DBRS Takes Rating Actions on Five Santander SME CLOs Transactions

DBRS Ratings Limited (DBRS) has today taken rating actions on five Santander SME CLOs transactions as follows:

FTA PYMES SANTANDER 6 (Pymes 6):
-- Series B Notes upgraded to AA (sf) from BBB (high) (sf)
-- Series C Notes confirmed at C (sf)

FTA PYMES SANTANDER 9 (Pymes 9):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes upgraded to BBB (high) (sf) from BB (high) (sf)

FTA PYMES SANTANDER 10 (Pymes 10):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes upgraded to AA (sf) from A (sf)
-- Series C Notes confirmed at C (sf)

FTA PYMES Santander 11 (Pymes 11):
-- Series B Notes upgraded to BB (sf) from CCC (sf)
-- Series C Notes confirmed at C (sf)

FT PYMES Santander 12 (Pymes 12):
-- Series A Notes confirmed at A (high) (sf)
-- Series B Notes upgraded to B (sf) from CCC (low) (sf)
-- Series C Notes confirmed at C (sf)

The ratings of the senior notes (Series A Notes) address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The ratings of the mezzanine and junior tranches (Series B and C Notes) address the ultimate payment of interest and principal on or before the legal final maturity date.

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.
-- Probability of Default (PD) rate for the remaining collateral pools.
-- The Credit Enhancement (CE) available to the rated notes.

All five transactions are cash flow securitisations collateralised by a portfolio of bank loans originated and serviced by Banco Santander S.A. (Santander) to self-employed individuals and small and medium-sized enterprises (SMEs) based in Spain.

PORTFOLIO PERFORMANCE
The portfolios of all five transactions are performing within DBRS’s expectations. For Pymes 6, the 90+ delinquency ratio was at 1.11% as of April and the cumulative default ratio was 4.46%. For Pymes 9, the 90+ delinquency ratio was at 0.74% as of April 2017 and the cumulative default ratio was 3.83%. For Pymes 10, the 90+ delinquency ratio was at 0.30% as of May 2017 and the cumulative default ratio was 0.76%. For Pymes 11, the 90+ delinquency ratio was at 0.29% as of May 2017 and the cumulative default ratio was 0.48%. For Pymes 12, the 90+ delinquency ratio was at 0.59% as of March 2017 and the cumulative default ratio was 0.10%.

PORTFOLIO ASSUMPTIONS
DBRS has kept the same PD assumptions as of closing on the remaining collateral pools for all five transactions. Base case PD rates used are as follows: 5.6% for Pymes 6, 10.63% for Pymes 9, 4.43% for Pymes 10; for Pymes 11 and Pymes 12, two distinct PD rates have been used for loans classified as restructured and as normal loans. For Pymes 11, the PD used is 15.50% for restructured loans and 3.40% for normal loans, and for Pymes 12, the PD used is 20.11% for restructured loans and 3.22% for normal loans.

The Series C Notes of Pymes 6, Pymes 9, Pymes 11 and Pymes 12 (together, the Series C Notes) were issued for the purpose of funding the Reserve Funds, and the ratings are 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.

CREDIT ENHANCEMENT
The CE available to all rated notes has continued to increase as the transactions continue to deleverage. The CE available to each of the rated notes was 61.76% for the Pymes 6 Series B Notes as of the April 2017 payment date; 110.32% and 39.64% for the Pymes 9 Series A and B Notes, respectively, as of the March 2017 payment date; 141.63% and 44.89% for the Pymes 10 Series A and B Notes, respectively, as of the May 2017 payment date; 21.97% for the Pymes 11 Series B Notes as of the May 2017 payment date; and 65.24% and 9.88% for the Pymes 12 Series A and B Notes, respectively, as of the March 2017 payment date. The increase in CE prompted today’s confirmation and upgrade rating actions.

Santander acts as Account Bank provider for all five transactions. The account bank reference rating of “A” – being one notch below the DBRS public Long-Term Critical Obligations Rating 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: “Rating CLOs Backed by Loans to European SMEs.”

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

A review of the transactions’ legal documents was not conducted as the documents have remained unchanged since the most recent rating actions.

