DBRS Morningstar Confirms Credit Ratings on FT RMBS Santander 6 and FT RMBS Santander 7

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the bonds issued by FT RMBS Santander 6 (Santander 6) and FT RMBS Santander 7 (Santander 7) as follows:

Santander 6
-- Class A notes at AAA (sf)
-- Class B notes at BB (high) (sf)

Santander 7
-- Class A Notes at AA (high) (sf)
-- Class B Notes at BB (high) (sf)

The credit ratings on the Class A notes in both transactions address the timely payment of interest and the ultimate repayment of principal by the respective legal final maturity date in December 2059 (Santander 6) and December 2063 (Santander 7). The credit ratings on the Class B notes in both transactions address the ultimate payment of interest and principal by the respective legal final maturity dates.

The confirmations of credit ratings follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses as of the respective payment dates (May 2023 for both transactions);
-- Updated portfolio default rates (PD), loss given default (LGD), and expected loss assumptions on the remaining pools of receivables; and
-- Current available credit enhancement to the rated notes in both transactions to cover the expected losses at their respective credit rating levels.

The transactions are securitisations of Spanish first-lien residential mortgage loans originated by Banco Santander SA (Santander), Banco Popular Español, S.A., and Banco Español de Crédito, S.A. The mortgage loans are secured over residential properties located in Spain. Santander acts as the servicer of the portfolios of both transactions.

PORTFOLIO PERFORMANCE
Santander 6
As of the May 2023 payment date, loans two to three month in arrears represented 0.3% of the outstanding portfolio balance, up from 0.2% in May 2022. Loans more than 90 days in arrears represented 0.7%, up from 0.5% in the same period, while the cumulative default ratio increased to 2.4%.

Santander 7
As of the May 2023 payment date, loans two to three month in arrears represented 0.2% of the outstanding portfolio balance, up from 0.1% in May 2022. Loans more than 90 days in arrears represented 0.6%, up from 0.2% in the same period, while the cumulative default ratio was at 1.0%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pools of receivables in both transactions and updated its base case PD and LGD assumptions to 5.5% and 34.1%, respectively, for Santander 6, and to 3.2% and 31.3%, respectively, for Santander 7.

CREDIT ENHANCEMENT
In both transactions, the credit enhancement to the Class A notes is provided through the subordination of the Class B notes and the reserve fund. The credit enhancement to the Class B notes is provided through the reserve fund.

As of the May 2023 payment date, the credit enhancements to the Class A and Class B notes in Santander 6 were 27.0% and 6.1%, respectively, up from 23.7% and 5.4%, respectively, in May 2022. As of the May 2023 payment date, the credit enhancements to the Class A and Class B notes in Santander 7 were 17.2% and 5.2%, respectively, up from 15.4% and 4.6%, respectively, in May 2022.

The transactions benefit from reserve funds with the target level of EUR 225 million (Santander 6) and EUR 265 million (Santander 7), which are available to cover senior expenses as well as interest and principal payments on the rated notes until they are paid in full. The reserve funds in both transactions were funded at closing via a subordinated loan and will start amortising three years after closing, up to a floor of EUR 112.5 million. The reserve funds will not amortise if certain performance triggers are breached, if they were used on any payment date and are under their target level, or until they reach 10% of the outstanding balance of the Class A and Class B notes in each transaction.

As of the May 2023 payment date, the reserve funds were at EUR 208.9 million for Santander 6 and EUR 228.0 million for Santander 7. Both reserve funds were below their respective target levels as they were used to meet the respective Class A notes target amortisation amounts according to the transaction documents.

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

The rating on the Class B notes issued by FT RMBS Santander 7 at BB (high) (sf) materially deviates from the higher rating implied by the quantitative model. DBRS Morningstar considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a quantitative model that is a substantial component of a rating methodology. In this case, the rating action takes into account the current level of interest shortfall on the Class B notes, where interest payments have been deferred since the November 2022 payment date. DBRS Morningstar notes that such deferrals are permissible until the maturity date and considers such interest deferrals to be temporary in nature. DBRS Morningstar will continue to monitor the situation and may take positive rating actions once cumulative interest shortfalls reduce.

DBRS Morningstar’s credit ratings on the Class A and Class B notes in both transactions address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-credit ratings.

DBRS Morningstar analysed the transactions structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in these transactions are listed at the end of this press release.

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

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating actions.

For a more detailed discussion of the sovereign risk impact on structured finance credit 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/401817/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-credit ratings.

The sources of data and information used for these credit ratings include transaction reports provided by Santander de Titulización, SGFT, 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 credit 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 credit ratings to be of satisfactory quality.

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

The last credit rating action on these transactions took place on 14 July 2022, when DBRS Morningstar upgraded the credit ratings on the Class A and Class B notes in both transactions as follows: the Class A notes to AAA (sf) from AA (low) (sf) and the Class B notes to BB (high) (sf) from CCC (high) (sf) in Santander 6; the Class A Notes to AA (high) (sf) from AA (sf) and the Class B Notes to BB (high) (sf) from BB (sf) in Santander 7. DBRS Morningstar also removed the Under Review with Positive Implications status on the Class A and Class B notes in both transactions.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the Base Case):
-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans are 5.5% and 34.1%, respectively for Santander 6.
-- The base case PD and LGD of the current pool of loans are 3.2% and 31.3%, respectively for Santander 7.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the credit rating on the Class A notes in Santander 6 would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating on the Class A notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the Class A notes would be expected to fall to AA (high) (sf).

Santander 6
Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)

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

Santander 7
Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

Class B Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit 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://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit 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 Dates:
Santander 6: 9 July 2020
Santander 7: 8 July 2021

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.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-credit ratings.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v 6.0.0.0, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (1 March 2023), https://www.dbrsmorningstar.com/research/410420/european-rmbs-insight-spanish-addendum.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.

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].