On 17 September 2021 Scope Ratings GmbH (Scope) completed a monitoring review of FITZROY 2018-1 CLO DAC and took no action on the rated instruments, Class A notes and tranches A through E as defined under the credit protection agreement between Banco Santander and the issuer:

Class A, GBP 836m: AA-_SF

Tranche A, GBP 836m: AAA_SF

Tranche B, GBP 56m: AA_SF

Tranche C, GBP 67m: A_SF

Tranche D, GBP 45m: BBB_SF

Tranche E, GBP 56m: BB_SF

The Class A credit-linked notes reference Tranche A of the credit protection deed (CPD) between FITZROY 2018-1 CLO DAC and Banco Santander, London Branch SA (Santander). The synthetic risk transfer agreement is backed by a revolving pool of project finance loans primarily originated in the United Kingdom (UK) by Santander.

The tranche ratings reflect the credit risk for FITZROY 2018-1 CLO DAC, as the credit protection seller, to guarantee payments in case of credit events according to the terms of the credit protection deed. The ratings neither address potential losses arising from the transaction’s early termination, nor any market risk associated with the transaction. The ratings reflect the expected loss for every tranche over its expected weighted average life.

Scope does not rate tranche F and the credit linked notes Class B through F.

Scope performed the credit analysis using the available historical monitoring data provided by Santander. This monitoring neither constitutes a rating action, nor does it indicate likelihood that Scope will conduct a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found at www.scoperatings.com.

Key rating factors

The reference portfolio has performed satisfactory with no defaults to date. Santander put only a minor share of transactions in the reference portfolio under an internal credit watch list. The portfolio shall have its last replenishment on 1 October 2021.

The ratings on the rated CPD tranches reflect the reference portfolio’s strong BBB+ weighted average credit quality and the respective tranche’s credit enhancement of 25% for tranche A, 20% for tranche B, 14% for tranche C, 10% for tranche D, and 5% for tranche E. The tranches’ exposure to Santander, as the protection buyer, risk premium payer and collateral account holder is considered as immaterial in Scope’s view.

Same as the tranche A, the Class A notes benefit from the reference portfolio’s strong credit quality and 25% credit enhancement from subordination. However, the credit quality of Banco Santander itself, as the holder of the Class A note’s cash collateral, constrains the debt instrument’s rating at the level of Banco Santander credit rating.

CREDIT-POSITIVE (+)

Performance. No credit events have occurred to date and the share of transactions on the active watchlist has only marginally increased since our last assessment.

Portfolio credit quality. The underlying portfolio’s credit quality is stable at BBB+ and provides a robust support for the rated instruments.

Experienced originator. The originator generally targets senior exposures to projects with strong counterparties known to the bank. Santander is an experienced project finance lender in Europe with a longstanding track record and well-tested processes and models.

CREDIT-NEGATIVE (-)

Counterparty risk. All funds available for payment to the Class A note holders are exposed to the credit quality of the bank. The bank holds the cash collateral paid in by the Class A note investors, which is the only source of Class A principal repayment. The bank is also the payer of the guarantee premium and collateral account interest, which funds the interest on these notes. The bank is of high credit quality, but there is no risk mitigant to limit the excessive counterparty exposure.

Country and sector concentration. The transaction is only exposed to the UK and Ireland and highly exposed to renewable energy sector. The other sectors include project finance initiatives (PFI), infrastructure and utilities. Concerns about the UK economy in the context of post-Brexit and the SARS-CoV-2 pandemic are offset by the domestic setting of the underlying assets, the strength of the UK’s finances and the dynamic nature of UK markets, supported by excellent property rights and the rule of law. Renewable energy sector exposure is somewhat diversified across offshore wind, onshore wind and photo-voltaic solar. The reference portfolio’s underlying assets benefit from higher recovery rates due to their mainly operational status, which helps to mitigate the transaction concentration risk.

The methodologies applicable for the reviewed ratings (General Structured Finance Rating Methodology, 14 December 2020; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Project Finance Rating Methodology, 16 November 2020) are available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Dmitriy Platonov, Associate Director

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