The rating actions are as follows:

Serie A (ISIN ES0305381008), EUR 1,941.5m: preliminary rating (P) AA+_SF

Serie B (ISIN ES0305381016), EUR 258.5m: preliminary rating (P) BB+_SF

Serie C (ISIN ES0305381024), EUR 110.0m: preliminary rating (P) CCC_SF

Transaction overview

The securitised portfolio was originated in the ordinary course of business by Banco Santander SA, Banesto and Banif. It contains three main product types: unsecured loans (63.5% of the portfolio balance), credit lines (29.9% of the portfolio balance) that are mostly unsecured, and secured loans (6.6% of the portfolio balance). The credit lines have been drawn to approximately 97% of their collective limit, but can be further drawn post-closing up to 105% of their respective committed amount. Potential credit line draw-downs are funded by collections from the assets or a liquidity facility provided by Santander if collections aren’t sufficient.

The transaction features three tranches of sequentially amortising notes with a combined priority of payments, an amortizing reserve fund and the liquidity facility to fund potential credit line draw-downs. Interest on serie B ranks senior to serie A principal, unless a 5% cumulative default trigger is breached. Interest and principal payments on serie C, which funds the reserve fund, are fully subordinated to the mezzanine and senior notes. The amortisation of the reserve fund is floored at EUR 55m, an amount equivalent to 2.5% of the initial serie A and serie B balance.

Santander (AA-/S-1+/Stable) performs all counterparty roles in the transaction as the originator, servicer, issuer account bank holder, paying agent, and liquidity facility provider.

The preliminary ratings are based on a portfolio dated 15 October 2018.

Rating rationale

The preliminary ratings reflect the quality of the underlying collateral in the context of the Spanish macroeconomic environment; the legal and financial structure of the transaction; the transaction-specific protection features; the counterparty risk exposure to Santander and the management ability of Santander de Titulización SGFT SA. The ratings factor in the notes’ protection against portfolio losses, provided by their respective credit enhancement and periodic gross excess spread, which stands at 1.3% as of the pool cut-off date.

The serie A rating reflects the tranche’s risk exposure to fast-amortising assets and 16.75% of credit enhancement protection against losses, which includes a 5.0% reserve fund. This level of credit enhancement, while lower than that of previous PYMES Santander transactions, is coupled with higher quality assets in the portfolio.

The serie B rating reflects a longer expected risk horizon and 5% credit enhancement provided by the reserve fund. The tranche is also exposed to medium-term economic uncertainties in Spain beyond Scope’s outlook.

The serie C provides funds for the cash reserve, and its rating reflects the expected provisioning of portfolio losses from this reserve.

Counterparty risk exposure is well mitigated by i) the automatic guarantee or replacement of the bank upon loss of a long-term BBB rating by Scope (as account bank, paying agent and liquidity facility provider); ii) Scope’s view on Santander’s long-term credit quality (AA-/S-1/Stable); and iii) the expected short life of the serie A.

Key rating drivers

Experienced originator (positive). The transaction benefits from the assets’ proven performance and the experience of the originator. This is the 14th securitisation of the PYMES series issued by Santander and Scope calibrated its performance assumptions based on analysis of comparable transactions in the PYMES series. Santander follows prudent underwriting standards consistent with those of previous securitisations.

Obligor credit quality (positive). The portfolio’s obligors are on average stronger than those in previous PYMES Santander transactions rated by Scope, based on Santander's internal credit measures. Santander's weighted average one-year probability of default for the portfolio is 0.9%, significantly lower than the 2.1% found in PYMES 13.

Fast amortisation (positive). Serie A’s short expected life, mainly driven by the fast amortisation of the credit line segment, substantially limits the risk exposure to asset deterioration and Santander as transaction counterparty, as well as possible macroeconomic deterioration.

Unsecured exposures (negative). 93.4% of the portfolio consists of unsecured exposures – loans and credit lines. This is higher than previous PYMES transactions analysed by Scope and introduces the potential for lower recovery rates when compared to secured positions.

