The rating actions are as follows:

Tranche A, EUR 1,514m: assigned new rating AAA_SF
Tranche B, EUR 132m: assigned new rating AA_SF
Tranche C, EUR 212m: assigned new rating A+_SF
Tranche D, EUR 143m: assigned new rating BBB+_SF
Tranche E, EUR 172m: assigned new rating BB+_SF
Tranche F, EUR 120m: not rated

The ratings assigned by Scope reflect the risk for the credit protection seller to make payments with respect to a credit event under the terms of the credit protection deed. The ratings do not address potential losses arising from the transaction’s early termination, nor any market risk associated with the transaction. All ratings reflect the expected loss on each respective tranche, in a risk horizon equal to the expected weighted average life of the tranche.

The tranches represent a EUR 2.3bn synthetic risk-transfer securitisation of project finance loans originated in Spain and other EU countries by Banco Santander SA (AA-/S-1+/Stable) and its affiliates in the ordinary course of business. The transaction is structured contractually as an executed credit protection deed in accordance with Basel III (CRR) and EBA guidelines regarding significant risk transfers (SRT). The legal maturity date is 30 September 2045.

The reference portfolio is static and comprises 241 senior secured, first-lien project finance loans. The projects backing these loans relate to renewable energy, transportation, social infrastructure, and TMT (technology, media, and telecommunications) and are located in Spain, Portugal, France, Germany and other EU countries. The tranches are not exposed to FX risk because non-Euro reference obligations are converted to euros at a fixed rate. All reference obligations are scheduled to repay before the transaction’s legal maturity.

The structure features six tranches and is a plain vanilla synthetic transaction with no synthetic excess spread, structured contractually as executed guarantee contracts. Scope rates the A, B, C, D, and E tranches. The most junior tranche (F) is not rated. Tranches A, B, C, D, and E benefit from credit enhancement provided by first loss protection of respectively 34.00%, 28.25%, 19.00%, 12.75% and 5.25%.

Premia will be accrued on the effective balance of the tranches (i.e. outstanding balance after writing off losses from the reference portfolio). Losses are allocated to the tranches in reverse sequential order (i.e. from F to A). Defaults, and realised losses after restructurings, increase the loss balance; recoveries adjust the loss balance when realised.

The structure releases credit enhancement when performance is good, because of the pro-rata allocation of reductions in guaranteed exposure (i.e. the reference portfolio’s scheduled and prepaid principal amortisations, and recoveries).

Default definitions include failure to pay after the longer of 90 days or the contractual grace period, bankruptcy-like events, and the completion of a restructuring due to credit deterioration which resulted in losses. Losses will be verified by an independent agent.

The protection seller under the credit protection deed is the special purpose vehicle Boadilla Project Finance CLO (2009-1) DAC, which will be renamed RENEW PROJECT FINANCE CLO 2017-1 DAC soon after closing.

Rating rationale

The ratings reflect the structure’s legal and financial characteristics as defined under the credit protection deed; the quality of the referenced collateral given both current and long-term macroeconomic conditions in Spain and continental Europe; the experience and ability of the originator and servicer, Santander; and the counterparty credit risk exposure to Santander as protection buyer and premia payer.

All guarantee tranches benefit from the moderate credit quality of the assets in the reference portfolio, with low single-asset concentrations compared to most project finance portfolios. Scope expects losses of 1.4% for the portfolio over a weighted average life of 7.7 years.

The ratings also reflect the credit enhancement in the form of first loss protection of the respective tranches. Tranche A is strongly protected by its senior position.

The tranche B is also well protected, but more sensitive than tranche A to unexpected portfolio losses from country and sector concentrations as well as major asset defaults.

Tranche A particularly benefits from the trigger for the sequential amortisation of all tranches when cumulative portfolio losses exceed 2%. Otherwise, amortisation of the tranches is pro-rata.

The counterparty risk to Santander as protection buyer and premia payer is immaterial because the guarantee would be terminated upon the bank’s default. The risk is further mitigated by Santander’s alignment of interest with investors’ and by the independent verification of losses.

Key rating drivers

Senior secured exposures (positive). Scope calculates moderate expected losses from the portfolio of senior project finance loans (i.e. 1.4% equivalent to a BBB-quality portfolio), reflecting a high weighted-average expected recovery rate of 85%, typical for senior project finance exposures.

Static portfolio (positive). The portfolio is static and would only allow loan extensions following a restructuring or when this is contractually possible, but not the addition of new referenced obligations.

Experienced originator (positive). Santander’s proactive risk management and restructuring approach partially mitigates concentration risks. Santander is an experienced project finance lender in Europe with a longstanding track record.

