Rating action:

Serie A, EUR 753.0m: upgrade to AA_SF from A+_SF

Serie B, EUR 261.4m: affirmation of CC_SF

Serie C, EUR 63.7m: affirmation of C_SF

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

FT RMBS SANTANDER 5 is a granular true sale securitisation of a EUR 1,275m portfolio (at closing) of non-conforming first-lien mortgage-secured loans granted to Spanish individuals and resident foreigners to finance the purchase, construction or refurbishing of residential properties in Spain. The assets have been originated by Banco Santander SA (‘Santander’), its former subsidiaries Banesto, and Banif (a banking franchise now fully integrated in Santander) and their respective brokers. The transaction closed on 14 December 2015 with a final legal maturity of 17 October 2065.

Rating rationale

The rating actions are driven by deleveraging of the transaction and solid performance of the portfolio to date. The serie A notes have amortised to EUR 753.0 (74.3% of the serie A balance at closing). Credit enhancement for the tranche has increased to 31.3% from 25.5% at closing. Cumulative failed loans and 90 days-past-due loans are 1.26% and 1.06%, respectively, which are both below Scope’s expectations at closing. The transaction also benefits from the positive macro-economic momentum observed in Spain. However, the transaction is exposed to longer-term 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 serie A is significant, as credit enhancement for the senior notes is now 31.3%.

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 serie A, serie B and serie C notes are 8.3 years, 20.4 years and 30+ years, respectively.

Low asset quality (negative): The portfolio is exposed to a larger share of restructured and reconducted borrowers when compared to similar non-conforming transactions rated by Scope. These borrowers are more vulnerable to economic shocks and represents negative selection bias in the portfolio, as this segment potentially exhibits 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 41.0% (defined as 90 days-past-due loans) and a coefficient of variation of 25.0%.

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 7.2% between default date and provisioning date. Scope assumed a rating-conditional recovery rate on non-cured exposures of 41.5% for the serie A notes and 60.1% for the serie 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 how the results for each rated instrument change compared to the assigned rating 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 assumption, one notch; sensitivity to recovery rates, five notches.
Serie B: sensitivity to default rate assumption, one notch; sensitivity to recovery rates, one notch.
Serie 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 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 diligence/ 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
These credit ratings are 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 18.12.2015.

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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