Rating action

The rating actions are as follows:

Class A (ISIN ES0305508006), EUR 442,900,000: final rating of AAA_SF

Class B (ISIN ES0305508014), EUR 38,600,000: final rating of A-_SF

Class C (ISIN ES0305508022), EUR 33,500,000: not rated

The latest information on the ratings, including rating reports and related methodologies are available on this LINK.

Transaction overview

Fondo de Titulización RMBS Prado VII is a static cash securitisation consisting of prime residential mortgage loans originated by UCI and extended to individual borrowers resident in Spain. The pool’s balance, as of 5 November 2020 consists of first lien mortgages on residential properties extended to 4,244 borrowers resident in Spain, and the current pool balance is approximately equal to €515 million.

The portfolio is subject to certain credit-positive eligibility restrictions, such as the exclusion of any loans in arrears or under moratorium, loans that were restructured or have shown delinquencies in the past as well as non-released bridge loans. All loans in the portfolio are backed by first lien mortgages granted to individuals for purchasing first residence. Additionally, around 9% of the outstanding balance have an additional third-party guarantee, and around 34.7% have more than one mortgage securing the relevant loan.

Loans in the current portfolio were originated between 2009 and 2019, with 68.7% originated from 2018 onwards. 22.8% of loans come from the Prado I transaction (being fully called in June 2020) originated between 2009 and 2013 which have shown very good performance so far. The portfolio is seasoned 3.9 years and has a long weighted average remaining time to maturity of 25.5 years.

Loans have a relatively low weighted average loan-to-value of 67% down from 72.7% at loan origination. 13.3% of the loans in the portfolio are VPO loans which is reflected in the appraisal values and vice versa in the LTVs. Fixed-rate loans for life represent 35.6% of the portfolio. Additional 29.4% fixed rate loans have a compulsory future switch to floating. Fixed rate loans have a weighted average margin of 2.7%. Floating-rate loans are referred to 12 months Euribor and have a weighted average margin of 1.6% (1.5% if including the margin for the loans which switch to floating in the future).

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral; the experience and incentives of UCI as the transaction’s originator and mortgage manager; and the exposure to the other transaction counterparties.

Credit enhancement of the rated notes stems from their respective subordination levels as well as a 2% cash reserve fully funded at closing, which will amortise to 2% of the portfolio’s outstanding balance, with a floor at 0.25% of the initial pool balance. The class A and class B notes will amortise sequentially and the structure benefits from hedging covering fixed-floating interest rate risk.

The ratings also reflect: i) the subordination of class B interest payments to class A principal if cumulative portfolio defaults equal or exceed 2.3%, 4.5%, 6.2%, 7.9%, or 9.6% of the initial portfolio balance during the first five years of the transaction, respectively, or 11.5% in the subsequent years, and ii) the turbo amortisation of class A principal (all class A principal becomes due immediately) if cumulative portfolio defaults equal or exceed 1%, 2%, 3%, 4% or 5% of the initial portfolio balance in the first five years of the transaction, respectively and following the step-up date..

Performance assumptions on underlying collateral were mainly driven by: i) an analysis of historical defaults and recoveries vintage data provided by UCI that incorporate changes in underwriting criteria and economic conditions across the historical period; ii) an analysis of the performance of previous securitisations sponsored by UCI; and iii) the credit quality of the underlying portfolio in the context of current macroeconomic conditions in Spain.

UCI will be the transaction servicer and Santander de Titutlización S.G.F.T., S.A will be the cash manager. No back-up servicer will be appointed at closing but Banco Santander S.A. (Banco Santander) will act as back-up servicer facilitator.

Key rating drivers

Positive portfolio selection (positive). All loans are first-lien mortgages granted to individuals to purchase their main residence. Loans that have special features or were previously restructured or under moratoriums have been excluded from the securitised portfolio. In addition, none of the loans have ever been in arrears.¹

Portfolio characteristics (positive). The proportion of floating-rate loans in the pool as well as the original loan-to-value ratio are lower than Spanish average. All underlying mortgaged assets are owner-occupied properties.¹

Portion of portfolio from Prado I (positive). Around 23% of the portfolio comes from Prado I, which has been fully repackaged into this transaction. The weighted average seasoning of these loans is 9.8 years, and their current loan-to-value is 45.1%. Prado I historical performance has been very good, with very low delinquencies and defaults.¹

