DBRS Assigns “A” Rating to Santander Totta Covered Bonds Series 22

DBRS Ratings Limited (DBRS) has today assigned an “A” rating to Series 22 of the Santander Totta S.A. Covered Bonds (Obrigações Hipotecárias - Mortgages) (OH or the Portuguese legislative covered bonds (CBs)) issued under the Banco Santander Totta S.A. (Totta or the Issuer) EUR 12.5 billion OH Programme (the Programme). Series 22 is a EUR 1,000,000,000 fixed-rate bond, paying a coupon of 0.875% and maturing on 25 April 2024.

The ratings on all other series outstanding under the Programme have been confirmed at “A”. Following the issuance of Series 22, there are nine series of OH outstanding under the Programme for a total nominal amount of EUR 6.95 billion.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of BBB (high), being the Senior Unsecured Long-Term Debt & Deposit rating of Totta. Totta is the Issuer and Reference Entity for the Programme;
-- A Legal and Structuring Framework (LSF) Assessment of Average associated with Totta’s OH Programme;
-- A Cover Pool Credit Assessment (CPCA) of BB, being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L);
-- An LSF-L of BBB (high);
-- A two-notch uplift on the LSF-L for high recovery prospects;
-- A level of overcollateralisation (OC) to which DBRS gives credit of 15%, being the level of OC to which the Issuer commits in the investor report. Such a level is not subject to haircut as DBRS considers it to be persistent based on historically observed levels.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by two notches would lead to a downgrade of the LSF-L by one notch, resulting in a downgrade of the CBs rating by one notch.

In addition, everything else being equal, the Totta OH ratings would be downgraded if the quality and consistency of the CP were no longer sufficient to support two notches of uplift for high recovery prospects.

As of December 2016, the aggregated outstanding balance of the cover pool underlying Totta’s OH was EUR 8.05 billion. Including Series 22, the total amount of liabilities outstanding is EUR 6.95 billion, yielding a current OC ratio of 15.8%. The Issuer has publicly committed to maintain an OC level of 15.0%.

All the loans in the CP are prime residential mortgage loans, with a weighted-average (WA) current unindexed loan-to-value ratio of 53.5% and a WA seasoning of 107 months. Geographically, the pool is mainly distributed in Lisbon (35.8% by outstanding balance), the North (31.3%) and the Centre (18.5%), and all loans were originated for the purpose of acquiring first or second homes.

The CP comprised floating-rate loans (97.7% by outstanding balance) and fixed-rate loans (2.3%). This compares with 100% fixed-rate OH. The interest rate mismatch is mitigated by intra-group swap agreements; however, the swap documentation does not incorporate DBRS language. As such, no credit was given to swaps in DBRS’s analysis and the interest rate mismatch has been taken into account in our analysis.

As of today, the WA life of the cover pool was roughly 14 years based on a 0% prepayment rate, which is longer than the 5.9 years WA life on the OH when accounting for the expected maturity. This risk is mitigated by the Extended Maturity Date, which falls one year after the Maturity Date, and by the OC in place.

All CP assets and OH are denominated in euros. As such, investors are not currently exposed to any foreign-exchange risk.

DBRS has assessed the LSF related to Totta’s OH as Average according to its rating methodology. For more information, please refer to DBRS’s commentaries, “DBRS Assigns LSF Assessment to Portuguese Covered Bonds” and “Portuguese Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.

For further information on the Programme, please refer to the rating report at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Covered Bonds”. This can be found at www.dbrs.com at http://www.dbrs.com/about/methodologies.

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the Cash Flow analysis. A review of the transaction legal documents was limited to the documentation pertaining to the issuance of Series 22. All the other documents have remained unchanged since the most recent rating action.

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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include investor reports provided by Totta. DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 10 April 2017 when DBRS assigned an “A” rating to Series 21.

The lead analyst responsibilities for this transaction have been transferred to Roger Bickert.

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

For further information on DBRS 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 Limited are subject to EU regulations only.

Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 27 February 2012

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

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Global Methodology for Rating Banks and Banking Organisations
-- Critical Obligations Rating Criteria
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations
-- The Effect of Sovereign Risk on Securitisations in the Euro Area

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375