Rating action

Series A, EUR 1,654.7m: upgrade to AA+_SF from AA-_SF

Series B, EUR 590.0m: affirmation of CC_SF

Series C, EUR 147.5m: affirmation of C_SF

The rating action incorporates information available from historical transaction reports through October 2018.

FT RMBS SANTANDER 4 is a granular true sale securitisation of a EUR 2,950m portfolio (at closing) 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. The transaction closed on 3 July 2015 with a legal maturity of 15 September 2063.

Rating rationale

The rating actions are driven by deleveraging of the transaction and solid performance of the portfolio to date. The series A notes have amortised to EUR 1,654.7 (70.1% of the series A balance at closing). Credit enhancement for the tranche has increased to 31.7% from 25.0% at closing. Cumulative written-off loans and 90 days-past-due loans are 1.64% and 1.02%, respectively, which is below Scope’s expectations at closing. The transaction also benefits from the positive macro-economic momentum observed in Spain. The transaction is, however, exposed to longer-term future uncertainties because of the non-conforming nature of the obligors in the pool and long loan maturities.

Key rating drivers:

Credit enhancement (positive): The loss-absorbing protection provided by the structure to Series A is significant, as credit enhancement for the senior notes is now 31.7%.

Counterparty credit quality (positive): The role of Santander (AA- by Scope) as servicer, account bank and paying agent limits counterparty risk and provides increased rating stability. Additionally, a replacement trigger for the account bank at a loss of BBB provides further comfort.

Long maturity (negative): The portfolio will amortise slowly, making it vulnerable to future economic shocks. The expected weighted average lives of the series A, series B and series C notes are 7.9 years, 19.1 years and 30+ years, respectively.

Low asset quality (negative): The portfolio is exposed to reperforming borrowers that may be more vulnerable to economic shocks. This represents negative selection bias in the portfolio as this segment exhibits a higher default risk.

Rating-change drivers

Positive. A faster than expected recovery of employment in Spain would lower the expected portfolio default rate. Scope expects a gradual, but moderate, recovery of employment.

Negative. Home-price corrections bringing Spanish property markets below their long-term sustainable level would reduce expected recovery rates upon loan default. The rating-conditional recovery rates applied for the analysis of the mezzanine and junior notes reflect Scope’s expectations under current market conditions.

Cash flow analysis
Scope has performed a cash flow analysis, considering the portfolio's characteristics and the transaction's main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, senior costs, as well as servicing fees. This analysis produces an expected loss and expected weighted average life for the notes. 

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 the portfolio’s default rate, following an inverse Gaussian distribution. Scope assumed a mean default rate of 37.3% (defined as 90 days-past-due loans) and a coefficient of variation of 18.7%.

Defaulted loans are provisioned for, once they reach 18 months-past-due mark, in accordance with the transaction structure. Scope assumed a cure rate of 20% between default date and provisioning date. Scope assumed a rating-conditional recovery rate on non-cured exposures of 40.5% for the series A notes and 67.5% for the series B and C notes.

Scope did not perform a long-term adjustment of portfolio default-rate assumptions to analyse the higher rating scenarios; We believe that the performance of this non-conforming mortgage portfolio over its long life will depend on its internal credit strength more than on its exposure to economic-cycle stresses.

Scope analysed the transaction under a high (5%) and low (0%) prepayment assumption.

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

Sensitivity analysis
Scope tested the resilience of the assigned 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 assigned ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows the sensitivity of the assigned ratings when the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

Series A: sensitivity to default rate assumption, no change; sensitivity to recovery rates, no change.
Series B: sensitivity to default rate assumption, no change; sensitivity to recovery rates, one notch.
Series C is already at the lowest performing rating and shows no sensitivity as such.

Methodology
The methodologies applicable for these final ratings are the ‘General Structured Finance Rating Methodology’, and the ‘Methodology for Counterparty Risk in Structured Finance’. 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.

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 due diligence/asset audit provided at closing of the transaction upon initial assignment of the ratings. The external due dilligence/ asset audit has no negative impact on the credit ratings.
Prior to the issuance of the rating or outlook action, 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.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 24.06.2015. The ratings were last updated on 20.07.2016.

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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, 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 GmbH at Lennéstrasse 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.