Simple structure (positive). The transaction is static and the notes will amortise fully sequentially. In addition, a turbo amortisation mechanism and a class B interest subordination trigger protect most senior noteholders from portfolio performance deterioration.³

Historical performance (negative). The historical performance of UCI differs from the average for Spanish mortgage pools originated by banks, with large disparities between vintages. However, the performance of post 2009 vintages has been improved, due to stronger underwriting criteria and an improved Spanish economy.²

Third-party origination (negative). UCI’s origination relies mostly on a network of external financial consultants. However, the risk analysis of potential debtors is done only by UCI teams.⁴

Limited excess spread (negative). The transaction’s excess spread is low, thus increasing its sensitivity to changes in interest rates. We have run stress scenarios to test the impact of this sensitivity.^1,3

Interest rate mismatch (negative). The notes pay a floating rate, while a portion of portfolio pays a fixed rate, either for the transaction’s life or for a period before switching to floating rate. This creates a mismatch between interest flows, a risk heightened by the low excess spread. A fixed-floating swap will hedge this risk. Basis risk will remain unhedged but is limited.^1,3

Upside rating-change drivers

Stabilisation of the Spanish macroeconomic conditions with a return to the previous norm.

Downside rating-change drivers

Spanish macroeconomic uncertainty in relation to the global slowdown. Covid-19 impacts may weigh negatively on collateral pool performance, as higher unemployment may affect the capacity of borrowers to repay.

Quantitative analysis and assumptions

Scope used a cash flow model to analyse the transaction and applied a statistical distribution of defaults when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period.

A mean default rate of 7.0% and a coefficient of variation of 85.0% were applied over the portfolio’s expected weighted average life. Scope derived an expected portfolio default rate distribution based on 2001-18 vintage data provided by UCI. The vintage data exhibits two distinct behaviours, with the worst origination years being between 2004-2008 due to a combination of lax underwriting criteria and seasoning of the loans when the European Sovereign Crisis affected the Spanish economy. Loans originated before 2009 have been excluded from the securitised portfolio. The default rate assumptions at 360 days were also benchmarked versus a top-down analysis based on both (i) a macro view of a AAA default rate for Spain and (ii) the loan-by-loan characteristics of the UCI pool, which are better than the previous Prado transactions.

Scope considered a rating-conditional recovery rate of 45% for Class A and 57% for Class B. Scope were provided with historical performance data on recoveries, incorporating both (i) cure, (ii) potential restructuring and (iii) repossession. In order to define the AAA recovery rate assumption, Scope used two approaches: (i) the average recovery rate implied by the repossession as our base case rate, and (ii) the computed AAA recovery rate using our Market Value Decline Assumptions for the Spanish Property market using the geographical distribution. The recovery timing has a vectorised recovery schedule and a weighted average recovery lag of 7 years.

Scope derived a front-loaded default timing term structure by leveraging on the portfolio amortisation schedule. Back-loaded default scenarios are not as severe owing to credit enhancement build-up and the effect of seasoning on the portfolio.

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope analysed the transaction under both 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 mean-default rate and the 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 quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A: sensitivity to default rate, two notches; sensitivity to the recovery rate, two notches.
• Class B: sensitivity to default rate, one notch; sensitivity to the recovery rate, one notch.

Rating driver references
1. Loan-by-loan datatape of the securitised pool (confidential)
2. Originator’s vintage data (confidential)
3. Transaction documents (confidential)
4. Servicer internal documents and information (confidential)

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

Cash flow analysis
Scope analysed the transaction’s cash flows using the Scope Cash Flow SF EL Model Version 1.1. This model incorporates default and recovery rate assumptions over the portfolio’s amortisation period and the transaction’s main structural features such as the notes’ priorities of payment, 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 were Scope’s General Structured Finance Rating Methodology (18 December 2019) and its Methodology for Counterparty Risk in Structured Finance (8 July 2020). All documents are available on www.scoperatings.com.
The model/s used for this rating(s) Scope Cash Flow SF EL Model Version 1.1. is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
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.

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 diligence assessment/asset audit was considered when preparing the ratings and it has no impact on the credit ratings.
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.
Lead analyst Martin Hartmann, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The preliminary ratings were first released by Scope on 26 October 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
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.