Rating action

The rating action is as follows:

Class A notes, EUR 450.0m: assigned final rating of AA_SF
Class B notes, EUR 24.0m: assigned final rating of A_SF
Class C notes, EUR 19.0m: assigned final rating of BBB_SF
Class D notes, EUR 17.0m: assigned final rating of BB+_SF
Class E notes, EUR 10.0m: assigned final rating of B+_SF
Class F notes, EUR 5.2m: NR

*The analysis is based on the portfolio as of 04 June 2020 and subsequent updates.

Transaction overview

Santander Consumer Spain Auto 2020-1, FT is a true-sale securitisation of a EUR 520.0m static portfolio of 49,547 secured auto loans with no residual value risk, granted to private individuals and retail commercial clients in Spain by Santander Consumer Finance.

The transaction features a pro-rata amortisation mechanism for tranches A through E, subject to certain performance conditions for the underlying portfolio. If the assets underperform or the outstanding asset balance falls below 10% of the initial balance, the liabilities will amortise fully sequentially.

Santander Consumer Finance, a fully owned subsidiary of Banco Santander SA, is the portfolio servicer and account bank in this transaction; Banco Santander is the paying agent and interest cap provider.

Santander Consumer Finance provides the consumer finance business for the Santander group globally. Its auto credit origination relies heavily on cooperation with dealer networks and manufactures, as well as on the bank’s online lending platform. The bank provides a wide range of lending solutions to its customers, including standard amortising auto loans, which represent 100% of the securitised portfolio. Monitoring and recovery processes are pro-active and focus on minimising losses for the bank while maintaining the client relationship.

Of the six classes of notes being issued, Scope has assigned ratings to classes A through E, leaving class F unrated. The transaction closed on 22 September 2020 and the legal final maturity is on 21 March 2033.

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the credit quality of the underlying portfolio in the context of macroeconomic conditions in Spain and the current Covid-19 pandemic; the ability of the originator and servicer, Santander Consumer Finance; as well as the counterparty credit risk exposure to Banco Santander and its subsidiaries in their different money handling roles as account bank, servicer, paying agent and interest-cap counterparty.

Classes A to E are protected against potential losses from the underlying portfolio via subordination of 14.5%, 9.9%, 6.2%, 2.9% and 1.0% respectively. The notes will start to amortise on a pro-rata basis but will switch to sequential if the underlying portfolio performs poorly. The ratings reflect the evolution of the absolute credit enhancement available under the pro-rata amortisation mechanism as well as the notes’ rating sensitivity to analytical assumptions and default timing.

The notes also benefit from significant excess spread of at least 5.8% per annum at closing, which will be available to cover periodic payment shortfalls. Liquidity is further supported by a fully funded 1% liquidity reserve, whose remaining balance can also cover note losses at the transaction’s maturity. The issuer will enter into interest rate caps with Banco Santander, which cap the potential increase of the 3-month EURIBOR at 1% and prevent further erosion of excess spread due to the fixed-floating asset-liability mismatch.

The transaction benefits from the consistent and proven business model of Santander Consumer Finance and its integration into Santander Group. Santander Consumer Finance is an experienced auto loan originator, providing highly standardised auto financing solutions to its private and retail customers.

Santander Consumer Finance has made a commitment to replace or repurchase any loan for which moratorium measures related to Covid-19 have been granted. This partially mitigates portfolio credit risks related to Covid-19. Scope’s baseline scenario is a general economic slowdown in the EU area, which will have a negative impact on the Spanish macroeconomy with increasing levels of unemployment and declining household incomes.

The ratings also reflect the counterparty risk exposure of the transaction to Santander Consumer Finance and Banco Santander SA as servicer, account bank and interest cap provider. The strong credit profile of Santander Group and its subsidiaries together with appropriate replacement mechanisms upon the loss of a BBB rating mitigate the concentration of the counterparty exposure. Scope maintains ratings on Banco Santander SA and Santander Consumer Finance.

Key rating drivers

Positive asset selection (positive)¹. The portfolio is positively selected, as eligibility criteria exclude all loans with a bank-internal probability of default above 4%, as well as all loans in arrears.

Experienced loan originator and servicer (positive)¹. Santander Consumer Finance has a long track record (25+ years) in the Spanish consumer and auto loan business. The bank is the second largest financing platform in Spain and has a global footprint, which provides additional experience from other jurisdictions.

Significant excess spread (positive)¹. High excess spread to cover periodic losses from the assets provides strong credit protection for the notes. The spread between the portfolio’s weighted average interest and the weighted average cost of liabilities is about 5.8% as of closing.

