Serie A: EUR 1,214.7m: affirm at AAA_SF

Serie B: EUR 445.5m: upgrade to BBB-_SF from BB+_SF

Serie C: EUR 135.0m: affirm at CCC_SF

The rating actions incorporate information available from historical transaction reports through 15 November 2018.

Transaction overview

FT PYMES SANTANDER 13 is a securitisation comprising credit lines, secured and unsecured loans to SMEs and individuals in Spain. The assets were originated by Banco Santander S.A. (AA-/S-1+/Stable Outlook), as well as Banesto and BANIF, two fully integrated banking franchises. The transaction’s legal maturity is 15 May 2043. The priority of payments is sequential and note amortisation references the non-defaulted balance of the portfolio, as well as accelerated amortisation from default provisioning using excess spread.

Rating rationale

The rating actions are primarily driven by structural deleveraging and better than expected asset performance. Serie A notes have amortised to EUR 1,214.7m (53.9% of the serie A balance at closing) and credit enhancement available to protect both the rated notes has increased since closing.

The ratings also reflect the legal and financial structure of the transaction; counterparty exposure to Banco Santander S.A. (Santander) as account bank, paying agent and servicer; and the management ability of Santander de Titulización SGFT SA (not rated). Counterparty risk from financial exposures to Santander as account bank and paying agent is mitigated by a replacement mechanism should its issuer rating fall below BBB.

Key rating drivers

Increased credit enhancement (positive). The level of credit enhancement has increased to 35.0% for serie A (21.5% at closing) and 8.1% for serie B (5.0% at closing), driven by transaction deleveraging and positive asset performance.

Obligor performance (positive). As a percentage of assets at closing, observed cumulative defaults (0.04%) are better than Scope’s expectations at closing (0.43%). As percentage of outstanding balance, observed 90+ delinquencies (0.67%) are better than Scope’s expectation (1.0%).

Transparent structure (positive). The deal features a strictly-sequential, three-tranche structure with a combined priority of payments, a cash reserve for default provisioning, and a liquidity facility to fund further drawings under credit lines which cannot be serviced from the portfolio.

Experienced originator (positive). The transaction benefits from the assets’ proven performance and the experience of the originator. This is the 13th securitisation of the PYMES series issued by Santander .

High default rate volatility for mortgage segment (negative). The performance of the mortgage segment could deviate significantly from Scope’s mean default rate assumptions, which is reflected mainly by the mortgage segment’s high point-in-time coefficient of variation and point-in-time historical mean default rate.

Unhedged fixed-floating mismatch (negative). The transaction is exposed to interest rate risk because 17.4% of the collateral balance pays a fixed coupon. Scope considers this risk to be limited given the currently low current interest rates, the monetary policy implemented by the central bank, the very short life of the serie A, and the excess spread available.

Counterparty concentration (negative). Counterparty risk to Santander is mitigated by the expected short life of the serie A; the credit quality of the bank as reflected in Scope’s rating; and adequate structural protection features, which include the bank’s automatic replacement (as account bank, liquidity facility provider and paying agent) upon loss of a BBB rating.

Key rating-change drivers

Positive. Further transaction deleveraging may result in future rating upgrades if credit enhancement builds up before credit losses crystallise.

Negative. Higher-than-expected default rates and/or lower-than-expected recoveries upon asset defaults may negatively impact the ratings. Deteriorating market conditions beyond Scope’s economic outlook may also negatively affect the ratings.

Quantitative analysis and assumptions

Scope determined the expected loss and weighted average life of the rated notes considering the portfolio characteristics and the transaction’s main structural features, such as the notes’ priorities of payments, note size, the notes’ respective coupon, senior costs and servicing fees.

Scope applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis considers the probability distribution of the portfolio’s default rate, using an inverse Gaussian distribution. Scope assumed a point-in-time portfolio mean default rate of 6.0% and coefficient of variation of 97.6%. Scope also considered a long-term economic cycle adjustment with a default distribution reflecting a long-term portfolio mean default rate of 3.0% and a coefficient of variation of 95.5%.

Defaulted secured and unsecured exposures are provisioned for once they reach the 12 and 6 months-past-due mark, respectively, in accordance with the transaction structure. Scope assumed a cure rate of 15.0% between the default date and the provisioning date. Scope also assumed rating-conditional recovery rates on non-cured exposures of 26.0% for the serie A notes, 43.6% for the serie B notes and 54.7% for the serie C notes.

Scope analysed the transaction under high (15%) and low (0%) prepayment scenarios.

Sensitivity analysis

Scope tested the resilience of the assigned ratings against deviations of the main input parameters: the portfolio mean-default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the assigned ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for each rated instrument change compared to the assigned rating when the portfolio’s expected default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Serie A: sensitivity to default rate assumption, 0 notches; sensitivity to recovery rates, 0 notches.
• Serie B: sensitivity to default rate assumption, 0 notches; sensitivity to recovery rates, 0 notches.
• Serie C: sensitivity to default rate assumption, -2 notches; sensitivity to recovery rates, -2 notches.

Stress testing
Stress testing was performed by applying rating-conditional recovery rate assumptions.

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope’s cash flow model (Scope CFM v.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 applied for these ratings are the ‘SME ABS Rating Methodology’, ‘General Structured Finance Rating Methodology’ and the ‘Methodology for Counterparty Risk in Structured Finance’. All documents are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information
The rated instruments' issuer and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the instruments to be satisfactory. The information and data supporting Scope’s ratings 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 Ratings GmbH has relied on a third-party asset due diligence/asset audit provided at closing of the transaction upon initial assignment of the ratings. The analysis has no negative impact on the credit rating.
Prior to the issuance of the rating action, the issuer and/or its agents were given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
These credit ratings are issued by Scope Ratings GmbH
Lead analyst Kreschma Nazary, Associate Director
Person responsible for approving the rating: David Bergman, Executive Director
The final ratings were first released by Scope on 30.01.2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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.

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