Press Release

DBRS Morningstar Assigns Provisional Ratings to FT RMBS Santander 7

RMBS

July 08, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by FT RMBS Santander 7 (the Issuer):

-- Class A Notes at AA (sf)
-- Class B Notes at BB (sf)

The provisional rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date. The provisional rating on the Class B Notes addresses the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date.

The Class A and Class B Notes will be issued at closing to finance the purchase of a portfolio of first-lien residential mortgage loans originated by Banco Santander SA (Santander; rated A (high) with a Stable trend by DBRS Morningstar); Banco Español de Crédito, S.A. (Banesto); and Banco Popular, S.A. (Popular). The mortgage loans are secured over residential properties located in Spain. Santander will be the Servicer, while Santander de Titulización SGFT, SA (the Management Company) will manage the transaction.

Both Banesto and Banco Popular are a part of Santander. In 1994, Santander acquired majority ownership of Banesto, bringing it into the Santander Group. Since then, Santander increased its ownership of Banesto until its absorption in April 2013. In June 2017, the Single Resolution Board (SRB) and the Fondo de Reestructuración Ordenada Bancaria (FROB) resolved Popular and the bank was transferred to Santander, which finally absorbed Popular in September 2018. Santander has managed the mortgage loans since the absorption dates.

The Class A Notes benefit from the EUR 530 million (10.0%) subordination of the Class B Notes plus the EUR 265 million (5.0%) reserve fund, which is available to cover senior expenses as well as interest and principal on the Class A Notes until paid in full. The reserve fund will amortise with a target equal to the lower of EUR 265 million and 10.0% of the outstanding balance of the Class A and Class B Notes, subject to a floor of EUR 132.5 million. The reserve fund will not amortise if certain performance triggers are breached. The Class A Notes will benefit from full sequential amortisation whereas principal on the Class B Notes will not be paid until the Class A Notes have been redeemed in full. Additionally, the Class A Notes principal will be senior to the Class B Notes interest payments in the priority of payments.

DBRS Morningstar was provided with a provisional portfolio equal to EUR 5.5 billion as of 14 June 2021 (the cut-off date), which consisted of 43,360 loans extended to 42,606 borrowers. Most of the loans in the portfolio (80.6%) were included in previous Santander RMBS funds that have already been cancelled, resulting in a high WA seasoning of 11.9 years. The weighted-average (WA) original loan-to-value (LTV) ratio stands at 86.6% whereas the WA current indexed LTV is 87.7%. The mortgage loan portfolio is distributed among the Spanish regions of Andalusia (22.2% by current balance), Madrid (20.4%), and Catalonia (13.2%). 15.2% of the loans are classified as second homes. All the loans in the pool amortise on a monthly basis, with no interest-only loans. Of the portfolio balance, 11.7% of the loans were granted to self-employed borrowers and 4.2% to Santander employees. As of the cut-off date, 0.55% of the mortgage loans were no more than 30 days in arrears. The WA coupon of the mortgages is 0.63%.

The Servicer is allowed to grant loan renegotiations for margin compressions, change of interest rate type, extension of maturity, and payment holidays due to legal or sector moratoria, without consent of the Management Company. These permitted variations are included in the transaction’s documents, and limited to a portion of the pool in most cases. Furthermore, loans representing 18.5% of the portfolio currently benefit from margin or interest rate reduction due to cross selling of Santander products, a benefit which can increase in the future for some of these loans. DBRS Morningstar extended the maturity for loans representing 10% of the portfolio and decreased the margin of the loans in the portfolio in its cash flow analysis.

Currently, 94.98% of the portfolio are floating-rate loans linked to 12-month Euribor, while 3.96% are linked to other Spanish indices (either IRPH or TRH). The remaining 1.06% of the portfolio are fixed rate loans. The notes are floating rate linked to three-month Euribor. Both the interest rate risk and the basis risk mismatch will remain unhedged.

Santander acts as the treasury account bank. The transaction’s account bank agreement requires the Management Company to find (1) a replacement account bank or (2) an account bank guarantor, upon loss of an applicable A (low) account bank rating. DBRS Morningstar’s Long Term Critical Obligations Rating (COR) and Long-Term Deposits rating on Santander are AA (low) and A (high), respectively, as of the date of this press release. The applicable account bank rating is the higher of one notch below the COR, and the Long-Term Deposits rating on Santander.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of Santander’s capabilities with regard to originations, underwriting, and servicing. DBRS Morningstar was provided with Santander’s historical mortgage performance data as well as loan-level data for the mortgage portfolio. DBRS Morningstar was not supplied with an Agreed Upon Procedures report. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss levels on the mortgage portfolio, which are used as inputs in the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with DBRS Morningstar’s “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions in the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional conditional prepayment rate sensitivity scenarios.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The transaction’s legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain of “A” with a Stable trend as of the date of this press release.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for 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, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in probability of default for certain borrower characteristics, and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential high levels of payment holidays in the portfolio.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 methodology applicable to the ratings are the “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: Spanish Addendum” (6 July 2021).

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

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

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 this rating include Santander and Santander de Titulización, S.G.F.T., S.A. DBRS Morningstar was provided with loan-level data as of 14 June 2021 and historical performance data (static delinquencies) covering the period from January 2004 to September 2020. These data only included loans with an original LTV > 80% and originated by Santander.

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

DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the 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 an expected to be issued new 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- In respect of the Class A Notes, the PD of 24.3% and LGD of 55.9%, corresponding to a AA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 10.7% and LGD of 43.6%, corresponding to a BB (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to B (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to B (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to CCC (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 July 2021

DBRS Ratings GmbH, Sucursal en España
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Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
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: http://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: http://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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