The interest rate cap entered into with Banco Santander protects the excess spread. Additionally, the high credit quality of Santander Consumer Finance makes a servicer replacement scenario with associated potential cost increases a remote scenario.

Pro-rata amortisation (negative)¹. The amortisation mechanism erodes absolute credit enhancement for the highest tranches and particularly exposes the senior tranches adversely to the timing of defaults and the speed of repayments.

This is partially mitigated by a pro-rata stop trigger schedule referencing delinquencies, cumulative defaults and cumulative losses as well as a reserve fund available to cover losses from the portfolio at transaction termination. Additionally, the 90+ days past due default definition increases the effectiveness of the pro-rata triggers and of the provisioning of defaults from excess spread.

Weak macroeconomic outlook (negative)². The Spanish economy is currently challenged by two adverse effects, Covid-19 and the general economic slowdown in Europe, which Scope expects to result in rising levels of unemployment and decreasing household income.

Support measures from the government and supranational institutions may help to reduce the adverse impact. Also, Santander will replace or repurchase all loans for which Covid-19 related moratorium measures have been granted. However, uncertainties remain in terms of default risk volatility and recovery expectations. We have factored these uncertainties into our analysis.

Counterparty concentration (negative)¹. Banco Santander and its subsidiaries perform all counterparty roles in this transaction. The high credit quality of the group and its subsidiaries partially mitigates counterparty risk. Moreover, the transaction benefits from an automatic replacement mechanism upon the loss of a BBB rating for the account bank Santander Consumer Finance and the interest cap provider Banco Santander SA, as well as from the collateralisation of the servicer exposure, should the current servicer Santander Consumer Finance default.

Rating-change drivers

(Positive) An early activation of the stop-pro-rata trigger followed by improving portfolio performance may reflect positively on the senior rated instruments.

(Negative) A severe Covid-19 second wave poses downside risk to the transaction, which would be likely reflected in higher unemployment and an increase of defaults in the portfolio.

Quantitative analysis and assumptions

Scope performed a cash flow analysis of the transaction over the amortisation period, incorporating important structural mechanisms into the analysis. The agency used a large homogenous portfolio approximation approach to analyse the highly granular collateral pool. Scope assumed that portfolio defaults followed an inverse Gaussian distribution when calculating the expected loss of the rated tranches. The analysis also provided the expected weighted average life of each tranche. Scope considered asset and liability amortisation.

Scope’s analysis considered a ‘90-days-past-due’ mean default rate and coefficient of variation assumptions of 6.0% and 50.0%, respectively. Scope derived the assumptions from Santander Consumer Finance’s default vintage and recovery performance data covering the period 2013 to Q1 2020. This period captures the bank’s performance in both a distressed and a benign environment for Spanish consumers.

The pro-rata amortisation mechanism makes the transaction sensitive to the timing of defaults. Scope tested several front and back-loaded scenarios and reflected the results in the assigned ratings.

Scope considered a base case recovery rate for the portfolio of 40% applicable for a B category rating. Rating-conditional haircuts of 40% were applied for a AAA rating target, 32% for AA, 24% for A, 16% for BBB and 8% for BB.

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

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.

• Class A: sensitivity to mean-default rate + 50%, 2; sensitivity to recovery rates – 50%, 0;
• Class B: sensitivity to mean-default rate + 50%, 4; sensitivity to recovery rates – 50%, 2;
• Class C: sensitivity to mean-default rate + 50%, 2; sensitivity to recovery rates – 50%, 1;
• Class D: sensitivity to mean-default rate + 50%, 2; sensitivity to recovery rates – 50%, 0;
• Class E: sensitivity to mean-default rate + 50%, 0; sensitivity to recovery rates – 50%, 0.

Rating driver references
1. Confidential issuer and arranger internal documents and information
2. Scope’s macroeconomic view on Spain

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 this rating(s) and/or rating outlook(s) Consumer and Auto ABS Rating Methodology (4 March 2020), Methodology for Counterparty Risk in Structured Finance (8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
The model/s used for this rating(s) Cash Flow SF EL Model Version 1.1 is 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 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 received a third-party asset due diligence assessment/asset audit. The external due assessment/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 rated entity was 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 rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Sebastian Dietzsch Director
Person responsible for approval of the rating: Antonio Casado, Executive Director
First released as preliminary ratings on 26 August 2020. The final ratings were first released by Scope on 25 September 2020.

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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