.5% for the Class B and Class C Notes at closing and for the Class A Notes after the step-up date.

-- BNP Paribas is the eligible cap counterparty for this transaction. DBRS Morningstar’s rating of BNP Paribas is consistent with the criteria in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

-- The loans in the portfolio are paying monthly instalments with a weighted-average reset interval of six months, while the Class A, Class Z, Class B, and Class C Notes pay a quarterly coupon. Hence, there is some basis risk in the transaction that is not hedged. As a mitigant, amounts standing in the reserve fund are also available to cover the interest rate and basis risk for the Class A, Class Z, and Class B Notes. DBRS Morningstar stressed the interest rates as described in its “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS Morningstar also stressed the spread between IRPH and Euribor in its cash flow analysis.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing responsibilities. DBRS Morningstar was provided with UCI’s historical mortgage performance data. Details of the portfolio default rate (PD), loss given default (LGD), and expected losses (EL) resulting from DBRS Morningstar’s credit analysis of the mortgage portfolio at AAA (sf) and A (high) (sf) stress scenarios are detailed below.

-- In accordance with the transaction documentation, the servicer can grant loan modifications without consent of the management company within the range of permitted variations. Floating-rate loans can be renegotiated to fixed-rate loans up to a maximum of 5% of the initial balance of the portfolio; the margin can be reduced to 0.75 basis points (bps) for loans linked to Euribor and the maturity of the loan can be extended to the final maturity date of the notes. DBRS Morningstar has considered this permitted variation and factored them in its cash flow analysis.

-- The transaction’s account bank agreement and respective replacement triggers require Santander, acting as treasury account, to find (1) a replacement account bank or (2) an account bank guarantor upon the loss of an “A” account bank applicable rating. The DBRS Morningstar Long Term Critical Obligations Rating (COR) of Santander is AA (low), while the DBRS Morningstar rating for Santander’s Long-Term Issuer Rating is A (high).

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many structured finance transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, additional stresses to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings in this transaction are the “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: Spanish Addendum” (26 August 2020).

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

An asset and a cash flow analysis were both conducted.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include those provided by UCI and its representatives. DBRS Morningstar was provided with loan-level data for both the completion and offer pipeline loans as of 28 April 2021 and historical performance data (delinquencies, defaults, recoveries, payment data, and loan level repossession data) covering the period from January 2001 to December 2020.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):
-- In respect of the Class A Notes, a PD of 24.2% and LGD of 40.9%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class Z Notes, a PD of 24.2% and LGD of 40.9%, corresponding to the AA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 17.8% and LGD of 32.3%, corresponding to the A (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class Z Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 20 April 2021

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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