DBRS Morningstar Confirms and Upgrades Ratings on Three Santander Transactions

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the bonds issued by three Santander RMBS transactions:

FTA, Santander Hipotecario 7 (SH7):
-- Series A notes confirmed at AAA (sf)
-- Series B notes upgraded to BBB (high) (sf) from BB (high) (sf)
-- Series C notes confirmed at C (sf)

FTA, Santander Hipotecario 8 (SH8):
-- Series A notes confirmed at AAA (sf)
-- Series B notes upgraded to B (high) (sf) from B (low) (sf)
-- Series C notes confirmed at C (sf)

FTA, Santander Hipotecario 9 (SH9):
-- Series A notes confirmed at AA (high) (sf)
-- Series B notes upgraded to BB (sf) from BB (low) (sf)
-- Series C notes at confirmed C (sf)

The ratings on the Series A and Series B notes address the timely payment of interest and the ultimate payment of principal on or before their respective legal final maturity dates in 2054. The ratings on the Series C notes address the ultimate payment of interest and principal on or before their respective legal final maturity dates.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the latest payment date for each transaction;
-- Portfolio default rates (PD), loss given defaults (LGD), and expected loss assumptions for the outstanding collateral pools;
-- Current available credit enhancements to the Rated Notes to cover the expected losses at their respective rating levels;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic;

The Series C notes of each transaction were issued to fund the reserve fund and are in a first-loss position supported only by available excess spreads. Given the characteristics of the Series C notes, as defined in the respective transaction documents, the default would most likely be recognised at maturity or following early termination of the transactions.

The three Santander RMBS transactions are securitisations of Spanish prime residential mortgage loans originated and serviced by Banco Santander SA (Santander).

PORTFOLIO PERFORMANCE
The portfolios are performing within DBRS Morningstar’s expectations. For SH7, as of the March 2021 payment date, the 90+ days delinquency ratio was at 0.6% of the collateral portfolio, while the current cumulative default ratio stood at 4.2% of the original portfolio balance. For SH8, as of the February 2021 payment date, the 90+ days delinquency ratio was at 0.7% of the collateral portfolio, while the current cumulative default ratio stood at 5.5%. For SH9, as of the February 2021 payment date, the 90+ days delinquency ratio was at 0.5% of the collateral portfolio, while the current cumulative default ratio stood at 2.7%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining collateral pools of receivables and updated its PD and LGD assumptions, including the Coronavirus Disease (COVID-19) adjustments. For SH7, the base-case PD and LGD are 5.6% and 45.1%, respectively. For SH8, the base-case PD and LGD are 6.0% and 46.5%, respectively, while for SH9, they are 6.6% and 39.8%, respectively.

CREDIT ENHANCEMENT
The credit enhancements available to all the rated notes have continued to increase as the transactions continue to deleverage. The Series A notes in all three transactions are supported by the subordination of the Series B notes and the Reserve Fund, which is available to cover senior fees, interest, and principal of the Series A and Series B notes. The Series B notes are solely supported by the respective reserve funds. For SH7, as of March 2021, the credit enhancements to the Series A notes and Series B notes were 50.5% and 7.6%, respectively, up from 46.3% and 6.9%, as of March 2020. For SH8, as of February 2021, the credit enhancements to the Series A notes and Series B notes were 46.8% and 3.4%, respectively, up from 42.8% and 2.7% as at February 2020. For SH9, as of February 2021, the credit enhancements to the Series A notes and Series B notes were 54.9% and 7.6%, respectively, up from 50.1% and 6.9% as at February 2020.

The Series C notes will be repaid according to the reserve fund amortisation.

The reserve funds in all three transactions are able to amortise once they have reached 10% of the outstanding balance of the Series A and Series B notes, maintaining such percentage until the reserve fund reaches the floor of 1.8% of the initial amount of the Series A and Series B notes for SH7 and SH8, and the floor of 2.2% for SH9. The reserve funds for SH7, SH8, and SH9 are currently at EUR 63.6 million, EUR 12.7 million, and EUR 28.6 million, respectively. The reserve funds are at the target levels for SH7 and SH9, and below the target of EUR 28.1 million for SH8.

Santander acts as the account bank for all three transactions and as the swap counterparty for SH7 and SH8. Based on Santander’s reference rating of A (high), being one notch below its DBRS Morningstar Long-Term Critical Obligations Rating (COR) of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transactions’ structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the most senior notes in each transaction, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology. Santander’s COR is also consistent with the First Rating Threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transactions’ structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, DBRS Morningstar increased the expected default rate for certain borrowers, incorporated a moderate reduction of collateral values, and considered reported payment holidays in its cash flow analysis.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (8 February 2021). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include transaction reports provided by Santander de Titulización, SGFT, S.A. and loan-level data from the European DataWarehouse GmbH.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings of each transaction, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purpose of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

On 10 April 2020, DBRS Morningstar confirmed the ratings of the Series A, Series B, and Series C notes in all three transactions. On 6 April 2021, DBRS Morningstar upgraded the rating of the Series A Notes in SH9 to AA (high) (sf) from AA (sf), following the finalisation of the “Legal Criteria for European Structured Finance Transactions” methodology.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.

To assess the impact of changing the transactions parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

-- For SH7, the base case PD and LGD assumptions for the remaining collateral pool are 5.6% and 45.1%, respectively.
-- For SH8, the base case PD and LGD assumptions for the remaining collateral pool 6.0% and 46.5%, respectively.
-- For SH9, the base case PD and LGD assumptions for the remaining collateral pool are 6.6% and 39.8%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Series A notes in SH7 would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series A notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and the LGD increase by 50%, the rating of the Series A notes would still be expected to remain at AAA (sf).

SH7 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

SH7 Series B notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

SH8 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

SH8 Series B notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of below B (low) (sf)

SH9 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA(high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

SH9 Series B notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

For the three transactions, the ratings of the Class C notes would not be affected by any hypothetical change in either PD or LGD.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date:
SH7 Initial Rating Date: 28 July 2011
SH8 Initial Rating Date: 20 December 2011
SH9 Initial Rating Date: 2 July 2013

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021),
https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v 5.0.0.1, https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (26 August 2020), https://www.dbrsmorningstar.com/research/366107/european-rmbs-insight-spanish-addendum.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.