Rating action

Scope Ratings GmbH (Scope) has reviewed the performance of credit-linked notes (CLNs) issued by Banco Santander SA (Santander) and has taken the following rating actions:

Class C (XS2019750343), USD 14.7m outstanding: upgraded to AA-_SF from A_SF

Class D (XS2019750426), USD 9.3m outstanding: upgraded to A_SF from BBB+_SF

Class E (XS2019750699), USD 5.3m outstanding: upgraded to BBB+_SF from BBB-_SF

Class F (XS2019751150), USD 3.6m outstanding: upgraded to BBB_SF from BB+_SF

Transaction overview

This transaction is a synthetic significant risk transfer securitisation, which closed on 28 June 2019. The CLNs constitute direct obligations of Santander and reference the credit performance of a static pool of auto loans granted to private and commercial customers in the US by Santander Consumer USA Inc. Santander is the issuer of the CLNs and holder of the collateral account. The ratings reflect the risk for investors in the CLNs associated with the coverage of a loss stemming from credit events in the reference portfolio under the CLNs’ terms.

The CLN investors fund the collateral account held at Santander, up to the amount they have committed under the notes. This collateral is available to cover losses from the reference portfolio. The CLN investors are split into eight different classes, whereby each class has a certain claim in the repayment of collateral, following portfolio amortisation or the realisation of recovery proceeds, but also an obligation to cover for portfolio credit losses, in reverse order of seniority. The repayment of the classes A to G follows a pro-rata amortisation schedule, subject to a 2.7% cumulative loss trigger which changes the amortisation schedule to sequential from pro-rata.

As of the calculation date, March 2022, the notes’ outstanding nominal balance was USD 234.5m (USD 1,381.5m at closing). Since the 25 September 2020 payment date, class G started amortising together with classes A to F on a pro-rata basis. This was due to the size of class G reaching a pro-rata amortisation trigger equal to or greater than 7.5% of the total notes’ principal balance outstanding. The repayment of class H will always remain subordinated.

Rating rationale

The rated classes benefit from credit enhancement build-up due to the fast repayment of the reference obligation portfolio. As of 25 March 2022, credit enhancement on classes C, D, E and F has respectively increased to 25.1%, 21.2%, 18.9%, and 17.4% from the closing levels of 16.5%, 12.1%, 9.6% and 7.9%. Since closing, no subordination event has been breached, nor has a downgrade event occurred. As of 25 March 2022, the cumulative event loss ratio was 1.82%, well below the 2.70% threshold level to trigger a subordination event. As of March 2022, the transaction’s loss performance was in line with Scope’s expectations. Transaction late delinquencies after the closing date have been relatively stable and at low levels, which may be explained by the pool’s good credit quality (consisting of prime auto loan borrowers).

There is downside risk from a back-loaded default scenario given the notes’ pro-rata amortisation feature. This scenario is plausible given a portfolio maturity profile with weaker obligors being left towards the end of the transaction’s life. Scope considers this negative factor to be offset by: i) the low observed level of pool late delinquencies; and ii) the structural subordination event trigger, which will switch the notes’ amortisation from pro-rata to sequential.

Scope continues to link the CLNs’ maximum achievable rating to the credit rating of Banco Santander. The bank’s credit quality limits the CLNs’ maximum achievable ratings because the collateral account held by the bank contains the funds available for loss coverage and note repayment, which results in an excessive risk exposure to this counterparty.

Key rating drivers

Increased credit enhancement (positive)^1,2. Credit enhancement on classes C, D, E and F has respectively increased to 25.1%, 21.2%, 18.9%, and 17.4% from the closing levels of 16.5%, 12.1%, 9.6% and 7.9%.

Fast amortisation (positive)¹. The portfolio has shown rapid amortisation with faster repayment than initially expected, reducing the transaction’s exposure to future credit event losses.

Borrower credit profile (positive)¹. The portfolio had a weighted average FICO score of 753 at closing, indicating high credit quality borrowers on average. This provides an element of protection should the US macroeconomic situation deteriorate.

Asset performance (positive)¹. As of March 2022, the pool reported losses in line with Scope’s expectations. Overall portfolio performance has been positive and has demonstrated a marked resilience to the negative effects of the pandemic since it broke out in the US. Since the closing date, the transaction subordination event trigger related to asset performance has never been breached and the observed pool late delinquency rates have been relatively stable and low.

Pro-rata amortisation (negative)². Compared to sequential structures, pure pro-rata structures typically erode credit enhancement for more senior tranches. This risk is partially offset by a 2.7% cumulative loss trigger which switches the pro-rata mechanism to fully sequential amortisation should the pool performance deteriorate.

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. Faster-than-expected amortisation following the activation of the cumulative loss trigger may reflect positively on the rated instruments.

Negative. Higher-than-expected losses due to a portfolio maturity profile with weaker obligors being left towards the end of the transaction’s life may adversely impact the rated notes.

Quantitative analysis and assumptions

Scope projected losses for the different tranches, incorporating the collateral release and loss-allocation mechanisms as well as the credit enhancement of the respective CLN, outlined in the CLNs’ terms and conditions.

The analysis used a large homogenous portfolio approximation approach to analyse the highly granular collateral pool. Scope assumed that portfolio defaults followed an inverse Gaussian distribution to calculate the expected loss of the rated notes. The analysis also provided the expected weighted average life of each class of notes. Scope’s analysis considered the combined portfolio.

Based on the pool composition as of March 2022, Scope established a 90-days-past-due revised mean default rate of 3.9% for the remaining pool over a weighted average life of 0.8 years. Scope also maintained its closing base case recovery rate of 50% and pool default coefficient of variation of 50%. The rating-conditional recovery rates are therefore: 50% for B, 45% for BB, 40% for BBB, 35% for A, 30% for AA and 25% for AAA.

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 C: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches

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

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

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

Rating driver references
1. Investor reports (confidential)
2. Transaction documentation (confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-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, (General Structured Finance Rating Methodology, 17 December 2021; Consumer and Auto ABS Rating Methodology, 3 March 2022; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies .
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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 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.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis 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: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 1 July 2019. The Credit Ratings were last updated on 18 June 2021.

Potential conflicts¹
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. Scope Ratings provided the following Ancillary Service(s) to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

1. Editor's note: This section was amended on 27 December 2022. On the publication date of 12 April 2022, this section originally stated: "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
© 2022 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.