Limited vintage data (negative). Loan vintage data provided by Santander only captures performance from 2012 onwards, which does not capture a complete credit cycle nor reflects the most stressed economic periods in Spain. As a mitigant, Scope incorporated information reflected in vintage data available from PYMES 13 into its analysis to capture a broader performance period.

Relatively low credit enhancement (negative). The credit enhancement available for the series A is lower for this transaction compared to previous PYMES transactions analysed by Scope, but reflects the portfolio’s higher credit quality.

Unhedged interest rate risks (negative). 27.6% of the portfolio pays a fixed-rate coupon, while the notes will pay a floating-rate coupon referenced to three-month Euribor. The relatively short expected life of serie A mitigates interest rate risk, while mezzanine and junior noteholders are more exposed due to the notes’ longer expected life.

Rating-change drivers

Positive. Better-than-expected performance of the assets, as well as faster-than-expected portfolio amortisation if credit enhancement builds up before credit losses crystallise, may positively impact the ratings.

Negative. Worse-than-expected performance of the assets as well as a deterioration of the Spanish macroeconomic environment could negatively impact the ratings.

Quantitative analysis and key assumptions

Scope has performed a cash flow analysis, considering the portfolio's characteristics and the transaction's main structural features. Scope has applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the amortisation period. The cash flow analysis considers the probability distribution of each portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

Scope calibrated point-in-time portfolio assumptions based on 2011-2018 credit line vintage data and 2012-2018 loan vintage data, which reflects the performance for a selected part of Santander’s SME book in Spain. Scope also considered data from previous transactions to support its analysis and applied a long-term economic cycle adjustment to limit procyclicality for the serie A rating.

Scope assumed a point in time portfolio mean default rate of 3.2% and coefficient of variation of 65.9%. Scope also considered a long-term economic cycle adjustment with a default distribution reflecting a long-term portfolio mean default rate of 1.4% and a coefficient of variation of 148.6%.

The weighted average base case recovery rate used in the analysis is 55.9%, where the AAA recovery rate is 16.9%. Recovery rate assumptions for the unsecured loans and credit lines were derived from recovery vintage data from 2012-2018 and 2011-2018, respectively. Recoveries on secured exposures were derived using Scope’s market-value-decline assumptions.

Scope analysed the transaction under high (15%) and low (0%) prepayment scenarios.

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

Cash flow analysis
Scope analysed the cash flow vectors from the assets and took into account the transaction’s main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, hedging, senior costs, as well as servicing fees. This analysis produces an expected loss and expected weighted average life for the notes.

Rating sensitivity
Scope tested the resilience of the ratings against deviations of 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 ratings to input assumptions and is not indicative of expected or likely scenarios.
The following shows the sensitivity of quantitative outputs when the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Serie A: sensitivity to default rate assumptions, two notches; sensitivity to recovery rates, one notch;
• Serie B: sensitivity to default rate assumptions, two notches; sensitivity to recovery rates, one notch;
• Serie C: sensitivity to default rate assumptions, one notch; sensitivity to recovery rates, one notch.

Methodology
The methodologies applicable for this preliminary rating are the SME ABS Rating Methodology and the Rating Methodology for Counterparty Risk in Structured Finance Transactions. All documents are available on www.scoperatings.com.
Historical default rates of the entities rated by 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.
Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

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: public domain, 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 Ratings GmbH has relied on a third-party asset audit. The external asset audit has no impact on the credit rating.
Prior to the issuance of the ratings, the rated entity was given the opportunity to review the ratings and the principal grounds on which it is based. Following that review, the ratings were not amended before being issued.

Regulatory and legal disclosures
This credit ratings are issued by Scope Ratings GmbH.
Lead analyst: Thomas Miller-Jones, Associate Director.
Person responsible for approval of the ratings: Guillaume Jolivet, Managing Director.
The preliminary ratings were first released by Scope on 22.11.2018.
The ratings concern financial instruments, which have been rated by Scope for the first time.

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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