DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following notes to be issued by FT PYMES Santander 15 (the issuer):
-- Series A Notes rated A (high) (sf)
-- Series B Notes rated CCC (low) (sf)
-- Series C Notes rated C (sf)
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. (Banco Santander or the originator; rated A (high) with a Stable trend by DBRS Morningstar) to corporates, small and medium-size enterprises and self-employed individuals based in Spain. As of 14 November 2019, the transaction’s provisional portfolio included 32,102 loans and credit lines to 28,561 obligor groups, totalling EUR 3,676.5 million. At closing, the originator will select the final portfolio of EUR 3.0 billion from the provisional pool.
The portfolio also contains loans and credit lines originated by Banesto and Banif prior to their integration into Banco Santander, which was completed in April 2014.
The transaction has a revolving period of two years, during which time Banco Santander has the option to sell new loans or credit lines at par to the issuer on a quarterly basis as long as the additional purchases comply with eligibility criteria. However, the revolving period will end prematurely if replenishment termination events occur, such as the cumulative default rate reaching certain limits.
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 rating of the Series B Notes and Series C Notes addresses the ultimate payment of interest and principal on or before the legal maturity date.
Interest and principal payments on the notes will be made quarterly on the 20th of January, April, July and October, with the first interest payment date on 20 April 2020, while the first principal payment will only occur after the end of the revolving period. The notes will pay an interest rate equal to three-month Euribor plus 0.30%, 0.50% and 0.65% for the Series A Notes, Series B Notes and Series C Notes, respectively.
The ratings will be finalised upon receipt of an executed version of the governing transaction documents. To the extent that the documents and information provided to DBRS Morningstar differ from the executed version of the governing transaction documents, DBRS Morningstar may assign different final ratings to the notes.
During the revolving period, the transaction will acquire new loans and credit lines if they satisfy the eligibility criteria. To account for changes in portfolio composition, DBRS Morningstar considered the limitations established in the eligibility criteria to create a worst-case portfolio that was used for the analysis. The eligibility criteria fixed a relatively high limit regarding the NACE Code industry concentration: the maximum concentration in one industry will be 25.0% of the portfolio balance, and the top three industries will represent a 60.0% maximum of the portfolio balance.
The eligibility criteria also established a low minimum percentage of secured loans at 10.0% with a weighted average loan-to-value of 70.0%.
The eligibility criteria set relatively low obligor concentration limits. The exposure to the largest and top-ten largest borrower groups cannot exceed 0.85% and 6.5% of the outstanding portfolio balance, respectively.
The historical data provided by Banco Santander reflects the portfolio composition, which includes secured and unsecured loans as well as credit lines. Banco Santander also provides migration matrices from internal rating models and according to eligibility criteria the maximum weighted-average internal probability of default (PD) of the portfolio could be 1.50%. DBRS Morningstar applied a PD of 2.25% for this transaction.
The Series A Notes benefit from 25.0% subordination of the Series B Notes and the reserve fund. The Series B Notes benefit from 5.0% subordination of the reserve fund. The reserve fund will be funded through the issuance of the Series C Notes and is available to cover senior fees and interest and principal on the Series A and Series B Notes, the reserve fund will be allowed to amortise after the first two years if certain conditions related to the performance of the portfolio and deleveraging of the transaction are met. The reserve fund cannot amortise below EUR 75.0 million.
The transaction is exposed to some interest rate risk. Based on the interest rate distribution of the portfolio, DBRS Morningstar assumed a stressed basis of 65 basis points per year, reducing the spread of floating loans from day one.
The ratings are based on DBRS Morningstar’s “Rating CLOs Backed by Loans to European SMEs” methodology and the following analytical considerations:
-- The PD for the portfolio was determined using the historical performance information supplied, including the transition matrices and considering the eligibility criteria, which limits the maximum weighted-average PD during the revolving period to 1.50% based on Santander’s internal PD models. Considering the eligibility criteria is based on the originator’s internal PD, DBRS Morningstar determined the average annualised default rate, considering the transition matrices and applying a factor of 1.5 times to the maximum allowed weighted-average internal PD, resulting in a 2.25% as annual base-case PD.
-- The assumed weighted-average life (WAL) of the portfolio is 4.09 years.
-- The PD and WAL were used in the DBRS Morningstar SME Diversity Model to generate the hurdle rate for the respective ratings.
-- The recovery rate was determined by considering the market value declines for Spain, the security level and the type of collateral. For the Series A Notes, DBRS Morningstar applied a 48.9% recovery rate for secured loans and a 16.3% recovery rate for unsecured loans. For the Series B Notes, DBRS Morningstar applied an 70.3% recovery rate for secured loans and a 21.5% recovery rate for unsecured loans.
-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS Morningstar cash flow tool.
The rating of the Series C Notes is based upon DBRS Morningstar’s review of the following considerations:
-- The Series C Notes are in the first loss position and, as such, are highly likely to default.
-- Given the characteristics of the Series C Notes as defined in the transaction documents, the default most likely would only be recognised at the maturity or early termination of the transaction.
The transaction structure was analysed in a proprietary excel tool, considering the default rates at which the notes did not return all specified cash flows.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs”.
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with principal methodology.
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 these ratings include the parties involved in the ratings, including but not limited to the Originator, Banco Santander, the Issuer, and Santander de Titulización S.G.F.T., S.A.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis. However, this did not impact the rating analysis.
DBRS Morningstar was supplied with one or more third-party assessments.
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.dbrs.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):
-- PD Used: Base case PD of 2.25%, a 10.0% and 20.0% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 19.5% at the A (high) (sf) and 26.4% at the CCC (low) (sf) stress levels, a 10% and 20% decrease in the base case recovery rate, respectively. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% would not have impact on the Series A Notes or the Series B Notes. A hypothetical decrease of the base case recovery rate by 20%, ceteris paribus, would have no impact on the Series A Notes or the Series B Notes. A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10% would not have impact on the Series A Notes or the Series B Notes.
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, Sucursal en España are subject to EU and US regulations only.
Lead Analyst: María López, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 4 December 2019
DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
DBRS Ratings GmbH
Neue Mainzer Straße 75
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.
--Rating CLOs Backed by Loans to European SMEs
--Legal Criteria for European Structured Finance Transactions
--Interest Rate Stresses for European Structured Finance Transactions
--Rating CLOs and CDOs of Large Corporate Credit
--Cash Flow Assumptions for Corporate Credit Securitizations
--Operational Risk Assessment for European Structured Finance Servicers
--Operational Risk Assessment for European Structured Finance Originators
--European RMBS Insight: Spanish Addendum
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 email@example.com.