Rating action

Scope Ratings GmbH (Scope) has reviewed the performance of the notes issued by FT RMBS Prado VII and has taken the following rating actions:

Class A (ES0305508006), EUR 399.3m outstanding: affirmed at AAA_SF

Class B (ES0305508014), EUR 38.6m outstanding: affirmed at A-_SF

Class C (ES0305508022), EUR 33.5m outstanding: not rated

Transaction overview

Fondo de Titulización RMBS Prado VII is a static cash securitisation consisting of prime residential mortgage loans originated by UCI and provided to individual borrowers residing in Spain.

As of the last payment date in September 2021, 10 months since the closing date, the notes’ outstanding nominal balance was EUR 471.4m (EUR 515.0m at closing). As expected, the transaction is still amortising the most senior outstanding class A notes.

Rating rationale

As expected, the transaction has been amortising the notes fully sequentially, resulting in a modest increase in credit support for the rated notes. As of September 2021, the credit support on rated classes A and B was at 17.3% and 9.1%, respectively, which compares with 16.0% and 8.5% at closing date.

Since closing, no loans have defaulted. There have also been no breaches on the transaction collateral performance triggers related to the turbo amortisation and class B interest deferral events, which confirms the satisfactory pool performance. As of September 2021, the cumulative default ratio was at 0.0%, well below the thresholds for the turbo amortisation and class B interest deferral triggers of 1.0% and 2.3%, respectively. As of September 2021, the pool delinquency ratio for 91-180 days past due, closer to the transaction’s default definition, was at 2 bps of the aggregated pool balance outstanding, which confirms the positive collateral performance.

The observed performance is in line with Scope’s initial expectations, showing the transaction’s resilience against the negative effects of the pandemic crisis. However, Scope believes it is too soon to change any of its initial pool credit assumptions because whether the transaction can perform well without state financial support remains to be seen.

In Scope’s view, the following key factors explain the satisfactory collateral performance: i) the strong credit quality of the borrowers and credit-positive eligibility criteria; ii) UCI’s proactive pool management throughout the pandemic; and iii) the financial support provided by the Spanish government.

The ratings are not constrained by the application of Scope’s counterparty criteria. Banco Santander S.A. in its role as issuer account bank holder and interest rate hedging counterparty has maintained the minimum rating that allows the transaction to achieve its highest possible rating. Scope continues to see the strong credit profile of Banco Santander S.A. combined with the appropriate counterparty downgrade and replacement mechanisms to be effective at mitigating most of the transaction’s counterparty risk related to these material roles.

Key rating drivers

Borrower credit profile (positive)^1,2. The portfolio’s satisfactory performance over the past 10 months indicates not only the strong credit quality of the underlying borrowers in the pool, but also the credit-positive effect of the transaction’s eligibility criteria. These provide an element of protection should the Spanish macroeconomic situation deteriorate or discretionary fiscal support provided by the state during 2020 and 2021 be removed.

Asset performance (positive)¹. As of September 2021, no loans have defaulted, in line with Scope’s initial expectations. Overall portfolio performance has been positive and has demonstrated a marked resilience to the pandemic’s negative effects. Since the closing date, asset performance-related triggers have 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 a 16.0% unemployment rate in Spain for 2021. Unemployment has decreased since peaking at 16.2% in Q3 2020. However, it is uncertain whether the Spanish government will reduce the discretionary fiscal measures aimed at easing the pandemic’s negative economic effects. Moreover, the global economy has been slowing down.

Rating-change drivers

Positive. Significantly better performance than expected could lead to a rating upgrade for the notes. This could be demonstrated through significantly lower defaults or significantly higher recoveries than expected, fuelled by strong macroeconomic conditions.

Negative. Spanish macroeconomic uncertainty in relation to the global economic slowdown. Covid-19 impacts may weigh negatively on collateral pool performance, as higher unemployment may affect the capacity of borrowers to repay and could push default rates much higher than expected.

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.

Based on the pool composition as of September 2021, Scope maintained a mean default rate of 7.0% for the remaining pool over a weighted average life of 12.7 years. Scope also kept its closing base case recovery rate of 75% and pool default coefficient of variation of 85%. The rating-conditional recovery rates were therefore: 75.0% for B, 69.0% for BB, 63.0% for BBB, 57.0% for A, 51.0% for AA and 45.0% for AAA.

Scope tested the transaction’s results considering both 15% and 5% 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, two notches; sensitivity to recovery rate, two notches
   
• Class B: sensitivity to mean default rate, one notch; sensitivity to recovery rate, one notch

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, dated 14 December 2020 and Methodology for Counterparty Risk in Structured Finance, dated 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 Ratings’ 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-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/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 Entity 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 GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK 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 12 November 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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.