DBRS Finalises Provisional Ratings on Notes Issued by Fondo de Titulización de Activos (FTA) RMBS Santander 3

DBRS Ratings Limited (DBRS) has today finalised the provisional ratings on the following notes issued by Fondo de Titulización de Activos (FTA) RMBS Santander 3:

-- €5,395,000,000 Series A Notes at AA (sf)
-- €1,105,000,000 Series B Notes at BB (sf)
-- €975,000,000 Series C Notes at C (sf)

FTA RMBS Santander 3 (Santander 3) is a securitisation of a portfolio of prime residential mortgage loans including a portion of borrowers with higher-risk characteristics and secured by first-lien mortgages on properties in Spain, originated by Banco Santander SA (Santander) and Banco de Credito Español (Banesto), which is now part of Santander (rated “A”/R-1 (low) by DBRS). Santander 3 will use the proceeds of the Series A and B Notes issuance to fund the purchase of the mortgage portfolio. In addition, the Series C Notes proceeds will fund the reserve fund. The securitisation will take place in the form of a fund in accordance with Spanish Securitisation Law.

The ratings are based on a review by DBRS of the following analytical considerations:

-- The transaction’s capital structure and the form and sufficiency of available credit enhancement. The rated Series A Notes benefit from 32% of credit enhancement in the form of the €1,105 million (17%) subordination of the Series B Notes and €975 million (15%) of the reserve fund, which is available to cover senior fees, interest and principal of the Series A and B Notes. The Series A Notes also benefit from a fully sequential amortisation, where principal on the Series B Notes will not be paid until the Series A Notes have been redeemed in full. The Series C Notes will be repaid according to the reserve fund amortisation.

-- The main characteristics of the portfolio include: (1) 67.6% originated by Banesto and 32.4% by Santander; (2) 69.6% current unindexed weighted-average current loan-to-value (WA CLTV) and 102.1% indexed WA CLTV (as per Instituto Nacional de Estadistica (INE) Q4 2013 house price index); (3) top three portfolio geographical concentrations in Spain by property are: Andalusia (24.4%), Madrid (19.8%) and Catalonia (11.8%); (4) 8.5% loans in grace period; (5) 5.1% of non-national borrowers; (6) a high WA seasoning of 6.5 years, with 35.9% of loans originated after the peak of the housing market in 2008 and after; (7) 4.5% of loans originated through brokers; and (8) 1.6% second-home properties.

-- A variable interest rate linked to 12-month Euribor is paid by 93.6% of the mortgage portfolio and the remaining 6.4% pay a rate linked to IRPH (6.1%) or a fixed rate (0.3%). In contrast to the mortgage portfolio, the issued notes’ variable interest rate is linked to three-month Euribor. DBRS considers there to be limited basis risk in the transaction which is mitigated by (1) the historical positive spread between 12- and three-month Euribor in favour of 12-month Euribor; (2) the monies standing to the credit of the reserve fund; and (3) the available credit enhancement to cover for potential shortfalls from that mismatch. DBRS stressed the existing risk in its cash flow modelling.

-- DBRS classified 19.6% of the underlying borrowers as higher-risk borrowers. Higher-risk borrowers are those with a loan modification (19.5%) or those who had a missed payment within the past two years and an update of their loan contract within the same time (0.1%). Loan modifications are the result of a restructuring process where borrowers with less than three months in arrears were granted either one or more changes to their original loan agreements such as (1) the reduction in margin, (2) extension of maturity or (3) granting of a grace period. Typically, this restructuring occurs as a consequence of consolidating certain other debt contracts a borrower might have under the mortgage loan. Loan updates have occurred outside of any loan modification but can also include adjustments to the loan margin or maturity. Missed payments are typically some form of technical arrears, but DBRS was more concerned with the occurrence of both missed payments and loan updates for borrowers over the past two years. The longest grace period ends in 2019, and 8.5% of the mortgage loans are in a current grace period. All these loans have been subject to a modification. DBRS applied higher default probabilities to loans with these characteristics and adjusted its cash flow modelling for the loans with the current grace period in place.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing duties. DBRS was provided with the bank’s historical mortgage performance data as well as loan-level data for the mortgage portfolio. Details of the defaults, loss given default and expected losses resulting from DBRS credit analysis of the mortgage portfolio at AA (sf), BB (sf) and C (sf) stress scenarios are highlighted below.

