Press Release

DBRS Takes Rating Actions on Five Santander Spanish RMBS Transactions

RMBS

June 02, 2017

DBRS Ratings Limited (DBRS) has today taken rating actions on five Santander Spanish residential mortgage-backed securities (RMBS) transactions as follows:

FTA RMBS Santander 1 (RMBS Santander 1):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FTA RMBS Santander 2 (RMBS Santander 2):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FTA RMBS Santander 3 (RMBS Santander 3):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 4 (RMBS Santander 4):
-- Series A Notes confirmed at A (high) (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 5 (RMBS Santander 5):
-- Series A Notes upgraded to A (high) (sf) from A (low) (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

Today’s rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance in terms of delinquencies, defaults and losses.
-- Portfolio default (PD) rate, loss given default (LGD) and expected loss assumptions for the remaining collateral pools.
-- The credit enhancement (CE) available to the rated notes to cover the expected losses at their respective ratings. The Series C Notes of each transaction were issued to fund the Cash Reserve and are in a first loss position supported only by available excess spread. Given the characteristics of the Series C Notes as defined in the transaction documents, the default would most likely be recognised at maturity or following an early termination of the transaction.

All five transactions are securitisations of Spanish first-lien mortgage loans. The pools of RMBS Santander 1 and RMBS Santander 2 are originated and serviced by Banco Santander S.A. (Santander). The pools of RMBS Santander 3 and RMBS Santander 4 are originated by Santander and Banco de Crédito Español (Banesto, now fully integrated into Santander) and serviced by Santander. The pool of RMBS Santander 5 is originated by Santander, Banesto and Banco Banif S.A.U., and serviced by Santander.

PORTFOLIO PERFORMANCE
The portfolios of all five transactions are performing within DBRS’s expectations, despite the increase in the cumulative default as a percentage of the collateral pool balance at the transaction’s closing (cumulative default ratio). For RMBS Santander 1, loans more than 90 days delinquent as a percentage of the outstanding collateral pool balance excluding defaulted loans (90+ ratio) decreased to 2.1% as of March 2017 from 2.8% 12 months prior and the cumulative default ratio increased to 2.2% from 0.4%. For RMBS Santander 2, the 90+ ratio decreased to 0.9% as of May 2017 from 1.3% and the cumulative default ratio increased to 0.9% from 0.2%. For RMBS Santander 3, the 90+ ratio decreased to 1.4% as of May 2017 from 1.9% and the cumulative default ratio increased to 1.3% from 0.3%. For RMBS Santander 4, the 90+ ratio increased to 2.0% as of March 2017 from 0.9% and the cumulative default ratio increased to 0.5% from 0.0%. For RMBS Santander 5, the 90+ ratio increased to 1.8% as of April 2017 from 0.3% and the cumulative default ratio increased to 0.1% from 0.0%.

DBRS has updated the PD and LGD assumptions on the remaining collateral pools for all five transactions. At the base case B (sf) level, PD and LGD are 17.9% and 41.7%, respectively, for RMBS Santander 1; 8.0% and 33.1% for RMBS Santander 2; 11.2% and 43.1% for RMBS Santander 3; 14.2% and 44.4% for RMBS Santander 4; and 15.7% and 41.8% for RMBS Santander 5.

CREDIT ENHANCEMENT
The CEs available to all rated notes have continued to slighly increase as the transactions continue to deleverage. The sources of CE are the subordinated notes and the Cash Reserve. The Cash Reserves were all funded at the Issue Date through the issuance of a junior series, as well as cover principal losses,senior fees and interest shortfall on the rated notes. The current level is EUR 37.3 million for RMBS Santander 1, EUR 135.0 million for RMBS Santander 2, EUR 273.4 million for RMBS Santander 3, EUR 147.5 million for RMBS Santander 4 and EUR 63.7 million RMBS Santander 5. The Cash Reserves are at their target level for RMBS Santander 4 and RMBS Santander 5.

The CE available to the notes is 39.3% and 3.7% for the RMBS Santander 1 Series A and Class B Notes, respectively, as of the March 2017 payment date; 32.5% and 5.6% for the RMBS Santander 2 Series A and Series B Notes, respectively, as of the May 2017 payment date; 34.6% and 5.1% for the RMBS Santander 3 Series A and Series B Notes, respectively, as of the May 2017 payment date; 28.9% and 5.8% for the RMBS Santander 4 Series A and Series B Notes, respectively, as of the March 2017 payment date; and 28.1% and 5.5% for the RMBS Santander 5 Series A and Series B Notes, respectively, as of the April 2017 payment date.

Santander acts as the Account Bank for all five Santander RMBS transactions. The Account Bank reference rating of ‘A’, being one notch below the DBRS public Long-Term Critical Obligations Rating (COR) of Santander of A (high), complies with the Minimum Institution Rating, given the rating assigned to the most senior class of rated notes in each transaction, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal 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 these ratings include investor reports from Santander de Titulización, SGFT, S.A. and loan-level data from the European DataWarehouse GmbH.

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 for RMBS Santander 1, RMBS Santander 2 and RMBS Santander 3. At the time of the initial rating, DBRS was supplied with third-party assessments for RMBS Santander 4 and RMBS Santander 5. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

The last rating action on all RMBS Santander transactions took place on 2 June 2016, when DBRS confirmed the AA (sf), CCC (sf) and C (sf) ratings on the Series A, Series B and Series C Notes of RMBS Santander 1, upgraded the rating on the Series A Notes to AA (sf) from A (sf) and confirmed the CCC (sf) and C (sf) ratings on the Series B and Series C Notes of RMBS Santander 2, confirmed the AA (sf), CCC (sf) and C (sf) ratings on the Series A, Series B and Series C Notes of RMBS Santander 3, confirmed the A (high) (sf), CCC (sf) and C (sf) ratings on the Series A, Series B and Series C Notes of RMBS Santander 4 and confirmed the A (low) (sf), CCC (sf) and C (sf) ratings on the Series A, Series B and Series C Notes of RMBS Santander 5.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 to the parameters used to determine the rating (the “Base Case”):

-- DBRS expected a Base Case probability of default (PD) and loss given default (LGD) for the portfolios 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.

-- For RMBS Santander 1, at the AA (sf) rating level, the Base Case PD and LGD assumptions for the collateral pool are 41.3% and 55.2%, respectively.

-- For RMBS Santander 2, at the AA (sf) rating level, the Base Case PD and LGD assumptions for the collateral pool are 26.0% and 48.1%, respectively.

-- For RMBS Santander 3, at the AA (sf) rating level, the Base Case PD and LGD assumptions for the collateral pool are 30.2% and 56.7%, respectively.

-- For RMBS Santander 4, at the A (high) (sf) rating level, the Base Case PD and LGD assumptions for the collateral pool are 31.8% and 55.1%, respectively.

-- For RMBS Santander 5, at the AAA (sf) rating level, the Base Case PD and LGD assumptions for the collateral pool are 34.2% and 52.5%, respectively.

-- The Risk Sensitivity overview below illustrates the rating 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 on the RMBS Santander 1 Series A Notes would be expected to be at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Series A Notes would be expected to be downgraded to BBB (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and the LGD increase by 50%, the rating on the Series A Notes would be expected to be downgraded to BB (high) (sf).

RMBS Santander 1:
Series A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (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)