Rating action

The rating actions are as follows:

Class A (ISIN ES0305545008), EUR 382,000,000: final rating of AAA_SF

Class Z (ISIN ES0305545016), EUR 50,000,000: final rating of AA-_SF

Class B (ISIN ES0305545024), EUR 26,400,000: final rating of BBB+_SF

Class C (ISIN ES0305545032), EUR 21,600,000: not rated

The latest information on the ratings, including rating reports and related methodologies, is available on this LINK.

Transaction overview

Fondo de Titulización RMBS Prado VIII is a static cash securitisation consisting of prime residential mortgage loans originated by Unión de Créditos Inmobiliarios, S.A., Establecimiento Financiero de Crédito (UCI). The current pool as of 28 April 2021 consists of first-lien mortgages on residential properties extended to borrowers resident in Spain and the pool’s balance is around EUR 480m.

The current portfolio is subject to certain credit-positive eligibility restrictions such as the exclusion of loans that have been in arrears, under active moratorium, restructured or delinquent as well as non-released bridge loans. All loans in the portfolio are backed by first-lien mortgages granted to individuals for purchasing their first residence. Additionally, around 12.4% of the outstanding balance have an additional third-party guarantee, and around 42.1% have more than one mortgage securing the relevant loan.

Loans in the current portfolio were originated between 2007 and 2020, with 63.3% originated from 2018 onwards. The portfolio has a seasoning of 4.5 years and a weighted average remaining time to maturity of 25.7 years.

Loans have a low weighted average loan-to-value (LTV) of 62.3% relative to the Spanish market, down from 67.9% at loan origination. VPO loans (Vivienda de Proteccion Oficial) make up 10.9% of the portfolio, reflected in the appraisal values and LTVs. Loans with a fixed rate over the transaction’s entire life represent 14.5% of the portfolio. Additionally, 40.1% of fixed-rate loans will switch to floating-rate at some point in the future (known as ‘mixed-rate loans’) and 45.4% are floating-rate loans. Fixed-rate loans have a weighted average nominal interest rate of 2.8%. The weighted average margin is 1.4% for floating-rate loans and 1.1% for mixed-rate loans.

Rating rationale

The ratings reflect i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral; iii) the experience and incentives of UCI as the transaction’s originator and mortgage manager; and iv) the exposure to the other transaction counterparties.

Credit enhancement of the rated notes stems from their respective subordination levels as well as a 2% cash reserve fully funded at closing, which will amortise to 2% of the portfolio’s outstanding balance, with a floor at 0.25% of the initial pool balance. The class A, Z, B and C notes will amortise sequentially and the structure benefits from cap hedging and transaction’s structural caps on class A, B and C notes partially mitigating fixed-floating interest rate risk.

The ratings also reflect: i) the subordination of class B interest payments to class A principal if cumulative portfolio defaults equal or exceed 2.7%, 5.3%, 7.3%, 9.3%, or 11.3% of the initial portfolio balance during the first five years of the transaction, respectively, or 13.2% in the subsequent years; and ii) the turbo amortisation of class A, Z, B and C principal (all class A, Z, B and C principal becomes due immediately) if cumulative portfolio defaults equal or exceed 1%, 2%, 3%, 4% or 5% of the initial portfolio balance in the first five years of the transaction, respectively, and following the step-up date.

Performance assumptions on underlying collateral were mainly driven by: i) an analysis of historical defaults and recoveries vintage data provided by UCI that incorporate changes in underwriting criteria and economic conditions across the historical period; ii) an analysis of the performance of previous securitisations sponsored by UCI; and iii) the credit quality of the underlying portfolio in the context of current macroeconomic conditions in Spain.

UCI will be the transaction servicer and Santander de Titutlización S.G.F.T., S.A will be the cash manager. No back-up servicer will be appointed at closing, but Banco Santander S.A. will act as back-up servicer facilitator.

Key rating drivers

Positive portfolio selection (positive)¹. All loans are first-lien mortgages granted to individuals to purchase their main residence. Loans that have special features or that were previously restructured or under active moratoriums have been excluded from the securitised portfolio. In addition, none of the loans have ever been in arrears.

Portfolio characteristics (positive)¹. The proportion of floating-rate loans in the pool as well as the original loan-to-value ratio are lower than the Spanish average. All underlying mortgaged assets are owner-occupied.

Simple structure (positive)³. The transaction is static and the notes will amortise fully sequentially. In addition, a turbo amortisation mechanism and a class B interest subordination trigger protect class A and Z noteholders from potential portfolio performance deterioration.

