DBRS Morningstar Confirms and Upgrades Ratings on Four RMBS Santander Transactions

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the bonds issued by four Santander Spanish residential mortgage-backed securities (RMBS) transactions:

FTA RMBS Santander 1 (SAN1):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FTA RMBS Santander 3 (SAN3):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes upgraded to B (high) (sf) from B (low) (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 4 (SAN4):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes upgraded to B (sf) from B (low) (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 5 (SAN5):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes upgraded to B (low) (sf) from CCC (sf)
-- Series C Notes confirmed at C (sf)

In each transaction, the ratings on the Series A Notes address the timely payment of interest and ultimate payment of principal on or before the respective legal final maturity dates. The ratings on the Series B Notes and Series C Notes address the ultimate payment of interest and principal on or before the respective legal final maturity dates.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performances, in terms of delinquencies, defaults and losses.
-- Portfolio default rates (PD), loss given default (LGD) and expected loss assumptions on the remaining pools of receivables.
-- Current available credit enhancement to the Series A and Series B Notes to cover the expected losses at their respective rating levels. The Series C Notes of each transaction were issued to fund the cash reserve 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.

All four transactions are securitisations of Spanish first-lien residential mortgage loans and include a portion of borrowers with higher-risk characteristics. The pool of SAN1 was originated and is serviced by Banco Santander S.A. (Santander). The pools of SAN3 and SAN4 were originated by Santander and Banco de Crédito Español (Banesto, integrated in Santander since 2013) and are serviced by Santander. The pool of SAN5 is originated by Santander, Banesto and Banco Banif S.A.U. and is also serviced by Santander.

PORTFOLIO PERFORMANCE
The portfolios are performing within DBRS Morningstar’s expectations. As of the latest payment dates, the 90+ delinquency ratios stood at 1.0%, 0.7%, 0.9%, 1.0% of the outstanding collateral pools of SAN1, SAN3, SAN4 and SAN5, respectively. The cumulative default ratios were 4.0%, 2.5%, 2.0%, and 1.3%, computed on the original portfolio balances of SAN1, SAN3, SAN4 and SAN5, respectively.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted loan-by-loan analyses on the remaining collateral pools of receivables and updated its PD and LGD assumptions as follows:

-- In SAN1, the base case PD and LGD are 12.3% and 31.0%, respectively;
-- In SAN3, the base case PD and LGD are 7.5% and 34.3%, respectively;
-- In SAN4, the base case PD and LGD are 9.2% and 35.3%, respectively;
-- In SAN5, the base case PD and LGD are 10.9% and 32.2%, respectively.

CREDIT ENHANCEMENT
The credit enhancements available to the Series A and B Notes continue to increase as the transactions continue to deleverage. The Series C Notes funded the reserve funds and hence do not benefit from credit enhancement.

The credit enhancements consist of the overcollateralisation provided by the outstanding collateral portfolios and include the Reserve Funds in all transactions. The credit enhancements were as follows:

-- In SAN1, the Series A and Series B Notes credit enhancements were 47.1% and 3.9% as of the June 2019 payment date, compared with 44.2% and 3.7% as of the September 2018 payment date;
-- In SAN3, the Series A and Series B Notes credit enhancements were 41.6% and 6.1% as of the August 2019 payment date, compared with 38.2% and 5.4% as of the August 2018 payment date;
-- In SAN4, the Series A and Series B Notes credit enhancements were 33.8% and 5.8% as of the June 2019 payment date, compared with 31.7% and 5.4% as of the September 2018 payment date;
-- In SAN5, the Series A and Series B Notes credit enhancements were 33.7% and 6.1% as of the July 2019 payment date, compared with 30.7% and 5.4% as of the July 2018 payment date.

The reserve funds were funded through the issuances of junior series and are available to cover principal losses, senior fees and interest shortfall on the rated Notes. As of the latest payment dates, the reserves were at EUR 32.0 million in SAN1, EUR 265.5 million in SAN3, EUR 123.1 million in SAN4 and EUR 57.7 million in SAN5. None of the reserve funds are at their target levels but they have been increasing over the last year in all transactions.

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

The transaction structures were analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology”. 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 rating actions.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.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 Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for the ratings include investor 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 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 actions on the transactions took place on 5 October 2018, as follows:

-- SAN1: Series A Notes upgraded to AAA (sf) from AA (sf); Series B Notes confirmed at CCC (sf); Series C Notes confirmed at C (sf).
-- SAN3: Series A Notes upgraded to AAA (sf) from AA (sf); Series B Notes upgraded to B (low) (sf) from CCC (sf); Series C Notes confirmed at C (sf).
-- SAN4: Series A Notes upgraded to AA (sf) from A (high) (sf); Series B Notes upgraded to B (low) (sf) from CCC (sf); Series C Notes confirmed at C (sf).
-- SAN5: Series A Notes upgraded to AA (sf) from A (high) (sf); Series B Notes confirmed at CCC (sf); Series C Notes confirmed at C (sf).

The lead analyst responsibilities for all four transactions have been transferred to Shalva Beshia.

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

To assess the impact of changing the transactions’ parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pools based on a review of the current assets.
Adverse changes to asset performances may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- In SAN1, the base case PD and LGD of the pool of mortgages are 12.3% and 31.0%, respectively. At the AAA (sf) rating level, the corresponding PD is 36.0% and the LGD is 51.4%.
-- In SAN3, the base case PD and LGD of the pool of mortgages are 7.5% and 34.3%, respectively. At the AAA (sf) rating level, the corresponding PD is 27.7% and the LGD is 54.6%.
-- In SAN4, the base case PD and LGD of the pool of mortgages are 9.2% and 35.3%, respectively. At the AA (sf) rating level, the corresponding PD is 27.4% and the LGD is 51.0%.
-- In SAN5, the base case PD and LGD of the pool of mortgages are 10.9% and 32.2%, respectively. At the AA (sf) rating level, the corresponding PD is 30.7% and the LGD is 48.1%.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. Considering SAN1 as an example, if the LGD increases by 50%, the rating of the Series A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series 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 rating of the Series A Notes would be expected to remain at AAA (sf).

-- The Risk Sensitivity overview below illustrates the 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 rating of the Series A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series 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 rating of the Series A Notes would still be expected to remain at AAA (sf).

SAN1: Series 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)
-- 50% 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 and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

SAN1: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CC (sf)
-- 25% increase in PD, expected rating of CC (sf)
-- 50% increase in PD, expected rating of CC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of below CC (sf)

SAN3: Series 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)
-- 50% 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 and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

SAN3: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)

SAN4: Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (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 AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

SAN4: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

SAN5: Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (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 AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

SAN5: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of CCC
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

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

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.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
SAN1 Initial Rating Date: 18 June 2014
SAN3 Initial Rating Date: 17 November 2014
SAN4 Initial Rating Date: 24 June 2015
SAN5 Initial Rating Date: 10 December 2015

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland

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.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- 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: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.