Rating action

• Series A (ES0305078000), EUR 1,436.25m outstanding amount: affirmed at AA+_SF
   
• Series B (ES0305078018), EUR 590.0m outstanding amount: upgraded to CCC_SF from CC_SF
   
• Series C (ES0305078026), EUR 147.5m outstanding amount: affirmed at C_SF

The rating action incorporates information available from historical transaction reports through December 2019.

Transaction overview

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 1,436.25m (60.8% of the series A balance at closing). Credit enhancement for the tranche has increased to 35.21% from 25% at closing. Similarly, credit enhancement for the Series B notes has increased to 6.11% from 5% at closing. Cumulative written-off loans and 90 days-past-due loans are 2.19% and 1.09%, respectively, which is below Scope’s expectations at closing. 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

Increased credit enhancement (positive). The loss-absorbing protection provided by the structure to Series A is significant, as credit enhancement for the senior notes has risen to 35.2%.

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 7.1 years, 18.1 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. Further transaction deleveraging may result in rating upgrades for the Series A and B notes if credit enhancement builds up before credit losses crystallise.

Negative. Home-price corrections bringing Spanish property markets below their long-term sustainable level would reduce expected recovery rates upon loan default.

Quantitative analysis and assumptions

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.

Sensitivity analysis

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 how the results for each rated tranche change compared to the assigned ratings when the assumed mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases 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, two notches.
• Series C is already at the lowest performing rating and shows no sensitivity as such. 

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

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF/EL Model Version 1.1.1, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

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 instruments' issuer 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.
At closing Scope Ratings GmbH has received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the issuer and/or its agents were given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit ratings are issued by Scope Ratings GmbH.
Lead analyst: Cyrus Mohadjer, Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The final ratings were first released by Scope on 6 July 2015. The ratings were last updated on 4 December 2018.

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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