Rating action

Class A (ES0305381008), EUR 287.6m outstanding: affirmed at AAA_SF

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

Class B (ES0305381024), EUR 63.2m outstanding: affirmed at CCC_SF

The rating actions incorporate information available from public transaction reports and European DataWarehouse (EDW) data through January 2021.

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 532m (EUR 2,200m as of closing) portfolio is comprised of unsecured loans (79.6%), secured loans (19.9%) and credit lines (0.5%) granted to Spanish SMEs to finance various business needs. The transaction closed on 26 November 2018.

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 amortising reserve fund is its EUR 63.2m target level. It has a floor of EUR 55m, an amount equivalent to 2.5% of the senior and mezzanine notes at closing.

Rating rationale

The rating actions are largely driven by increased credit enhancement and better than expected asset performance. The increased credit enhancement has been driven by higher-than-expected prepayments (7.7% lifetime prepayment rate). 90 day+ delinquencies account for 0.4% of the outstanding portfolio balance compared to 1.89% a year ago. Cumulative defaults amount to 0.65% of the portfolio balance at closing compared to 0.37% a year ago.

Class A credit enhancement has increased to 57.8% (16.8% at closing).

Class B credit enhancement has increased to 9.3% (5.0% at closing).

The upgrade of the Class B and the affirmation of Class A notes are also supported by the notes’ expected resilience to macro-economic uncertainties in Spain, including potentially negative economic impacts from COVID-19. Class C notes were affirmed based upon expected provisioning of portfolio losses from the cash reserve and the aforementioned macro-economic uncertainties.

Santander performs all major counterparty roles in the transaction. Counterparty exposure is mitigated by the bank’s high credit quality and by investment grade replacement triggers.

Key rating drivers

Increased credit enhancement (positive)¹. Class A credit enhancement has increased to 57.8% from 16.8% at closing, while class B credit enhancement has increased to 9.3% from 5.0% at closing.

Asset performance (positive)¹. 90+ delinquencies account for 0.4% of the outstanding portfolio as of 15 January 2021. Cumulative defaults as a percentage of the portfolio at closing is 0.65%. A 7.7% lifetime prepayment rate has also benefitted the senior and mezzanine notes.

Increased secured loan share (positive)². The share of secured loans has increased to 19.9% from 6.6% at closing. This potentially increases recovery rates when compared to unsecured loans and credit lines. The share of credit lines has decreased to 0.5% from 29.9% at closing.

Macro-economic uncertainties (negative). The transaction is exposed to macroeconomic uncertainties in Spain, especially when considering impacts of COVID-19.

Class B interest subordination (negative)³. 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)¹. 29% 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.

Rating-change drivers

Positive: Rapid transaction deleveraging from higher-than-expected prepayment could positively impact the ratings.

Negative: A severe deterioration of the Spanish macro-economic environment, beyond what Scope has considered, could lead to 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 considered the assets’ amortisation schedule and assumed a default timing reflecting a constant default intensity. This accounts for observed default behaviour and reduced duration risk as a result of portfolio deleveraging, resulting in an updated remaining lifetime mean default rate and coefficient of variation.

Scope assumed a portfolio mean default rate of 2.7% and coefficient of variation of 50.9%. Scope assumed a base case recovery rate of 46.7% and AAA recovery rate of 22.9%.

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, 0 notches; sensitivity to recovery rates, 0 notches.

Rating driver references
1. Transaction reports 
2. European DataWarehouse
3. Transaction prospectus

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ 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, “SME ABS Rating Methodology” dated 26 May 2020, ‘General Structured Finance Rating Methodology’ dated 14 December 2020 and “Methodology for Counterparty Risk in Structured Finance” dated 8 July 2020 are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings are Scope Cash Flow SF/EL Model Version 1.1, available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit 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 Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 these 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 has received a third-party asset audit. The external asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
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 Ratings are based. Following that review, the Credit 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. The Credit Ratings are UK-endorsed.
Lead analyst: Thomas Miller-Jones, Associate Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 26 November 2018. The Credit Ratings were last updated on 3 April 2020.

Potential conflicts
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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