Scope assigned definitive ratings to the notes issued by FT PYMES Santander 12 as follows:

Class A (ISIN: ES0305107007), EUR 2,100m: definitive rating AAA_SF
Class B (ISIN: ES0305107015), EUR 700m: definitive rating B+_SF
Class C (ISIN: ES0305107023), EUR 140m: definitive rating C_SF

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 Banco Santander (A+/S-1/Stable Outlook) as the servicer; the counterparty risk exposure to Santander as the account bank, paying agent and liquidity provider; and the management ability of Santander de Titulización SGFT SA.

RATING RATIONALE

The 30% credit enhancement available in the structure to protect the class A notes provides significant support against losses. The rating of class A benefits from the fast-amortising credit lines and the mainly French amortisation scheme of the portfolio assets. This results in a short weighted average tranche life of 1.2 years. Class B’s rating reflects the tranche’s larger exposure to i) uncertainties of the Spanish economy beyond Scope’s outlook and ii) lower-quality mortgages with long maturities in this portfolio – the mortgage segment contains 42% of refinanced assets, which have shown very weak performance historically. The three rated tranches benefit from periodic excess spread, which accumulates to 1.20% as of closing, and is paid to the class C unless it is required for shortfall-provisioning.

The short-term outlook on the Spanish economy reflects positively on the transaction. The weighted average portfolio life is relatively short at 2.8 years under 0% prepayments, with 17.4% of fast-amortising credit lines, 67.6% amortising unsecured loans and 15.0% long-maturity mortgages.

Scope derived the portfolio modelling assumptions from obligor-segment-specific vintage data provided by Santander, covering a period from 2007 to Q2 2015. This captures a period of significant economic stress in Spain. We assumed '90 days past due' lifetime default rates of 5.7%, 6.9% and 62.5% for the respective portfolio segments – credit lines, unsecured loans and mortgages – as well as cure rates of 14.7%, 25.8% and 15.6%, respectively. Credit risk from the portfolio is also driven by the relatively low volatility of historic default rates. This is reflected in the low 40.8% portfolio-segment-weighted default-rate coefficient of variation derived from vintage data, which combines 137%, 55% and 25% for credit lines, unsecured loans and mortgages, respectively.

The different asset segments in the portfolio exhibit heterogeneous recovery rate levels, and Scope assumed base case recovery rates of 51.6%, 21.2% and 36.0% for credit lines, unsecured loans and mortgages, respectively. Credit lines and loans are unsecured. The mortgages are secured by commercial and residential properties and have high loan-to-value ratios (currently 101% – not indexed). Scope derived recovery rate assumptions from the vintage data, which reflects Santander’s recovery practices and foreclosure costs.

KEY RATING DRIVERS

Spanish economy (positive). The Spanish economy continues to improve. This recovery will benefit class A notes in the short term, while the impact on class B notes is less certain due to its longer weighted average life and the fragile recovery in Spain.

Higher quality obligors (positive). The obligors in this portfolio are, on weighted average, stronger than those in the portfolio of the previous similar transaction by Santander – FTA PYMES Santander 11 (PYMES 11). This is illustrated by the lower internal probabilities of default assigned by Santander (3.3% vs. 5.6% for PYMES 11) and relates to the composition of the portfolio (17% credit lines vs. 40% credit lines in PYMES 11). The remainder of the PYMES 12 pool, after credit lines have amortised, is significantly better than that for PYMES 11. Santander has 2.2% and 9.5% weighted-average annual internal probability of default for unsecured loans and mortgages, respectively, for this transaction; compared to 5.9% and 18.5%, respectively, for the portfolio of the PYMES 11 transaction.

Stressed performance references (positive). Scope calibrated the assumptions of its portfolio modelling with 2007-2015 vintage data, a period of high stress for Spanish SMEs. Scope also considered a long-term economic cycle adjustment to limit the procyclicality for the class A rating.

