Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organizations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed a monitoring review of the following credit-linked notes issued by Banco Santander S.A.:

Class C (ISIN XS2019750343): USD 65.1m: A_SF
Class D (ISIN XS2019750426): USD 40.9m: BBB-_SF
Class E (ISIN XS2019750699): USD 23.3m: BB_SF
Class F (ISIN XS2019751150): USD 15.8m: BB-_SF

The credit linked notes constitute a synthetic securitisation of U.S. prime auto loans from Santander Consumer USA Inc.

The review took place on 23 June 2020 using transaction reporting through the March 2020 payment date, resulting in no action on the assigned ratings. Scope did not rate Class A, Class B, Class G or Class H. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found at www.scoperatings.com.

Key rating factors

The no action is driven by offsetting factors.

The rated notes have benefited from deleveraging and lower-than-expected portfolio losses. However, there is still material downside risk from back-loaded default scenarios given the pro-rata amortisation features. This scenario is plausible given future COVID-19 uncertainties and a portfolio maturity profile with relatively weaker obligors on the back end.

Scope is also uncertain of any COVID-19 impact (if any) thus far on the portfolio, as the latest transaction data is from the March 2020 payment date. COVID-19-driven macro-economic impacts in the U.S. were particularly acute in the months following the most recent transaction report.

CREDIT-POSITIVE (+)

Fast portfolio amortisation: 30.2% of the portfolio has amortised since the 28 February 2019 cut-off data that was used for the initial ratings. This is faster than our initial expectation and has increased credit enhancement for Class C (19.5% from 16.5%), Class D (15.2% from 12.1%), Class E (12.8% from 9.6%) and Class F (11.2% from 7.9%).

Lower than expected losses: Losses so far are 50% below our expectation at closing. Cumulative losses of 0.31% are also well below the 2.7% trigger level.

Borrower credit profile: The portfolio had a weighted average FICO score of 753 at closing – indicating high credit quality borrowers on average. This provides an element of protection should the U.S. macro-economic situation significantly deteriorate.

CREDIT-NEGATIVE (-)

U.S. economy: The U.S. economy faces a recession in 2020, largely fueled by the Covid-19 pandemic. Additionally, the ramifications of the recent spikes in unemployment – a reliable predictor of auto loan performance deterioration – can’t yet be gleaned from the portfolio data given the latest transaction report is from March 2020. A weakened used car market due to the pandemic would also potentially depress recovery rates on repossessed vehicles sold at auction.

Pro-rata amortisation: Compared to sequential structures, pure pro-rata structures typically erode credit enhancement for more senior tranches. This risk is partially offset by a 2.7% cumulative loss trigger that switches the pro-rata mechanism to fully sequential amortisation. Another protective feature excludes the Class G from amortising until it is at least 7.5% of the outstanding notes. This has led to a non-material build-up of credit enhancement for the rated notes. However, Scope expects Class G to start amortising in the near-term.

Back-loaded defaults: Back-loaded defaults present notable downside risk because of the pro-rata structure. This scenario delays the benefit of the sequential amortisation trigger, which also provides more time for the pro-rata mechanism to eat into available credit enhancement.

The methodologies applicable for the reviewed ratings (Consumer and Auto ABS Rating Methodology, published 4 March 2020; Methodology for Counterparty Risk in Structured Finance, published 24 July 2019) are available on https://www.scoperatings.com/#!methodology/list.

This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.

Lead analyst Thomas Miller-Jones, Associate Director

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