Rating action

• Series A (ES0305078000), EUR 1,278.2m outstanding amount: upgraded to AAA_SF from AA+_SF
• Series B (ES0305078018), EUR 590.0m outstanding amount: affirmed at CCC_SF
• Series C (ES0305078026), EUR 147.5m outstanding amount: affirmed at C_SF

The rating action incorporates information available from historical transaction reports through to December 2020.

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 action is driven by the transaction’s deleveraging and the portfolio’s solid performance to date. The Series A notes have amortised to EUR 1,278.2m (54.2% of the Series A balance at closing). Credit enhancement for the tranche has increased to 38.35% from 25% at closing. Similarly, credit enhancement for the Series B notes has increased to 6.83% from 5% at closing. Cumulative failed loans and 90-days-past-due loans are at 2.51% and 1.14% respectively, which is below Scope’s expectations at closing. The transaction is, however, exposed to long-term uncertainties because of the non-conforming nature of obligors in the pool and the long loan maturities.

Key rating drivers

Increased credit enhancement (positive)¹. Credit enhancement for the Series A has risen to 38.35%, providing significant loss-absorbing protection to the senior notes.

Counterparty credit quality (positive)². 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, B and C notes are respectively 6.5 years, 17.3 years and more than 30 years.

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 B if credit enhancement builds up before credit losses crystallise.

Negative. House-price corrections bringing Spanish property markets below their long-term sustainable levels 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) and a coefficient of variation of 18.7%.

Provisions are raised on loans that are at least 18 months past due, in accordance with the transaction structure. Scope assumed a cure rate of 20% between the default date and provisioning date. Scope assumed a rating-conditional recovery rate on non-cured exposures of 40.5% for the Series A 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. This approach is based on Scope’s view that the performance of this non-conforming mortgage portfolio over its long life will depend more on internal credit strength than on the exposure to cyclical stresses.

Scope analysed the transaction under high (5%) and low (0%) prepayment assumptions.

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, zero notches; sensitivity to recovery rates, zero notches.
• Series B: sensitivity to default rate assumption, zero notches; sensitivity to recovery rates, two notches.
• Series C is already at the lowest performing rating and therefore shows no sensitivity.

Rating driver references
1. Investor payment reports
2. Transaction documentation (Confidential)
3. Loan-by-loan data tape (Confidential)

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

Cash flow analysis
Scope Ratings 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 credit ratings were Scope’s ‘General Structured Finance Rating Methodology’ published on 14 December 2020 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 8 July 2020. All documents are available on https://www.scoperatings.com/#!methodology/list.
The model used for these credit ratings, Scope Cash Flow SF/EL Model Version 1.1, is available in Scope Ratings’ 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 Ratings’ 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 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 Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings 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 credit rating action, the rated entity was given the opportunity to review the credit ratings and the principal grounds on which the credit rating and/or outlook is based. Following that review, the credit rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The credit ratings are UK endorsed.
Lead analyst: Cyrus Mohadjer, Senior Analyst
Person responsible for approval of the credit rating: David Bergman, Managing Director
The final credit ratings were first released by Scope Ratings on 6 July 2015. The credit ratings were last updated on 17 March 2020.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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