DBRS Assigns Final Ratings to FTA PYMES SANTANDER 9

DBRS Ratings Limited (“DBRS”) has today assigned final ratings to the Notes issued by FTA PYMES SANTANDER 9 (the “Issuer”), as follows:

• EUR 331.7 million Series A Notes: AA (sf)
• EUR 168.3 million Series B Notes: CCC (high) (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of bank loans originated by Banco Santander S.A. (“Santander” or the “Originator”) to small and medium-sized enterprises (“SMEs”) and self-employed individuals based in Spain. As of 3 April 2014, the transaction’s provisional portfolio included 3,333 loans to 3,184 obligors, totalling EUR 558 million. At closing, the Originator will select the final portfolio of EUR 500 million from the above mentioned provisional pool.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Legal Maturity Date in January 2041. The rating on the Series B Notes addresses the ultimate payment of interest and the ultimate payment of principal payable on or before the Legal Maturity Date in January 2041.

The provisional pool is highly exposed to the “Building & Development” industry, representing 27.1% of the outstanding balance. Such concentration in this sector represents a weakness of the transaction in DBRS’s view. “Business Equipment & Services” (9.4%) and “Retailers (except food & drug)” (8.3%) complete the top three industries based on the DBRS Industry classification. The provisional portfolio exhibits low obligor concentration. The top obligor and the largest ten obligor groups represent 0.9% and 6.1% of the outstanding balance, respectively. The top three regions for borrower concentration are Andalusia, Madrid and Catalonia representing approximately 21.0%, 15.1% and 15.1%, of the portfolio balance, respectively.

The portfolio is also exposed to loans that result from debt refinancing which are much riskier that the remaining portfolio, based on the internal annualised probability of default (“PD”) assigned by Santander. The exposure to refinanced loans is EUR 84.7 million or 15.2% of the provisional pool balance.

The portfolio is also concentrated in loan and client segments which historically have high default levels based on the historical performance data received. The historical data indicates that the worst performing loan segments are secured loans to “Carterizados” (borrowers to which the bank has a total risk exposure above EUR 500,000) and secured loans to “Estandardizados” (borrowers to which Santander has a total risk exposure below EUR 500,000). The exposure to these two segments represents 67.9% of the provisional pool outstanding balance. As a result, the base case PD used in the DBRS analysis is 10.6% which is significantly higher than that assumed for previous transactions. DBRS also recognises that the historical data includes restructured non-performing loans which are marked as defaulted on the historical data and which could lead to conservative PD estimates. However, Santander was unable to provide additional data to quantify this effect and as such DBRS has based its analysis on the data as provided.

These ratings are based upon DBRS’s review of the following items:
• The transaction structure, the form, and sufficiency of available credit enhancement, the portfolio characteristics.
-- At closing, the Series A Notes benefit from a total credit enhancement of 53.7%, which DBRS considers to be sufficient to support the AA (sf) rating. The Series B Notes benefit from a credit enhancement of 20.0%, which DBRS considers to be sufficient to support the CCC (high) (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund. In addition, the Notes also benefit from available excess spread.
-- The Reserve Fund will be allowed to amortise after the first two years if certain conditions – relating to the performance of the portfolio and deleveraging of the transaction – are met. The Reserve Fund cannot amortise below EUR 50 million.
• The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.
• An assessment of the operational capabilities of key transaction participants.
• The ability of transaction to withstand stressed cash flow assumptions and repay investors according to the approved terms. Interest and principal payments on the Series A Notes will be made quarterly on the 21st day of January, April, July and October, with the first payment date on 21 July 2014.
• The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the special purpose vehicle, as well as consistency with the DBRS “Legal Criteria for European Structured Finance Transactions”.

DBRS determined these ratings as follows, as per the principal methodology specified below:
• The PD for the Originator was determined using the historical performance information supplied. As stated above, DBRS assumed an annualised PD of 10.6% for this transaction.
• The assumed weighted average life (“WAL”) of the portfolio was 5.2 years.
• The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target ratings.
• The recovery rate was determined by considering the market value declines (“MVDs”) for Spain, the security level and type of the collateral. For the Series A Notes, DBRS applied the following recovery rates: 42.9% for secured loans and 15.8% for unsecured loans. For the Series B Notes, DBRS applied the following recovery rates: 67.0% for secured loans and 20.8% for unsecured loans.
• The break even rates for the interest rate stresses and default timings were determined using the DBRS cash flow model.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

All DBRS methodologies can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisation in the EURO Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the parties involved in the rating, including but not limited to the Originator, Banco Santander: S.A, the Issuer and Santander de Titulización S.G.F.T; S.A. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS determined key inputs used in our analysis based on historical performance data provided for the Originator and Servicer as well as analysis of the current economic environment. Further information on DBRS’s analysis of this transaction will be available in a rating report on http://www.dbrs.com or by contacting us at info@dbrs.com.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

These ratings concern newly issued financial instruments. It should be noted that provisional ratings were previously assigned before the Notes were issued.

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• Probability of Default Rates Used: Base Case PD of 10.6%, a 10% increase of the base case and a 20% increase of the base case PD.
• Recovery Rates Used: Base Case Recovery Rates of 37.1% at the AA (sf) stress level and 57.1% at the CCC (high) (sf) stress level for the Class A Notes and Class B Notes respectively, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS 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 each lead to a downgrade of the Series A Notes to A (high) (sf). 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 lead to a downgrade of the Series A Notes to A (high) (sf).

Regarding the Series B Notes, a hypothetical increase of the Base Case PD by 20% or a hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Series B Notes to CCC (low) (sf). 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 lead to a downgrade of the Series B Notes to CCC (low) (sf).

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see:
http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: María López
Initial Rating Date: 14 May 2014
Initial Rating Committee Chair: Simon Ross

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

“Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)”
“Legal Criteria for European Structured Finance Transactions”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Operational Risk Assessment for European Structure Finance Servicers”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”