Scope Ratings has assigned definitive ratings to the notes issued by FT RMBS SANTANDER 4 as follows:

Class A (ISIN: ES0305078000), EUR 2,360m: new rating AA-_SF

Class B (ISIN: ES0305078018), EUR 590m: new rating CC_SF

Class C (ISIN: ES0305078026), EUR 147.5m: new rating C_SF

FT RMBS SANTANDER 4 is a granular true sale securitisation of a EUR 2,950m portfolio of non-conforming first-lien mortgage-secured loans granted by Santander to Spanish individuals and resident foreigners to finance the purchase, construction or refurbishing of residential properties in Spain. The assets have been originated by Santander, Banesto (a banking franchise now fully integrated in Santander) and their respective brokers.

RATING RATIONALE
The ratings reflect: the legal and financial structure of the transaction; the quality of the underlying collateral in the context of the Spanish macroeconomic environment; the capability of Santander as the servicer; counterparty risk arising from exposure to Santander as the account bank and paying agent; and the management capability of Santander de Titulización SGFT SA.

Scope believes that the substantial credit enhancement provided by the structure is sufficient to protect the class-A notes against losses from a portfolio of mortgages we consider high-risk assets. In addition, the short-term outlook on the Spanish economy reflects positively on the transaction. The securitised mortgages can be labelled as ‘non-conforming’ because of insufficient collateralisation, high probability of default and/or aggressive terms and conditions, such as very long maturities. Nevertheless, we consider Santander’s management of performance problems has historically been very proactive and prompt. This will limit the volatility of credit losses around our high expectation as the transaction slowly deleverages. The class-B and class-C notes lack adequate protection against these risks and we expect them to default.

Scope has accounted for the high default risk which results from the credit weakness of the obligors. The portfolio has a high expected lifetime-default rate because: i) the pool has 4.9% of resident foreigners who are three times more likely to default on average than the average Spanish obligor, according to Santander; ii) the pool has 20.9% of so-called ‘reconducted’ mortgages originated to restructure other stressed, albeit performing, debts; iii) the pool has an additional 20.8% of weak mortgages that have been in arrears in the last 12 months; iv) the pool has 1.0% of mortgages originated via brokers who are known to underperform compared to branch-originated mortgages.

Scope has also accounted for the recovery risk resulting from high current loan-to-value (LTV) ratios—weighted average is 103%—and limited servicer flexibility. High LTV ratios result from the market-price correction of residential properties in Spain, even when the original LTVs were just below 80% on a weighted average basis. The collapse of the real-estate bubble in Spain followed the end of the aggressive credit-expansion period in 2007. A significant share (53%) of the portfolio was originated before 2008 and original LTV levels were sometimes based on inflated appraisal values. However, Santander has completed and provided a prudent revaluation of the properties underlying the mortgages, which results in the high LTVs used in our analysis.

Santander has limited servicer flexibility because of already stretched terms and conditions of the mortgages (i.e. high LTVs, low interest rate margins, constant annuity amortisations, long times to maturity). Furthermore, Santander has adhered to the code of good banking practice (contained in law 1/2013) which limits the ability of the servicer to enforce security rights over mortgaged collateral, and we thus expect long recovery lags after default. Our analysis models a recovery lag of five years.

METHODOLOGY
For the analysis of this transaction Scope applied its Structured Finance Instruments Methodology Guidelines, dated July 2014. Scope also applied the principles contained in the proposed methodology document Rating Methodology for Counterparty Risk in Structured Finance Transactions (Call for Comments), dated July 2015.

REGULATORY DISCLOSURES
The rating report freely available on www.scoperatings.com contains important additional information on rating stability, sensitivity analysis, data sources and additional regulatory disclosures.

Scope analysts are available to discuss all the details of the rating analysis and the risks which this transaction is exposed to.

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