High concentration in Spanish renewables (negative). Almost 40% of the portfolio relates to renewables in Spain (more than half of the Spanish assets in the portfolio). However, the Spanish economy is diversified and strong enough to support the projects’ risk horizon in this transaction. In addition, the reference portfolio is highly granular relative to most project finance portfolios, with 241 reference obligations and no single-project concentration above 2.5%.

Pro-rata amortisation (negative). The synthetic structure accumulates credit enhancement on the most senior class under most scenarios, including Scope’s expected case. Amortisation is pro-rata until cumulative portfolio losses exceed 2% of the initial reference portfolio balance, upon which it becomes strictly sequential.

Rating-change drivers

Positive. There is limited rating upside because all tranches amortise pro-rata when the transaction performs well. Furthermore, subordinated tranches will be exposed to tail concentration risk when amortisation switches to sequential and only a few loans remain outstanding (i.e. at later stages of the transaction’s life).

Negative. If defaults and recoveries diverge significantly from Scope’s expectations (e.g. due to an adverse event affecting a major portfolio segment), the agency may reassess the default likelihood and stressed recovery rates of reference obligations, which could result in downgrades.

Asset analysis

The reference portfolio is static and assets were selected from the European subset of Santander’s global project finance book. The portfolio comprises 241 senior secured, first-lien project finance loans backed by projects relating to renewable energy (44-55% of exposure in photovoltaic, thermosolar, onshore and offshore wind, cogeneration, mini-hydro, and LNG), transportation (26-33% of exposure in highways, railways, ports, and bridges), social infrastructure (16-21% of exposure in hospitals, parking, water, waste, schools, and public buildings), and TMT (1-3% of exposure). Almost three-quarters of the reference notional is linked to projects in Spain; with the remainder located in Portugal, France, Germany and other EU countries. No single-name, synthetic exposure exceeds 2.5% of the total reference portfolio balance.

The reference portfolio benefits from adequate debt service coverage ratios (current weighted average DSCR is above 1.5x, excluding statistical outliers). Assets will deleverage over a weighted-average loan life of 7.7 years with over 85% of reference obligations fully amortising. Reference obligations benefit from solid covenant packages and structural features such as cash sweeps, which will further reduce asset-level leverage if projects underperform.

Most projects benefit from stable and predictable cash flows, used to service the reference obligations. Project cash flows are often underpinned by long-term revenue contracts and sound fundamentals. For example, project outputs tend to be essential, which shields cash flows from demand risks. A number of projects rely on payments exposed to significant revenue risks such as wholesale electricity prices or traffic volume fluctuations. Almost a quarter of the portfolio relies on partially contracted or purely demand-based projects, and these exhibit the highest risks.

The reference portfolio’s exposure to construction risks are immaterial. Over 97% of reference notional is linked to fully operational, cash-generative projects. Scope expects that the last project to be completed will become operational after 1 February 2018.

The reference portfolio is diversified across 18 sub-sectors, with concentration in highways, photovoltaic, thermosolar, onshore wind, and railways. These five subsectors jointly represent almost three-quarters of the total portfolio balance.

The material share in Spanish renewables reflects Santander’s strong position in its home market. Regulatory risks of Spanish renewables assets continue to decrease, in Scope’s view. This is underpinned by a recovering and sufficiently diversified economy, the containment of the country’s tariff deficit under the new subsidy scheme, and the ongoing deleveraging of the affected loans.

There is sufficient diversification regarding key agents involved in the projects underlying the portfolio. Scope analysed the projects involving the same sponsors, revenue counterparties, contractors, operators, and suppliers. The analysis and correlation framework applied to the transaction capture the important role of key agents such as the Spanish Comision Nacional de los Mercados y la Competencia in the context of Spanish renewables.

Santander is an experienced originator in the European project finance market. The bank has a prudent origination strategy, a low risk appetite, and strong operational and risk management. Santander’s net economic interests are aligned well with those of investors through a material risk retention in the reference portfolio. Chinese walls between the project finance front office and the work-out teams, and the CLO structuring and portfolio management teams prevent conflicts of interest. This supports independent and consistent loan servicing because the servicing teams do not know what projects had part of their risk covered by this transaction.

Scope’s analysis of this transaction consisted of: (i) using asset-by-asset fundamental data points to produce a probability-of-default estimate for each reference obligation; (ii) producing rating-conditional recovery rates by incorporating Santander’s recovery-rate estimations and historical loss observations as well as Scope’s own data sources; and (iii) simulating portfolio performance with Monte Carlo analysis. Scope built a mapping approach to estimate each asset’s probability of default, in line with Scope’s General Structured Finance Rating Methodology, given the portfolio’s good granularity.

