Press Release

DBRS Morningstar Confirms Ratings of FT PYMES Santander 15

Structured Credit

December 03, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the notes issued by FT PYMES Santander 15 (the Issuer), as follows:

-- Series A Notes at A (high) (sf)
-- Series B Notes at CCC (low) (sf)
-- Series C Notes at C (sf)

The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal maturity date in April 2051. The ratings of the Series B and Series C Notes address the ultimate payment of interest and principal on or before the legal maturity date.

The rating confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the October 2021 payment date;
-- The one-year base case probability of default (PD), default and recovery rates based on the worst-case portfolio composition;
-- The current available credit enhancement to the Series A and Series B Notes to cover the expected losses assumed at their respective rating levels;
-- No early amortisation events have occurred so far; and
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The Series C Notes were issued to fund the reserve fund and are in a first-loss position supported only by available excess spread. Given the characteristics of the Series C Notes, as defined in the transaction documents, the default would most likely be recognised at maturity or following an early termination of the transaction.

The transaction is a cash flow securitisation collateralised by a portfolio of secured and unsecured term loans and credit lines originated by Banco Santander, S.A. (Santander), Banesto, and Banif (prior to their integration into Santander) to corporates, small and medium-sized enterprises (SME), and self-employed individuals based in Spain.

The transaction includes a 24-month revolving period, with the first amortisation date scheduled in April 2022. During the revolving period, the Issuer may acquire new loans and credit lines if they satisfy the eligibility criteria. To account for possible adverse changes in portfolio composition during the revolving period, DBRS Morningstar considered the limitations established in the eligibility criteria to create a worst-case portfolio that was used for the credit analysis.

PORTFOLIO PERFORMANCE
As of the October 2021 payment date, loans two to three months in arrears represented 0.1% of the outstanding portfolio balance, down from 0.8% in October 2020. The 90+ delinquency ratio was 0.4%, down from 0.9%, and the cumulative default ratio increased to 0.1%, up from 0.03% in the same period.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained its one-year base case PD assumption of 2.25%. DBRS Morningstar conducted a loan-by-loan analysis of the outstanding balance of the revolving pool of receivables but kept its default and recovery assumptions based on the worst-case portfolio composition.

CREDIT ENHANCEMENT
The Series A Notes benefit from a 27.0% credit enhancement provided by the subordination of the Series B Notes and the reserve fund. The Series B Notes benefit from a 5.5% credit enhancement provided by the reserve fund.

The reserve fund is available to cover senior fees and interest and principal on the Series A and Series B Notes. As of the October 2021 payment date, the reserve fund was at its target level of EUR 150.0 million. The reserve fund can amortise after two years from transaction closing if certain conditions related to the performance of the portfolio and deleveraging of the transaction are met, subject to the floor of EUR 75.0 million.

Santander acts as the account bank for the transaction. Based on the account bank’s reference rating of A (high), which is one notch below the DBRS Morningstar Long Term Critical Obligations Rating (COR) of Santander of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to Santander to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cashflow engine.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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 SME transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus.

As per DBRS Morningstar’s assessment, 6.1% and 22.2% of the outstanding portfolio balance represented industries classified in the mid-high and high-risk economic sectors, respectively. This led the underlying one-year base case PD to be multiplied by 1.5 and 2.0 times, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and more likely to be affected by the fallout of the pandemic on the economy.

DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolios. As of October 2021, only EUR 2.3 million or 0.08% of the outstanding balance of loans benefited from payment moratorium related to COVID-19.

For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 is the “Rating CLOs Backed by Loans to European SMEs” methodology (28 June 2021). 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.

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

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include investor reports provided by the management company, Santander de Titulización S.G.F.T., S.A., and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, DBRS Morningstar was 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.

The last rating action on this transaction took place on 10 December 2020, when DBRS Morningstar confirmed its ratings of the Series A, Series B, and Series C Notes at A (high) (sf), CCC (low) (sf), and C (sf), respectively.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at 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):
-- PD Rates Used: one-year base case PD of 2.25%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: recovery rate of 48.9% for secured loans and 16.3% for unsecured loans at the A (high) (sf) stress level for the Series A Notes. For the Series B Notes, at the CCC (low) (sf) rating level, DBRS Morningstar applied 70.3% recovery rate for secured loans and 21.5% recovery rate for unsecured loans.

DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Series A Notes to A (high) (sf).

With regards to the Series B Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at CCC (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Series B Notes at CCC (low) (sf).

The ratings on the Series C Notes would not be affected by a change in either the PD or the LGD.

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: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 4 December 2019

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: 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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