Press Release

DBRS Morningstar Finalises Provisional Ratings on FT RMBS Prado IX

RMBS

October 21, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by FT RMBS Prado IX (FT Prado IX or the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at A (high) (sf)

The ratings on the Class A Notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in June 2055. The rating on the Class B Notes addresses the ultimate repayment of interest and principal on or before the legal final maturity date. DBRS Morningstar does not rate the Class C Notes.

FT Prado IX is a securitisation of residential mortgage loans secured by first-lien mortgages originated by the Union de Créditos Inmobiliarios S.A., E.F.C (UCI or the Seller) in Spain. The Issuer used the proceeds of the Class A, Class B, and Class C Notes to fund the purchase of the mortgage portfolio from the Seller. UCI provided a separate additional subordinated loan to fund the reserve fund. The securitisation took place in the form of a fund, in accordance with Spanish securitisation law.

The originator and servicer of the transaction is UCI, which is jointly owned by Banco Santander SA (Santander) and BNP Paribas SA (BNP Paribas). Santander also acts as the account bank and paying agent in the transaction. BNP Paribas acts as interest rate swap counterparty.

DBRS Morningstar’s ratings are based upon a review of the following analytical considerations:
-- The transaction’s capital structure and the available credit enhancement. The Class A Notes benefit from 13.0% subordination provided by the Class B and Class C Notes. The Class B Notes benefit from 8.0% subordination provided by the Class C Notes. The notes also benefit from an amortising reserve fund with a target amount equal to 2.0% of the outstanding balance of the mortgage portfolio, funded through a subordinated loan, which could amortise up to a level of 0.25% of the original portfolio balance. The reserve fund provides liquidity support and is available to cover senior expenses as well as interest on the Class A and Class B Notes. At maturity, the reserve will be available to cover principal payments on the notes.

-- The Class A target amortisation amount is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the nondefaulted collateral. If a turbo amortisation event occurs, then all collections will be applied towards repayment of the Class A Notes until paid in full after servicing the senior fees, the interest due on the Class A and Class B Notes (if a Class B interest deferral event has not occurred), and the replenishment of the reserve fund. The Class B target amortisation amount (once the Class A Notes have been redeemed in full) is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the nondefaulted collateral. If a turbo amortisation event occurs, then all collections will be applied towards the payment of the Class B Notes principal until paid in full after the payment of the senior fees, the interest due on the Class B Notes, and the replenishment of the reserve fund.

-- The turbo amortisation event will occur when the cumulative default ratio is greater than or equal to 1% one year after the closing date, 2% two years after the closing date, 3% three years after the closing date, 4% four years after the closing date, and 5% five years after the closing date. Loans in arrears for more than 12 months will be considered as defaulted loans as per the transaction documentation.

-- DBRS Morningstar analysed the final portfolio, which was equal to EUR 488 million as of 13 October 2021, using the European RMBS Insight Model to estimate the defaults and losses of the portfolio. DBRS Morningstar divided the portfolio into two subpools. The first subpool comprises 96% of the portfolio by loan balance. The second subpool, which comprises the remaining 4% of the portfolio, includes loans restructured more than four years ago.

-- The main characteristics of the provisional portfolio include (1) 68.6% weighted-average current loan-to-value (WACLTV) and 69.2% indexed WACLTV; (2) the top three geographical concentrations of Catalonia (34.4% of the portfolio by loan balance), Madrid (27.4%), and Andalusia (18.6%); (3) weighted-average loan seasoning of 3.7 years; (4) the weighted-average remaining term of the portfolio at 26.2 years, with 0.7% of the loans having a remaining term longer than 30 years; and (5) no mortgage loans to be securitised in arrears for more than 90 days in the past and just a 4% of the portfolio consisting of mortgage loans that were restructured more than four years ago. Finally, at closing, no loans under payment moratoria were sold to the Issuer.