Substantial lifetime default rate (negative). Scope has considered a portfolio lifetime ‘90 day past due’ default rate of 16.1% with a cure rate of 22.2%, over a weighted average remaining term of 4.8 years. The average term of the transaction is almost two years longer than that of PYMES 11, the previous SME CLO transaction issued by Santander. The long maturity profile of the portfolio reflects the long risk horizon of restructured mortgages, accounting for 6.3% of the final portfolio.

Moderate default volatility risk (positive). The transaction is less exposed to the refinancing risk from undrawn credit lines due their lower share in the portfolio than in PYMES 11. This results in lower portfolio default rate volatility, as historically, unsecured loans and mortgages have shown lower default rate dispersion.

Low recovery rate (negative). Scope estimated a segment-weighted portfolio recovery rate of 33%. This low recovery rate assumption is driven by the large share of unsecured loans, which historically have shown the weakest recovery performance.

Moderate risk from credit lines (positive). This product poses revolving and refinancing risks, which result in increased portfolio default rates under stress scenarios. However, the rating assigned to the class A notes reflects i) the credit strength of Santander; as well as ii) its strong track record in originating and managing credit lines; coupled with iii) the very short life of the credit lines in this portfolio. These factors partially mitigate refinancing risk and thus the short-term default rate volatility of the portfolio credit lines. The weighted average usage of these credit lines is already 76% and could only theoretically increase to 100% in the next six months.

Fast amortisation (positive). Class A notes bear a very short risk exposure to counterparties, and possible macroeconomic deterioration, because its expected WAL is 1.2 years under 0% CPR, which is due to the fast amortisation of credit lines and the mainly French amortisation profile of the unsecured loans and mortgages in the portfolio.

Counterparty concentration (negative). Counterparty risk to Santander is mitigated by the short expected life of the class A; the credit quality of the bank as reflected in Scope’s rating; and adequate structural protection features, which includes an automatic replacement of the bank (as account bank and paying agent) upon loss of a BBB rating.

RATING SENSITIVITY

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

The class A rating is one and three notches lower, if the base case default rate assumption increases by 25% and 50% respectively. The class A rating is not sensitive to a 25% haircut to the base case recovery rate assumptions, but declines by two notches for a 50% haircut. The combined increase of the mean default rate by 25% and a reduction of recovery rate assumptions by 25% results in a rating level four notches lower, the same impact of a 50% increase in the coefficient of variation.

The class B rating is three notches lower, if the base case default rate assumption increases by 50%. The rating is one and two notches lower, if the base case recovery rate is haircut by 25% and 50% respectively. The class B rating depends less on tail events and is not sensitive to a 50% increase in the coefficient of variation.

The class A and class B ratings are not sensitive to an increase in interest rates up to 8% over the next six years.

The rating of class C is not sensitive to a change in any of the main input parameters.

METHODOLOGY

The methodology applicable for these definitive ratings is the ‘SME CLO Rating Methodology’, dated May 2015. Scope also applied the principles contained in the ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’, dated August 2015. Both files are available on www.scoperatings.com.
Scope analysts are available to discuss all the details of the rating analysis and the risks, to which this transaction is exposed.

REGULATORY AND LEGAL DISCLOSURES

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Sebastian Dietzsch, Lead Analyst. Guillaume Jolivet, Committee Chair, is the analyst responsible for approving the rating.
Rating history

The rating concerns newly issued financial instruments, which were evaluated for the first time by Scope Ratings AG. Scope had already performed a preliminary rating for the same rated instrument in accordance with Regulation (EC) No 1060/2009 on rating agencies, as amended by Regulations (EU) No 513/2011 and (EU) No 462/2013.

Instrument ISIN; Date; Rating action; Rating
ES0305107007; 11.11.2015; new; (P) AAA_SF
ES0305107015; 11.11.2015; new; (P) B+_SF
ES0305107023; 11.11.2015; new; (P) C_SF

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the issuer of the investment, represented by the management company.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Offering circular and final transaction-related contracts; operational review visit with the originator; delinquency and recovery vintage data; loan-by-loan portfolio information; legal opinion.
Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating is “SME CLO Rating Methodology”, dated May 2015. Scope also applied the principles contained in the “Rating Methodology for Counterparty Risk in Structured Finance Transactions”, dated August 2015. Both files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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