Quantitative analysis and assumptions

Scope has analysed the reference portfolio loan by loan, using a single-step Monte Carlo simulation implementing a Gaussian-copula dependency framework.

Scope has assumed an 8.9% weighted-average lifetime portfolio default rate and an 85% weighted-average portfolio recovery rate, based on its analysis of the portfolio using mapped loan-by-loan input assumptions. Scope has also assumed a maximum standard pair-wise correlation of 48.8% (excluding the top exposure correlation stress of +20pp). The non-parametric default-rate distribution resulting from the simulation exhibits an 79% coefficient of variation.

These metrics reflect the reference portfolio’s expected credit quality of BBB, the concentrations in Spanish assets, and relatively good diversification across 241 reference obligations with no single-name synthetic exposure exceeding 2.5%.

Scope has incorporated in the analysis the transaction’s capital structure, guarantee reductions, premia payments, and amortisation trigger to test the structure’s mechanisms and their impact on expected loss to the protection seller for each rated tranche under the guarantee. Scope obtained a measure of the expected loss and the expected weighted average life for each rated tranche, which were benchmarked against Scope’s idealised expected loss curves.

Scope mapped the bank’s individual internal risk measures to assess the default risk of each reference obligation for the transaction. The mapping is based on a loan score that Scope assigned to each reference obligation. The loan score incorporates i) fundamental data points that provide key information on the reference obligation’s credit risk including country, sector, revenue type, project stage, and key credit metrics; and ii) Santander’s internal assessments. Scope calibrated its mapping results by benchmarking i) results from Scope’s detailed fundamental credit analysis on selected assets; and ii) the performance history of Santander’s project finance loans from 2008 to 2016.

Scope has assumed average recovery rates for the portfolio ranging from 27% to 85%, applying rating-conditional stress scenarios with linearly tiered haircuts. Sector-dependent, rating-conditional recovery rates were produced for each reference obligation. Scope also anchored the recovery rates for all assets in a given sector using a beta distribution parametrised with market data provided by Santander (loss-given-default model estimates and loss observations from market data) as well as Scope’s own data sources including its General Project Finance Rating Methodology. The recovery rate assumptions were made specifically for this transaction and validated ad hoc based on market data.

Scope applied a correlation framework that it deems appropriate for the analysis of multi-sector project finance assets in different countries within the same region. The maximum correlation can be split into: a minimum 3.8pp for all loans; 7.5pp assigned to asset pairs sharing the same country; 15pp to pairs sharing the same sector; 7.5pp to pairs sharing the same country and sector; and 15pp to pairs sharing the same key agent.

Additionally, Scope applied stress to the largest exposures, consolidated by project, by assuming a higher default likelihood, applying a 10% haircut to rating-conditional recovery rates, and increasing the pair-wise correlation among the largest exposures by 20pp. The largest four exposures were selected based on their relative size and contribution to portfolio expected loss.

Rating sensitivity

Scope tested the resilience of the rating against deviations of main input parameters: portfolio mean default rate and its coefficient of variation, and the portfolio recovery rate. 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 following list shows how the ratings for each rated tranche changes when the portfolio’s expected default rate increases by 50%, the portfolio default rate’s coefficient of variation increases by 50%, and the portfolio’s expected recovery rate reduces by 50% (respectively):

• Tranche A: four, three, and two notches;
• Tranche B: three, four, and four notches;
• Tranche C: three, three, and four notches;
• Tranche D: three, two, and three notches;
• Tranche E: two, one, and five notches.

Methodology

The methodology applicable for these final ratings is the ‘General Structured Finance Rating Methodology’, dated August 2017, and the ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’, dated August 2017. The analysis also considered the analytical principles of the ‘General Project Finance Rating Methodology’, dated November 2017. All documents 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

This credit rating and/or rating outlook is issued by Scope Ratings AG.
The rating analysis was prepared by Carlos Terré
Responsible for approving the rating: Guillaume Jolivet
The ratings were first assigned as final ratings by Scope on 22.12.2015. The ratings were last updated on 22.12.2017.

Methodology
The methodology used for this ratings ‘General Structured Finance Rating Methodology’ dated August 2017 and the ‘Methodology for Counterparty Risk in Structured Finance’ dated August 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, public domain, 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. 
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
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

Scope Ratings AG, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 161306, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund; Chair of the Supervisory Board: Dr. Martha Boeckenfeld.