Scope Ratings (Scope) has reviewed the performance of FT PYMES Santander 12 (the transaction) and taken the following credit rating actions on the issued notes:

Class A (ISIN: ES0305107007): affirmed at AAA_SF
Class B (ISIN: ES0305107015): upgraded to BB_SF, from BB-_SF
Class C (ISIN: ES0305107023): affirmed at C_SF

The rating actions incorporate investor reports provided by Santander De Titulización S.G.F.T. up to the latest reporting date, 18 September 2017.

Rating rationale

The rating actions are driven by the solid performance of the collateral pool, illustrated by lower-than-expected delinquency and default rates and fast amortisation. Credit enhancement available to Class A and Class B increased to 80.4% and 13.5% respectively from 30% and 5%. The transaction benefits from a robust 1.32% excess spread net of any margin stress.

The rating actions also reflect Scope’s positive outlook on the macroeconomic environment in Spain and the continuing improvement of SME credit profiles due to corporate deleveraging and better debt affordability. Moreover, the ratings consider the current institutional uncertainty in Catalonia, which may result in adverse long-term economic effects.

Scope has considered the high likelihood of the reserve fund amortising down to 10% of the outstanding Class A and Class B notes, given that delinquencies may remain below 2.5% of the outstanding performing assets by the end of the lockup period in December 2017.

Key rating drivers

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). 

Moderate default volatility risk (positive). The transaction is less exposed to refinancing risk from undrawn credit lines. This is because, compared with peer transactions such as PYMES 11, the initial portfolio had less undrawn credit lines, which Scope expects to be almost fully amortised two years after closing. This results in lower portfolio default rate volatility, as, historically, unsecured loans and mortgages have shown lower default rate dispersion.

Stressed performance references (positive). Scope calibrated its portfolio assumptions 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.

Fast amortisation (positive). Class A notes bear a very short risk exposure to counterparties and possible macroeconomic deterioration because their expected weighted-average life is 0.6 years under a 0% constant prepayment rate. This is mainly due, after the rapid amortisation of the credit lines, to the French amortisation profile of the unsecured loans and mortgages in the portfolio.

Substantial lifetime default rate (negative). The long maturity profile of the portfolio, compared to peer transactions, reflects the long risk horizon of restructured mortgages, accounting for 6.3% of the initial final portfolio.

Low recovery rate (negative). Scope assumed a segment-weighted portfolio base recovery rate of 26%. This is low due to the large share of unsecured loans, which have historically shown the weakest recovery performance.

Quantitative assumptions

Scope performed a cash flow analysis incorporating important mechanisms in the structure. This considers the probability distribution of portfolio default rates, following an inverse Gaussian distribution, in order to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted-average life of each tranche. Scope considered asset and liability amortisation and changes in the pool composition. Scope also took into account the proportion of non-performing and defaulted assets.

Scope’s cash flow assumptions including mean default, coefficient of variation and mean recovery rate per asset segments have not changed since closing for the point in time and long term analysis. Based on the latest investor report dated 18 September, mortgages and unsecured loans /credit lines account respectively for 31.1% and 68.9%.  

Rating sensitivity

Scope tested the resilience of quantitative results against deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the quantitative results to input assumptions and is not indicative of expected or likely scenarios. The following provides the changes in the quantitative results for each rated tranche when the portfolio’s expected default rate increases by 50% or the portfolio’s expected recovery rate reduces by 50%, respectively:

• Class A: sensitivity to default rate assumptions, zero notches; sensitivity to recovery rates, zero notches
• Class B: sensitivity to default rate assumptions, two notches down; sensitivity to recovery rates, three notches down
• Class C: sensitivity to default rate assumptions, zero notches; sensitivity to recovery rates, zero notches

About the transaction

The transaction is a true-sale securitisation of mortgages, unsecured loans and credit lines co-originated by Santander, Banesto and Banif and granted to Spanish SMEs and self-employed individuals. The transaction was closed on 14 December 2015 and has amortised since then from EUR 2,700m up to an outstanding notional of EUR 1,046m as per the latest September investor report.

Regulatory and legal disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
The rating analysis was prepared by Florent Albert, Associate Director.
Responsible for approving the rating: Guillaume Jolivet, Managing Director
The ratings were first assigned as final ratings by Scope on 04.12.2015. The ratings were last updated on 07.12.2017.

Methodology
The methodology used for this ratings ‘General Structured Finance Rating Methodology’ dated August 2017, the ‘Methodology for Counterparty Risk in Structured Finance’ dated August 2017, and the ‘SME ABS Rating Methodology’ dated June 2017 are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA
Please also refer to 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, the rated entities’ agents, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope has not undertaken any assessment of Agreed Upon procedures carried out at the level of underlying financial instruments or other assets of structured finance instruments. Scope relied on a third-party assessment for the ratings at issuance.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Potential conflicts
Please see www.scoperatings.com. 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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