-- The loans are primarily floating-rate mortgages linked to 12-month Euribor (25.2%) or Índice de Referencia de Préstamos Hipotecarios (IRPH) (10.3%). Approximately 50.9% of the portfolio comprises fixed-rate loans with a compulsory switch to floating while 13.6% of the portfolio comprises fixed-rate-for-life loans. The current weighted-average interest rate of the portfolio is 2.14%. The fixed-rate loans with a compulsory switch to floating will revert to 12-month Euribor after the end of their fixed-rate period. Fixed-rate-for-life loans have a weighted-average interest rate of 2.87%. The notes are floating-rate liabilities indexed to three-month Euribor. The Issuer has entered an interest rate swap with BNP Paribas to mitigate the interest rates mismatch between the fixed-rate loans and the three-month Euribor paid on the notes. Under the swap agreement, the Issuer will pay a rate equal to (-0.39%) and in return, BNP Paribas will pay to the Issuer on each payment date a rate equal to three-month Euribor during the first five years of the transaction’s life. In addition, three-month Euribor rate is capped at 2.5% for the Class B and Class C Notes since closing and for the Class A Notes after the step-up date.

-- BNP Paribas is the eligible swap counterparty for this transaction. DBRS Morningstar’s rating on BNP Paribas is consistent with the criteria in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

-- The loans in the portfolio are paying monthly instalments with a weighted-average reset interval of six months, while the notes will pay a quarterly coupon. Because of the existence of different reference indices in the portfolio, there is some reset and basis risk in the transaction. The existence of liquidity in the transaction provided through the cash reserve and the possibility of using principal to pay interest on class A and Class B Notes acts as a mitigating factor for this risk. DBRS Morningstar stressed the interest rates as described in its “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS Morningstar has also stressed the spread between IRPH and Euribor in its cash flow analysis.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing responsibilities. DBRS Morningstar was provided with UCI’s historical mortgage performance data. Details of the portfolio default rate (PD), loss given default (LGD), and expected losses resulting from DBRS Morningstar’s credit analysis of the mortgage portfolio at AAA (sf) and A (high) (sf) stress scenarios are detailed below.

-- In accordance with the transaction documentation, the servicer can grant loan modifications without consent of the management company within the range of permitted variations. Fixed-rate loans can be renegotiated to floating-rate loans and floating-rate loans can be renegotiated to fixed-rate loans up to a maximum of 5% of the initial balance of the portfolio. The margin on 12-month Euribor loans can be reduced to 0.75 basis points for loans linked to Euribor and the maturity of the loan can be extended to the final maturity date of the notes. DBRS Morningstar has considered this permitted variation and factored them in its cash flow analysis.

-- The transaction’s account bank agreement and respective replacement trigger require Santander, acting as treasury account, to find (1) a replacement account bank or (2) an account bank guarantor upon the loss of an “A” account bank applicable rating. The DBRS Morningstar Long Term Critical Obligations Rating on Santander is AA (low), while the DBRS Morningstar rating on Santander’s Long-Term Issuer Rating is A (high).

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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 structured finance transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in default probability of self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case of high level of payment moratoriums in the portfolio. In addition, DBRS Morningstar assumed a moderate decline in residential property prices.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 methodologies applicable to the ratings in this transaction are the “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: Spanish Addendum” (6 July 2021).

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

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies. An asset and a cash flow analysis were both conducted.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include those provided by UCI and its representatives. DBRS Morningstar was provided with loan-level data for both the completion and offer pipeline loans as of 13 October 2021 and historical performance data (delinquencies, defaults, recoveries, payment data, and loan level repossession data) covering the period from January 2001 to June 2021.

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

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

This is the first rating action since the Initial Rating Date.

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

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

-- In respect of the Class A Notes, a PD of 25.9% and LGD of 44.5%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 19.3% and LGD of 36.0%, corresponding to the A (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class 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 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 A (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% 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, 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 (high) (sf)

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/cerepweb/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: Álvaro Astarloa, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 29 September 2021

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
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.

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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