Rating action

Scope Ratings UK Limited (Scope) has reviewed the performance of the notes issued by Santander Consumer Spain Auto 2020-1, FT and has taken the following rating actions:

Class A (ES0305499008), USD 369.9m outstanding: affirmed at AA_SF

Class B (ES0305499016), USD 19.7m outstanding: affirmed at A_SF

Class C (ES0305499024), USD 15.6m outstanding: affirmed at BBB_SF

Class D (ES0305499032), USD 14.0m outstanding: affirmed at BB+_SF

Class E (ES0305499040), USD 8.2m outstanding: affirmed at B+_SF

Transaction overview

The transaction is an auto ABS transaction, which consists of the securitisation of a EUR 520m portfolio of 49,547 fully amortising loans for vehicle acquisitions, originated by Santander Consumer Finance SA (SCF) and granted to Spanish consumers and commercial retail clients. The transaction features a pro-rata amortisation mechanism for tranches A to F, subject to certain performance conditions for the underlying portfolio. If assets underperform or the outstanding asset balance falls below 10% of the initial balance, then the liabilities will amortise fully sequentially. 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 final legal maturity will be on 21 March 2033.

As of last payment date in June 2021, 9 months since the closing date, the notes’ outstanding nominal balance was EUR 427.4m (EUR 520.0m at closing). As expected, the transaction is still amortising classes A-F pro-rata.

Rating rationale

As expected, the transaction has been amortising the notes pro-rata since the closing date. Therefore, there has been no material change in the level of credit support for the rated notes. As of the last payment date (June 2021), credit support on rated classes A, B, C, D and E was at 14.5%, 9.9%, 6.3%, 3.0% and 1.1%, respectively.

Since the closing date, none of the transaction collateral performance triggers to switch from initial pro-rata to sequential amortisation have been breached, which confirms the satisfactory pool performance. As of June 2021, the delinquency ratio, cumulative default and cumulative loss ratios were at 1.6%, 0.4% and 0.2%, well below their thresholds of 5%, 6.2% and 1.1%, respectively. The pool delinquency ratio 61-90 days closer to the transaction default definition was at 17 bps of the total non-defaulted pool balance outstanding at the end of June 2021, which confirms the positive collateral performance.

As of June 2021, the transaction’s observed defaults and recoveries have been better than Scope’s initial expectations, showing its resilience to the negative effects of the pandemic. However, Scope believes it is too soon to make changes to its initial pool credit assumptions without having seen the transaction’s performance without the benefit of Spanish government financial support.

In Scope’s view, the satisfactory collateral performance is due to the following key reasons: i) the borrowers’ positive credit quality; ii) SCF’s proactive pool management throughout the pandemic; and iii) significant Spanish government financial support. As of May 2021, there were still 600,000 jobs under furlough schemes, which represents around 3% of the total Spanish employed population.

The transaction’s positive performance is further delaying the rated notes’ future build-up of credit support due to a prolonged pro-rata amortisation.

There is still material downside risk from a back-loaded default scenario given the notes pro-rata amortisation feature. This scenario is plausible due to future uncertainty caused by the length of the pandemic and a pool maturity profile which leaves weaker obligors towards the end of the transaction’s life. These negative factors are offset by: i) the observed low level of pool delinquencies throughout the pandemic; and ii) the structural pro-rata switch to sequential amortisation, which protects senior noteholders.

The rated notes are not constrained by the application of Scope’s counterparty criteria. SCF, in its role as issuer account bank holder and interest rate cap counterparty, still maintains the minimum required ratings to allow the transaction to achieve its highest possible rating. Scope continues to believe that the strong credit profile of SCF and Banco Santander SA, combined with appropriate counterparty downgrade and replacement mechanisms, mitigate most of the transaction’s counterparty concentration risk.

Key rating drivers

Borrower credit profile (positive)¹. The portfolio’s satisfactory performance over the past nine months indicates the positive credit quality of the underlying pool of borrowers. This provides an element of protection should the Spanish macroeconomic situation deteriorate, or the level of discretionary fiscal support observed during 2020 and 2021 be removed.

Asset performance (positive)¹. As of June 2021, the pool’s reported defaults and losses were better than Scope’s initial expectations. Overall portfolio performance has been positive and has demonstrated a marked resilience to the negative effects of the pandemic. Since the closing date, the asset performance-related trigger, which switches to sequential amortisation, has not been breached and the observed pool delinquency rates have been relatively low and stable.

Macroeconomic uncertainties (negative)³. Scope expects 6.0% GDP growth and 16.0% unemployment rate in Spain for 2021. There has been a decrease in observed unemployment since it peaked at 16.2% in Q3 2020. However, there are still substantial uncertainties concerning the effectiveness of available vaccines and their ability to prevent further restrictions. Further uncertainties come from possible future reductions in the level of discretionary fiscal measures adopted by the Spanish government to ease the negative economic effects of the pandemic.

Pro-rata amortisation (negative)². Compared to sequential structures, pro-rata structures typically erode credit enhancement for more senior tranches. This risk is partially offset by collateral performance triggers that switch the pro-rata mechanism to fully sequential amortisation.

Back-loaded defaults (negative)². Back-loaded defaults present a notable downside risk because of the transaction’s pro-rata amortisation profile structure. This scenario delays the benefit of the transaction’s sequential amortisation trigger, which also provides more time for the pro-rata amortisation to continue to erode the available credit enhancement.

Rating-change drivers

Positive. Consistent better performance than expected manifested by lower defaults and faster recoveries could lead to an upgrade. An early activation of the stop-pro-rata trigger followed by improving portfolio performance may reflect positively on the senior rated instruments.

Negative. A prolonged pandemic crisis, together with a removal of government financial support, could lead to higher unemployment. This might translate into transaction losses beyond Scope’s rating case, thereby negatively impacting the ratings.

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.

Based on the pool composition as of June 2021, Scope established a 90-days-past-due mean default rate of 5.5% for the remaining pool over a weighted average life of 2.8 years. Scope maintained its closing base case recovery rate of 40% and pool default coefficient of variation of 50%. The rating-conditional recovery rates were therefore: 40.0% for B, 36.8% for BB, 33.6% for BBB, 30.4% for A, 27.2% for AA and 24.0% for AAA.

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

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in the main input parameters: the 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:

Class A: sensitivity to mean default rate, one notch; sensitivity to recovery rate, zero notches

Class B: sensitivity to mean default rate, three notches; sensitivity to recovery rate, two notches

Class C: sensitivity to mean default rate, two notches; sensitivity to recovery rate, one notch

Class D: sensitivity to mean default rate, two notches; sensitivity to recovery rate, zero notches

Class E: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches

Rating driver references
1. Investor reports (confidential)
2. Transaction documentation (confidential)
3. Scope revises Outlook on Spain's A- rating to Stable

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 Rating’s 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, (Scope’s ‘General Structured Finance Rating Methodology’, 14 December 2020; ‘Consumer and Auto ABS Rating Methodology, 3 March 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021) are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Scope Cash Flow SF EL Model Version 1.1) available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
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-UK. 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/or 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 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.
Scope Ratings has received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/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 UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +4420-7824-5180. The credit ratings are EU endorsed.
Lead analyst: Miguel Barata, Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The final Credit Ratings were first released by Scope Ratings on 25 September 2020.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/UK 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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