Rating action

Scope Ratings GmbH (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), EUR 259.7m outstanding: affirmed at AA_SF

Class B (ES0305499016), EUR 13.9m outstanding: downgraded to A-_SF from A_SF

Class C (ES0305499024), EUR 11.0m outstanding: affirmed at BBB_SF

Class D (ES0305499032), EUR 9.8m outstanding: affirmed at BB+_SF

Class E (ES0305499040), EUR 5.8m outstanding: affirmed at B+_SF

Transaction overview

The transaction is an auto ABS transaction consisting 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 pro-rata amortisation for tranches A to F, subject to performance conditions on the underlying portfolio. If assets underperform or the outstanding asset balance falls below 10% of the initial balance, liabilities will amortise fully sequentially. Of the six classes of notes, 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 2022, 21 months since the closing date, the notes’ outstanding nominal balance was EUR 303.4m (EUR 520.0m at closing).

Rating rationale

As of the last payment date (June 2022), credit enhancement on rated classes A, B, C, D and E was 14.6%, 9.9%, 6.3%, 3.0% and 1.1%, respectively. The transaction also benefits from significant excess spread. The spread between the portfolio’s weighted average interest and the issuer’s weighted average cost of liabilities, including third-party costs and servicing fees, is about 6%.

As of June 2022, the transaction’s observed defaults and recoveries have been in line with Scope’s initial expectations. No collateral performance triggers to switch from pro-rata to sequential amortisation have been breached, further delaying the build-up of credit support. The last three months’ average delinquency, cumulative default and cumulative loss ratios were 2.1%, 1.2% and 0.6%, respectively, still below their thresholds of 5%, 6.2% and 2.2%.

Downside risk from the back-loaded default scenario, given the pro-rata amortisation, remains material. This scenario is plausible due to current and expected macro-economic backdrop and a pool maturity profile which leaves weaker obligors towards the end of the transaction’s life. These negative factors are somewhat offset by the structural pro-rata switch to sequential amortisation, which protects senior noteholders.

Counterparty risk does not constrain ratings. Issuer account bank holder SCF and interest rate cap counterparty Banco Santander still hold the ratings required to allow the highest possible rating on the transaction. The strong credit profiles of SCF and Banco Santander, combined with appropriate counterparty downgrade and replacement mechanisms, mitigate most of the transaction’s counterparty concentration risk.

Key rating drivers

Borrower credit quality (positive)¹. The portfolio’s performance reflects the strong credit quality of the underlying pool of borrowers, which benefitted from positive selection at closing, i.e. the pool included only borrowers who were performing and not under moratoriums during the Covid-19 crisis. As of June 2022, the pool’s reported defaults and losses were in line with Scope’s expectations. Since the closing date, the asset performance triggers that switches to sequential amortisation have not been breached and the observed pool delinquency rates have been low and stable.

Excess spread compression (negative) ¹. Rises in Euribor rates have reduced current and expected available credit support from excess spread, given that interest rate risk is only partially mitigated by the cap hedge agreement. Classes A through C pay interest based on three-month Euribor plus a margin, which introduces a fixed-floating mismatch as all loans in the asset portfolio pay a fixed interest rate. The interest rate cap limits the maximum applicable three-month Euribor to 1%.

Macroeconomic uncertainty (negative) ^2,3. The energy crisis, geopolitical tensions and record-high inflation highlight the very uncertain macro-economic backdrop. Scope expects growth to slow to 4.1% in 2022 and 2% in 2023, from 5.1% in 2021. Consequently, the senior note remains exposed to back-loaded defaults, a notable downside risk because the transaction’s pro-rata amortisation is preventing credit enhancement build-up. This risk is partially offset by collateral performance triggers that switch amortisation from pro-rata to fully sequential.

Rating-change drivers

Positive. An early activation of the stop-pro-rata trigger followed by improving portfolio performance may reflect positively on the senior notes.

Negative. A worsening of the geopolitical tensions in Central and Eastern Europe as well as high sustained inflation may negatively impact the Spanish economy, asset performance and the ratings.

Quantitative analysis and assumptions

Scope performed a cash flow analysis of the transaction over the amortisation period, incorporating important structural mechanisms. 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 2022, Scope established a 90-days-past-due mean default rate of 4.6% and a coefficient of variation of 61.1% for the remaining pool over a weighted average life of 2.6 years. Scope maintained its closing base case recovery rate of 40%. 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 (7%) 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, three notches; sensitivity to recovery rate, two notches

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

Class C: sensitivity to mean default rate, four notches; sensitivity to recovery rate, three notches

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

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

Rating driver references
1. Investor reports
2. Transaction documentation
3. Sovereign mid-year outlook: slowdown, inflation, rising rates create divergent ratings trajectories

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, (General Structured Finance Rating Methodology, 17 December 2021; Consumer and Auto ABS Rating Methodology, 3 March 2022; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Scope Ratings' 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.
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 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: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 25 September 2020. The Credit Ratings were last updated on 16 September 2021.

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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