Other methodologies referenced in these transactions 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 information used for these ratings include information provided by 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 ratings, DBRS was not supplied with third-party assessments, except for Pymes 11 and Pymes 12. 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 Pymes 6 took place on 4 May 2017 when DBRS discontinued the rating on the Series A Notes; prior to that on 1 August 2016, DBRS confirmed the AAA (sf) and C (sf) ratings on the Series A and C Notes respectively and upgraded the rating on the Series B Notes to BBB (high) (sf) from BBB (sf).
-- The last rating action on Pymes 9 took place on 1 August 2016, when DBRS upgraded the ratings on the Series A and B Notes to AAA (sf) and BB (high) (sf) from AA (sf) and CCC (high) (sf), respectively.
-- The last rating action on Pymes 10 took place on 1 August 2016, when DBRS confirmed the AAA (sf) and C (sf) ratings on Series A and C Notes and upgraded the rating on the Series B Notes to A (sf) from BBB (high) (sf).
-- The last rating action on Pymes 11 took place on 13 June 2017 when DBRS discontinued the rating on the Series A Notes; prior to that on 1 August 2016, DBRS confirmed the A (high) (sf), CCC (sf) and C (sf) ratings on the Series A, B and C Notes, respectively.
-- The last rating action on Pymes 12 took place on 1 August 2016, when DBRS upgraded the rating on the Series A to A (high) (sf) from A (low) (sf) and confirmed the CCC (low) (sf) and C (sf) ratings on the Series B and C Notes (sf), respectively.

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):

Pymes 6
-- Probability of Default Rates Used: base case PD of 5.60% a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 30.02% at the AA (sf) stress level for the Series B Notes, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at AA (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would also lead to a confirmation of the Series B Notes at 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%, ceteris paribus, would also lead to a confirmation of the Series B Notes at AA (sf).

Pymes 9
-- Probability of Default Rates Used: base case PD of 10.63% a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 42.40% at the AAA (sf) stress level and 50.85% at BBB (sf) stress level for the Class A Notes and Class B Notes respectively, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AAA (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AAA (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%, ceteris paribus, would also lead to a confirmation of the Series A Notes at AAA (sf).

For the Series B Notes, DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at BBB (high) (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would also lead to a confirmation of the Series B Notes at BBB (high) (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%, ceteris paribus, would also lead to a confirmation of the Series B Notes at BBB (high) (sf).

Pymes 10
-- Probability of Default Rates Used: base case PD of 4.43% a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 28.70% at the AAA (sf) stress level and 30.91% at AA (sf) stress level for the Class A Notes and Class B Notes respectively, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AAA (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AAA (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%, ceteris paribus, would also lead to a confirmation of the Series A Notes at AAA (sf).

For the Series B Notes, DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at AA (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at 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%, ceteris paribus, would also lead to a confirmation of the Series B Notes at AA (sf).

Pymes 11
-- Probability of Default Rates Used: base case PD of 3.40% for “normal” loans and 15.50% for “restructured” 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 29.84% at the BB (sf) stress level for the Series B Notes, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at BB (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series B Notes at BB (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%, ceteris paribus, would also lead to a confirmation of the Series B Notes at BB (sf).

Pymes 12
-- Probability of Default Rates Used: base case PD of 3.22% for “normal” loans and 20.11% for “restructured” 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 25.21% at the A (high) (sf) stress level and 30.90% at B (sf) stress level for the Class A Notes and Class B Notes respectively, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (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%, ceteris paribus, would also lead to a confirmation of the Series A Notes at A (high) (sf).

For the Series B Notes, DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (low) (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would also lead to a downgrade of the Series B Notes to B (low) (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%, ceteris paribus, would lead to a downgrade of the Series B Notes to CCC (high) (sf).

The Series C Notes’ ratings would not be affected by a hypothetical change in either the PD or LGD.

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.

Pymes 6
Lead Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 November 2013

Pymes 9
Lead Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 May 2014

Pymes 10
Lead Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 November 2014

Pymes 11
Lead Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 May 2015

Pymes 12
Lead Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 3 December 2015

DBRS Ratings Limited
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United Kingdom
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.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Operational Risk Assessment for European Structured Finance Servicers
-- European RMBS Insight: Spanish Addendum
-- Unified Interest Rate Model for European Securitisations
-- Cash Flow Assumptions for Corporate Credit Securitisations

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.