DBRS Assigns Provisional Ratings to FTA PYMES SANTANDER 10

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes issued by FTA PYMES SANTANDER 10 (the Issuer):

EUR 2,907 million Series A Notes: AA (high) (sf) (the Series A Notes)
EUR 893 million Series B Notes: BB (high) (sf) (the Series B Notes)
EUR 760 million Series C Notes: C (sf) (the Series C Notes, together, the Notes)

The transaction is a cash flow securitisation collateralised by a portfolio of term loans and credit lines by Banco Santander, S.A. and Banco Español de Crédito, S.A. (Banco Santander and Banesto, together the Originators) to small and medium-sized enterprises (SMEs) and self-employed individuals based in Spain. As of 15 October 2014, the transaction’s provisional portfolio included 50,411 loans and credit lines to 45,119 obligors, totalling EUR 4,215.2 million. At closing, the Originator will select the final portfolio of EUR 3,800 million from the above-mentioned provisional pool.

This is the first transaction in the FTA PYMES Santander series that contains loans originated by Banesto. Banesto has been part of the Banco Santander Group since 1994. At the end of 2012, Banco Santander decided to acquire the remaining shares of Banesto it did not own and absorb Banesto through a merger. The full integration of Banesto into Banco Santander was completed in April 2014.

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 August 2057. The ratings on the Series B and Series C Notes address the ultimate payment of interest and the ultimate payment of principal payable on or before the Legal Maturity Date in August 2057.

The provisional pool is moderately exposed to the “Building & Development” industry, representing 17.5% of the outstanding balance, “Food products” (9.7%) and “Business Equipment & Services” (9.2%) 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 0.7% and 5.7% of the outstanding balance, respectively. The top three regions for borrower concentration are Madrid, Catalonia and Andalusia representing approximately 23.6%, 15.5% and 14.4%, of the portfolio balance, respectively.

The historical data provided by Santander distinguishes between “normal” loans and credit lines and loans that have been refinanced (refinanciados). The performance of both asset types is very different and for that reason DBRS uses two distinct probability of default (PD) for each. Loans classified as refinanced represent 10.3% of the outstanding balance of the provisional pool and will not represent more than 10.3% of the final portfolio. DBRS assumed a PD of 19.8% for such loans and a PD of 4.4% for the remaining portfolio.

The above ratings are provisional. Final ratings will be issued upon receipt of executed versions of the governing transaction documents. To the extent that the documents and information provided by FTA PYMES Santander, Santander de Titulización, S.G.F.T., S.A. and Banco Santander, S.A. to DBRS as of this date differ from the executed versions of the governing transaction documents, DBRS may assign lower final ratings to the Notes, or may avoid assigning final ratings to the Notes altogether.

These ratings are based upon DBRS’s review of the following items:
• The transaction structure, the form and sufficiency of available credit enhancement and the portfolio characteristics.
• At closing, the Series A Notes benefit from a total credit enhancement of 43.5%, which DBRS considers to be sufficient to support the AA (high) (sf) rating. The Series B Notes benefit from a credit enhancement of 20%, which DBRS considers to be sufficient to support the BB (high) (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund. In addition, the Series A and Series B Notes also benefit from available excess spread.
• The Series C Notes have been issued for the purpose of funding the EUR 760 million Reserve Fund.
• 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 380 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 20th day of February, May, August and November with the first payment date on 20 February 2015.
• 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. For this transaction DBRS assumed two annualised PD, a PD of 4.4% for “normal” loans, and a PD of 19.8% for refinanced loans.
• The assumed weighted average life (WAL) of the portfolio was 2.1 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: 42.6% for secured loans and 15.8% for unsecured loans. For the Series B Notes, DBRS applied the following recovery rates: 61.1% 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.
• The rating of the Series C Notes is based upon DBRS’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.

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.

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 4.4% for “normal” loans and 19.8% for “refinanced” loans, a 10% increase of the base case and a 20% increase of the base case PD.
• Recovery Rates Used: Base Case Recovery Rates of 20.9% at the AA (high) (sf) stress level and 28.6% at the BB (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% does not have any impact on the rating of the Series A Notes and a hypothetical decrease of the recovery rate by 20% would lead to a downgrade of the Series A Notes to AA (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% does not have any impact on the rating of the Series A Notes.

Regarding the Series B Notes, a hypothetical increase of the Base Case PD by 20% would lead to a downgrade of the Series B Notes to BB (sf) and a hypothetical decrease of the Base Case Recovery Rate by 20% does not have any impact on the rating of 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 lead to a downgrade of the Series B Notes to BB (sf).

Regarding the Series C Notes, the stress analysis is not appropriate.

It should be noted that the interest rates and other parameters that would normally vary with the 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.

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

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

Initial Lead Analyst: María López
Initial Rating Date: 25 November 2014
Initial Rating Committee Chair: Jerry van Koolbergen

DBRS Ratings Limited
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London, EC3R 7AA
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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”
“Operational Risk Assessment for European Structure Finance Servicers”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“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”