DBRS Confirms Ratings on FTA, Santander Hipotecario 7

DBRS Ratings Limited (DBRS) has today taken the following rating actions on the bonds issued by FTA, Santander Hipotecario 7 (the Issuer):
-- Series A notes confirmed at AA (high) (sf);
-- Series B notes confirmed at BBB (high) (sf);
-- Series C notes confirmed at C (sf)

The confirmation of the ratings of the Series A, Series B and Series C notes is based on the following analytical considerations, as described more fully below:
-- Portfolio performance, in terms of delinquencies and defaults, as of the December 2014 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Incorporation of a sovereign-related stress component in the rating analysis to address the impact of macroeconomic variables on collateral performance given the long-term foreign and local currency rating of A (low) for the Kingdom of Spain.
-- Current available credit enhancement to the Series A notes to cover the expected losses at the AA (high) (sf) rating level, and to the Series B notes to cover the expected losses at the BBB (high) (sf) rating level. The Series C notes were issued to fund the reserve fund and are in a first loss position supported only by available excess spread.

FTA, Santander Hipotecario 7 is a securitisation of a portfolio of residential mortgage loans originated and serviced by Banco Santander SA (Santander).

The 90+ delinquency ratio has declined since June 2011 and it is currently at 1.02%. The current cumulative default ratio (as a percentage of the original balance) is also low at 2.38%.

The Series A notes are supported by subordination of the Series B notes and a reserve fund funded by the issuance of the Series C notes. Credit enhancement for the Series A notes (as a percentage of the performing portfolio) increased steadily to 53.26% from 39.98% in June 2011. Credit enhancement for the Series B notes is provided by a reserve fund and increased to 25.76% from 19.98% at closing. The reserve fund is available to protect both the Series A and Series B notes against interest and principal shortfall on an ongoing basis and is only allowed to amortise under certain conditions. Additionally, the reserve fund is subject to a floor of EUR 180.00 million. The balance of the reserve fund as of the December 2014 payment date is EUR 337.29 million, below the target level of EUR 359.70 million.

Santander acts as Account Bank (as holder of the Treasury Account) for this transaction. Santander Issuer and Senior Debt public rating by DBRS is currently at “A”, which complies with the Minimum Institution Rating given the rating assigned to the Series A notes, as described in the DBRS Legal Criteria for European Structured Finance Transactions.

The Issuer has a replacement trigger for the Treasury Account; where, in the event Santander were to be downgraded below BBB (high) by DBRS, the Management Company shall find a replacement institution, which is rated at least BBB (high) by DBRS. However, the DBRS Legal Criteria for European Structured Finance Transactions as of 31 December 2014 refers to the Account Bank having the “minimum rating [of ”A” with respect to a AAA or AA transaction]… combined with a provision to replace within 30 calendar days of a downgrade below that level, is generally sufficient to mitigate the risk of that counterparty’s default such that risk may not need to be specifically modelled.” Given the combination of the current rating of Santander and the replacement provision described above, additional cash flow analysis for the Series A notes included scenarios where the transaction did not benefit from the reserve fund. In these scenarios, the available credit enhancement to the Series A notes was sufficient to cover DBRS’s expected losses at the AA (high) (sf) rating level.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the Master European Structured Finance Surveillance Methodology, which can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

The sources of information used for this rating include investor reports provided by Banco Santander SA and data from the European DataWarehouse. 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.

The last rating action on this transaction took place on 7 April 2014 when DBRS downgraded the rating on the Series A notes to AA (high) (sf) from AAA (sf), confirmed the rating on the Series B notes at BBB (high) (sf) and confirmed the rating on the Series C notes at C (sf).

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared with the parameters used to determine the rating (the base case):
-- DBRS expected a lifetime base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 14.31% and 43.87%, respectively. At the AA (high) (sf) rating level, the corresponding PD is 41.55% and the LGD is 60.69%.
-- 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 fall to AA (low) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Series A notes would be expected to fall to BBB (high) (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 fall to BBB (low) (sf).

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

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

Series C notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of C (sf)
-- 50% increase in LGD, expected rating of C (sf)
-- 25% increase in PD, expected rating of C (sf)
-- 50% increase in PD, expected rating of C (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of C (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of C (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of C (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of C (sf)

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: Lain Gutierrez
Initial Rating Date: 28 July 2011
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Diana Turner

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.

-- Legal Criteria for European Structured Finance Transactions (December 2014)
-- Master European Structured Finance Surveillance Methodology (December 2014)
-- Operational Risk Assessment for European Structured Finance Servicers (January 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (January 2015)
-- Unified Interest Rate Model for European Securitisations (January 2013)