Liquidity protection (positive)³. A cash reserve mitigates liquidity risk in the event of a servicer disruption. Additionally, the transaction benefits from a combined principal and interest waterfall, under which mortgage principal collections can be used to pay interest and senior costs.

Historical performance (negative)^2,5,6. The historical performance of UCI differs from the average for Spanish mortgage pools originated by banks, with large disparities between vintages. Performance has improved for post-2008 vintages and until the start of the pandemic in March 2020, due to a strengthening in underwriting criteria and in the Spanish economy. UCI’s total book performance has not deteriorated since the pandemic broke out and 94.7% of the pool has been originated post-2008.

Third-party origination (negative)⁴. UCI’s origination relies mostly on a network of external financial consultants. However, only UCI teams perform the risk analysis of potential debtors.

Limited excess spread (negative)^1,3. The transaction’s excess spread is low, thus increasing its sensitivity to changes in interest rates. Scope has run stress scenarios to test the impact of this sensitivity.

Interest rate mismatch (negative)^1,3. Class A, B and C notes pay a floating rate while a portion of portfolio pays a fixed rate, either for the transaction’s life or for a pre-defined period before switching into floating rate. This creates a mismatch between interest flows, a risk heightened by the low excess spread. A cap hedging agreement combined with transaction structural caps on class A, B and C notes will partially hedge this risk. Basis risk will remain unhedged but is considered limited.

Upside rating-change drivers

Stabilisation of the Spanish macroeconomic conditions with a return to the pre-pandemic norm.

Downside rating-change drivers

Spanish macroeconomic uncertainty in relation to the global slowdown. Covid-19 impacts may weigh negatively on collateral pool performance, as higher unemployment may affect the capacity of borrowers to repay.

Quantitative analysis and assumptions

Scope used a cash flow model to analyse the transaction and applied a statistical distribution of defaults when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period.

A mean default rate of 6.0% and a coefficient of variation of 85.0% were applied over the portfolio’s expected weighted average life. Scope derived an expected portfolio default rate distribution based on 2001-20 vintage data provided by UCI. The vintage data exhibits two distinct behaviours, with the worst origination years being between 2004-2008 due to a combination of less strict underwriting criteria and seasoning of the loans when the European sovereign crisis affected the Spanish economy. Loans originated before 2009 represent only 5.2% of the total pool. The default rate assumptions were also benchmarked versus a top-down analysis based on both i) a macro view of a AAA default rate for Spain; and ii) the loan-by-loan characteristics of the UCI pool, which are better than those in previous Prado transactions.

Scope considered rating-conditional recovery rates of 45% for class A, 51% for class Z and 63% for class B. Scope received historical performance data on recoveries, incorporating i) curing; ii) potential restructuring; and iii) repossession. The AAA recovery rate assumption was based on the average recovery rate implied by the repossession as the base case rate. The recovery timing has a vectorised recovery schedule and a weighted average recovery lag of seven years.

Scope derived a front-loaded default timing term structure based on the portfolio amortisation schedule. Back-loaded default scenarios are not as severe owing to credit enhancement build-up and the effect of seasoning on the portfolio.

A cash flow analysis was performed considering the portfolio’s characteristics and the transaction’s main structural features. Scope analysed the transaction under both a high (5%) and low (0%) prepayment assumption.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results change compared to the assigned ratings in the event of: i) an increase in the mean default rate by 50%; and ii) a reduction in the recovery rate by 50%, respectively:

• Class A: sensitivity to default rate, one notch; sensitivity to the recovery rate, zero notches.
   
• Class Z: sensitivity to default rate, zero notches; sensitivity to the recovery rate, zero notches.
   
• Class B: sensitivity to default rate, zero notches; sensitivity to the recovery rate, zero notches

Rating driver references
1. Loan-by-loan datatape of the securitised pool (confidential)
2. Originator’s vintage data (confidential)
3. Transaction documents (confidential)
4. Servicer internal documents and information (confidential)
5. Scope takes no action on the Kingdom of Spain
6. Sovereign Outlook 2021

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 14 December 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Cash Flow SF EL Model 1.1) available in Scope Ratings’ list of models, published under: https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#!governance-and-policies/regulatory-UK. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings UK Limited at 111 Buckingham Palace Road, London, United Kingdom, SW1W 0SR, Tel +44020-7340-6347. The Credit Ratings are EU-endorsed.
Lead analyst: Miguel Barata, Director.
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director.
The preliminary Credit Ratings were first released by Scope Ratings on 19 April 2021. The final Credit Ratings were first released by Scope Ratings on 6 May 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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