Press Release

DBRS Morningstar Upgrades and Confirms Ratings of FT PYMES Santander 15

Structured Credit

July 06, 2022

DBRS Ratings GmbH (DBRS Morningstar) upgraded and confirmed its ratings of the notes issued by FT PYMES Santander 15 (the Issuer), as follows:

-- Series A Notes upgraded to AA (high) (sf) from A (high) (sf)
-- Series B Notes upgraded to B (high) (sf) from CCC (low) (sf)
-- Series C Notes confirmed at C (sf)

The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal maturity date in April 2051. The ratings of the Series B and Series C Notes address the ultimate payment of interest and principal on or before the legal maturity date.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2022 payment date;
-- The one-year base case probability of default (PD), default and recovery rates based on the current portfolio of receivables;
-- The current available credit enhancement to the Series A and Series B Notes to cover the expected losses assumed at their respective rating levels; and
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

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

The transaction is a cash flow securitisation collateralised by a portfolio of secured and unsecured term loans and credit lines originated by Banco Santander SA (Santander), Banesto, and Banif (prior to their integration into Santander) to corporates, small and medium-sized enterprises (SMEs), and self-employed individuals based in Spain. The transaction included a 24-month revolving period that ended in December 2021 and the Series A Notes have been amortising since then.

PORTFOLIO PERFORMANCE
As of the April 2022 payment date, loans two to three months in arrears represented 0.2% of the outstanding portfolio balance, up from 0.1% in October 2021. The 90+-day delinquency ratio increased to 0.5% from 0.4%, and the cumulative default ratio increased to 0.3% from 0.1% in the same period.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained its one-year base case PD assumption of 2.25% but applied coronavirus adjustments, which increased the one-year base case PD to 2.47%. DBRS Morningstar conducted a loan-by-loan analysis of the outstanding balance of the receivables and updated its default and recovery assumptions based on the current pool of receivables, moving away from the worst-case portfolio composition applied during the revolving period.

CREDIT ENHANCEMENT
The Series A Notes benefit from 31.9% of credit enhancement provided by the subordination of the Series B Notes and the reserve fund, up from 27.0% last year. The Series B Notes benefit from 6.4% of credit enhancement provided by the reserve fund, up from 5.5% last year.

The reserve fund was funded through the issuance of the Series C Notes and is available to cover senior fees and interest and principal on the Series A and Series B Notes. As of the April 2022 payment date, the reserve fund was at its target level of EUR 150.0 million. The reserve fund can amortise if certain conditions related to the performance of the portfolio and deleveraging of the transaction are met, subject to the floor of EUR 75.0 million.

Santander acts as the account bank for the transaction. Based on the account bank’s reference rating of A (high), which is one notch below the DBRS Morningstar Long Term Critical Obligations Rating of Santander of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to Santander to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The coronavirus and the resulting isolation measures had 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 SME 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 increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 3.4% of the outstanding portfolio balance, represented industries classified in the high-risk economic sectors. This led the underlying one-year PDs to be multiplied by 1.5 times. DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 29 June 2022. 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/399022/baseline-macroeconomic-scenarios-for-rated-sovereigns-june-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the Coronavirus Disease (COVID-19) crisis on the performance of DBRS Morningstar-rated structured credit transactions in Europe almost two years on. For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cashflow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Rating CLOs Backed by Loans to European SMEs” (10 June 2022).

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 methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

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

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 investor reports provided by the management company, Santander de Titulización S.G.F.T., S.A., and loan-level data provided by 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, 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 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.

The last rating action on this transaction took place on 3 December 2021, when DBRS Morningstar confirmed its ratings of the Series A, Series B, and Series C Notes at A (high) (sf), CCC (low) (sf), and C (sf), respectively.

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

Sensitivity Analysis: 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):
-- PD Rates Used: one-year base case PD of 2.47%, a 10.0% and 20.0% increase on the base case PD.
-- Recovery Rates Used: base case recovery rates of 35.5%, a 10.0% and 20.0% decrease in the base case recovery rates.

Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels. DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Series A Notes at AA (high) (sf).

With regards to the Series B Notes, a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Series B Notes to B (sf). A scenario combining both, an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Series B Notes at B (high) (sf).

The ratings on the Series C Notes would not be affected by a change in either the PD or the 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: 4 December 2019

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.

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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