In accordance with the transaction documentation, the Servicer is able to grant loan modifications without the consent of the management company within the range of permitted variations. According to the documentation, permitted variation includes the reduction of the loan margins down to a weighted average of 1.0% of the mortgage portfolio and maturity extension for 10% of the portfolio up to three years before legal final maturity in 2064. DBRS stressed the repayment of the portfolio for longer amortisation and margin compression in its cash flow modelling.

-- DBRS used a combination of default timing (front- and back-ended) curves, rising and declining interest rates and low, mid and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. Given the low prepayment level observed in Spain, currently below 5%, DBRS also tested a scenario with zero prepayments.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions.”

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Master European Residential Mortgage-Backed Securities Rating Methodology and the Jurisdictional Addendum (August 2014). Other methodologies and criteria referenced in this transaction are listed at the end of this press release and can be found on www.dbrs.com under 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 Securitisations in the Euro Area” at http://www.dbrs.com/research/239786/the-effect-of-sovereign-risk-on-securitisations-in-the-euro-area.pdf.

The sources of information used for this rating include Banco Santander S.A. and its agents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

To assess the impact of potential changes in the transaction’s parameters on the ratings, DBRS considered in addition to its base case further stress scenarios for its main rating parameters Probability of Default (PD) and Loss Given Default (LGD) in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes. The following scenarios constitute the parameters used to determine the ratings (the Base Case):

• In respect of the Series A Notes and a rating category of AA (sf), PD of 37.6% and the LGD of 54.9%.
• In respect of the Series B Notes and a rating category of BB (sf), PD of 21.9% and the LGD of 40.9%.
• In respect of Series C Notes and a rating category of C (sf), DBRS expects the rating of the Series C notes to remain at C (sf).

DBRS concludes that for the Series A Notes:

• A hypothetical increase of the PD by 25% and a constant LGD, ceteris paribus, would lead to a downgrade of the Series A Notes to AA (low) (sf).
• A hypothetical increase of the PD by 50% and a constant LGD, ceteris paribus, would lead to a downgrade of the Series A Notes to A (low) (sf).
• A hypothetical increase of both, the PD and the LGD by 25%, ceteris paribus, would lead to a downgrade of the Series A Notes to A (sf).
• A hypothetical increase of the PD by 50% and the LGD by 25%, ceteris paribus, would lead to a downgrade of the Series A Notes to BBB (low) (sf).
• A constant PD and hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series A Notes to A (high) (sf).
• A hypothetical increase of the PD by 25% and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series A Notes to BBB (high) (sf).
• A hypothetical increase of both, the PD and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series A Notes to BBB (sf).
In all other sensitivity scenario the ratings of the Series A Notes did not change from the assigned AAA (sf).

DBRS concludes that for the Series B Notes:
• A hypothetical increase of the PD by 50% and a constant LGD, ceteris paribus, would lead to a downgrade of the Series B Notes to B (high) (sf).
• A hypothetical increase of both, the PD and the LGD by 25%, ceteris paribus, would lead to a downgrade of the Series B Notes to BB (low) (sf).
• A hypothetical increase of the PD by 50% and the LGD by 25%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (sf).
• A constant PD and hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series B Notes to BB (low) (sf).
• A hypothetical increase of the PD by 25% and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (sf).
• A hypothetical increase of the PD by 50% and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series B Notes to below B (sf).
In all other sensitivity scenario the ratings of the Series B Notes did not change from the assigned BB (sf).

DBRS concludes that for the Series C Notes:
The Series C Notes were issued to fund the reserve fund which is meant to serve the transaction as first loss piece. Subject to this and the rating level of the Series C Notes at C (sf), a stress analysis is not appropriate.

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Initial Lead Analyst: Sebastian Hoepfner
Initial Final Rating Date: 19 November 2014
Initial Final Rating Committee Chair: Quincy Tang
Lead Surveillance Analyst: Elisa Scalco

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

• Legal Criteria for European Structured Finance Transactions
• Operational Risk Assessment for European Structured Finance Servicers
• Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
• Unified Interest Rate Model for European Securitisations