DBRS Upgrades the Ratings on SC Germany Consumer 2016-1 UG (haftungsbeschränkt)

DBRS Ratings Limited (DBRS) upgraded the following ratings on the Notes issued by SC Germany Consumer 2016-1 UG (haftungsbeschränkt) (the Issuer):

-- Class A Fixed-Rate Notes upgraded to AAA (sf) from AA (sf)
-- Class B Fixed-Rate Notes upgraded to A (high) (sf) from A (sf)
-- Class C Fixed-Rate Notes upgraded to A (sf) from BBB (high) (sf)
-- Class D Floating-Rate Notes upgraded to BBB (low) (sf) from BB (high) (sf)

DBRS does not rate the Class E Floating-Rate Notes in this transaction.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:

-- The overall portfolio performance as of the August 2018 payment date, particularly with regard to low levels of cumulative net loss and delinquencies;
-- The probability of default (PD), loss given default (LGD) and expected loss assumptions for the remaining collateral pool;
-- The revolving period has ended and the transaction has amortised considerably; and
-- The current levels of credit enhancement (CE) available to the rated Notes to cover expected losses are in line with their respective rating levels.

The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in September 2029. The ratings of the Class B, Class C and Class D Notes address the ultimate payment of interest and principal on or before the final maturity date.

The Issuer is a securitisation of German consumer loans originated by Santander Consumer Bank AG (SCB), a subsidiary of Santander Consumer Finance SA (SCF). The EUR 424.6 million portfolio, as of the August 2018 payment date, consisted of both secured (23.6%) and unsecured (76.4%) loans.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
The gross cumulative default ratio was 1.8% of the original portfolio plus all subsequent portfolios as of the August 2018 payment date, 4.4% of which has been recovered; the 90+ delinquency ratio was 0.21%. DBRS has maintained its base case default rate and recovery assumptions at 6.6% and 17.5%, respectively.

REVOLVING PERIOD
The transaction included an initial 12-month revolving period, which ended in September 2017. The Class A Notes have since amortised to 48.8% of their original balance.

CREDIT ENHANCEMENT
CE is provided by the subordination of the respective junior obligations and the cash reserve. As of August 2018 and since closing, the CE for the Class A Notes increased to 26.9% from 15.2%; CE for the Class B Notes increased to 16.7% from 9.5%; CE for the Class C Notes increased to 10.1% from 5.7%; and CE for the Class D Notes increased to 7.4% from 4.2%.

The transaction benefits from a liquidity reserve available under certain circumstances to cover senior fees, expenses, swap payments and the interest due on the Class A Notes. It has remained at its target balance since closing and has a current balance of EUR 2.1 million, reflecting its target level of 0.5% of the aggregate outstanding principal amount of the performing collateral.

The deal is exposed to potential commingling and set-off risks as debtors may open accounts with the Originator and collections are swept to the account bank on each monthly payment date. As a mitigant, SCB in its capacity as Servicer and Originator will fund separate commingling and set-off reserves if the DBRS rating of SCB’s parent company – SCF – falls below specific thresholds as defined in the legal documentation. These reserves continue to be unfunded as no rating threshold triggers have been breached to date.

DBRS notes that there is a fixed–to-floating interest rate swap related to the lowest-ranked Classes D and E Notes between the Issuer and a swap counterparty. The original swap counterparty, Abbey National Treasury Services plc, was novated to Banco Santander S.A., London Branch through a novation agreement signed in April 2018. The swap payments (other than termination payments when the swap counterparty is the defaulting party under the swap agreement) rank ahead of interest payments on the Notes in the waterfall. DBRS has considered the relevant interest rate scenarios and the impact of regular swap payments on the cash flows in accordance with its methodologies.

The Bank of New York Mellon, Frankfurt Branch (BNY Mellon, Frankfurt Branch) serves as the transaction’s account bank. DBRS’s private rating of BNY Mellon, Frankfurt Branch is consistent with the minimum institution rating, given the ratings assigned to the Class A Notes, 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.

DBRS reviewed the legal documents related to the novation agreement signed in April 2018. A review of the remaining 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include monthly investor reports provided by SCB and loan-level data provided by 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. 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 this transaction took place on 25 September 2017, when DBRS confirmed the ratings of the Class A and Class B Notes at AA (sf) and A (sf), respectively, and upgraded the ratings of the Class C and Class D Notes to BBB (high) and BB (high) from BBB (sf) and BB (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”):

-- DBRS expected a base case PD and LGD for the portfolio 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 assets of receivables are 6.6% and 82.5%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to decrease to AA (high) (sf), the rating of the Class B Notes would be expected to remain at A (high) (sf), the rating of the Class C Notes would be expected to decrease to BBB (high) (sf) and rating of the Class D Notes would be expected to remain at BBB (low) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to AA (sf), the rating of the Class B Notes would be expected to decrease to A (low) (sf), the rating of the Class C Notes would be expected to decrease to BBB (low) (sf) and rating of the Class D Notes would be expected to decrease to BB (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A, Class B, Class C and Class D Notes would be expected to decrease to A (sf), BBB (high) (sf), BB (sf) and below B (sf), respectively, ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (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, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class C 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)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

Class D Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of below B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of below B (sf)

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 and US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 September 2016

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

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions

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.

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