Rating action

Class A (ES0305381008), EUR 669.8m: upgraded to AAA_SF from AA+_SF

Class B (ES0305381016), EUR 258.5m: upgraded to BBB_SF from BB+_SF

Class B (ES0305381024), EUR 110.0m: affirmed at CCC_SF

The rating actions incorporate information available from transaction reports¹ and European DataWarehouse² data through January 2020.

Transaction overview

FT PYMES SANTANDER 14 is a static, true-sale securitisation of loans originated by Banco Santander SA (Santander), Banesto and Banif – with latter two banks now fully integrated with Santander. The current EUR 909.4m portfolio is comprised of unsecured loans (76.4%), secured loans (30.1%) and credit lines (2.2%) granted to Spanish SMEs to finance various business needs.

The notes amortise sequentially and pay floating rate interest referencing 3-month Euribor, with a combined priority of payments. Class B interest ranks senior to class A principal unless a 5.0% cumulative default trigger is breached. Interest and principal payments on class C are fully subordinated to the mezzanine and senior notes. A reserve fund – funded by the class C notes – provides liquidity and credit enhancement for the class A and class B notes. The amortisation of the reserve fund – following a two-year lockout period from closing – is floored at EUR 55m, an amount equivalent to 2.5% of the senior and mezzanine notes at closing. The transaction closed on 26 November 2018.

Rating rationale

The rating actions are largely driven by increased credit enhancement and better than expected asset performance. Credit enhancement increased to 38.5% (16.8% at closing) for class A and 10.0% (5.0% at closing) for class B. The increase has been driven by portfolio amortisation (7.7% lifetime prepayment rate) and the non-amortising reserve fund. 90 day+ delinquencies account for 1.9% of the outstanding portfolio balance and cumulative defaults amount to 0.4% of the portfolio balance at closing.

The upgrades are also supported by the notes’ expected resilience to macro-economic uncertainties in Spain, including potential impacts from COVID-19. Class C notes were affirmed based upon expected provisioning of portfolio losses from the cash reserve and the uncertainties previously mentioned.

Santander, which performs all major counterparty roles in the transaction, continues to support the ratings. We assessed the credit quality of Santander using Scope’s ratings.

Key rating drivers

Increased credit enhancement (positive). Class A credit enhancement has increased to 38.5% from 16.8% at closing, while class B credit enhancement has increased to 10.0% from 5.0%.

Asset performance (positive). 90+ delinquencies account for 1.9% of the outstanding portfolio as of 31 January 2020. Cumulative defaults as a percentage of the portfolio at closing is 0.4%. A 7.7% lifetime prepayment rate has also benefitted the rated notes.

Increased secured loan share (positive). The share of secured loans has increased to 21.3% from 6.6% at closing. This potentially increases recovery rates when compared to unsecured loans, and credit lines in particular.

Macroeconomic uncertainties (negative). The transaction is exposed to macroeconomic uncertainties in Spain, especially when considering impacts from COVID-19. Negative growth is now expected for Spain this year, which may adversely impact certain obligors in the portfolio.

Class B interest subordination (negative). Class B interest is subordinated if cumulative defaults reach 5.0% of the closing portfolio balance. This feature leaves note holders more vulnerable to potential losses in a stressed economic environment.

Unhedged interest rate risk (negative). 29.4% of the portfolio pays a fixed-rate coupon, while the notes will pay a floating-rate coupon referenced to 3-month Euribor. The relatively short expected life of class A partially mitigates this risk along with excess spread, which is 1.34% (assuming a 0.5% servicer fee).

Rating-change drivers

Positive: Further transaction deleveraging and the reduction of the transaction’s remaining life will gradually reduce the lifetime exposure to uncertainties in Spain and could lead to rating upgrades.

Negative: A severe deterioration of the Spanish macroeconomic environment, beyond what Scope has considered, could lead to very high default rates and thereby negatively impact the ratings.

Quantitative analysis and assumptions

Scope Ratings 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 applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis considers the probability distribution of the portfolio’s default rate using an inverse Gaussian distribution.

Scope assumed a point-in-time portfolio mean default rate of 2.9% and coefficient of variation of 52.7%. Scope also considered a long-term economic cycle adjustment with a default distribution reflecting a long-term portfolio mean default rate of 1.3% and a coefficient of variation of 148.6%. Rating-conditional recovery rates of: 23.3% for the class A notes; 28.3% for the class B notes; and 42.8% for the class C notes, were incorporated in the analysis.

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

Sensitivity analysis

Scope tested the resilience of the rating against deviations in 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 rating 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 mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Class A: sensitivity to default rate assumptions, 0 notches; sensitivity to recovery rates, 0 notches;
   
• Class B: sensitivity to default rate assumption, 0 notches; sensitivity to recovery rates, 0 notches.
   
• Class C: sensitivity to default rate assumption, 3 notches; sensitivity to recovery rates, 3 notches.

Rating driver references
1. Transaction reports
2. European DataWarehouse

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 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 used for these ratings are the ‘SME ABS Rating Methodology’ dated 9 April 2019 and the ‘Methodology for Counterparty Risk in Structured Finance’ dated 24 July 2019. All documents are available on https://www.scoperatings.com/#!methodology/list. The models used for this rating(s) and/or rating outlook(s) are available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list. Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The rated instruments’ issuer and/or its agents participated in the rating process at closing.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entities’ agents, the issuer, 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 received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the rating and it had no impact on the credit rating.
Prior to the issuance of the rating actions, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings are based. Following that review, the ratings were not amended before being issued.

Regulatory disclosures
These credit ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The final ratings were first released by Scope on 26 November 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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