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Rating Action: Moody's assigns provisional ratings to ABS notes to be issued by Santander Consumo 4 Fondo de Titulizacion
Global Credit Research - 28 Jan 2021
EUR million ABS Notes rated, relating to a portfolio of Spanish consumer loans
Madrid, January 28, 2021 -- Moody's Investors Service ("Moody's") has assigned the following provisional ratings to the debts to be issued by Santander Consumo 4 Fondo de Titulizacion ("FT Santander Consumo 4"):
....EURM Class A Notes due September 2032, Provisional Rating Assigned (P) Aa2 (sf)
....EURM Class B Notes due September 2032, Provisional Rating Assigned (P) A3 (sf)
....EURM Class C Notes due September 2032, Provisional Rating Assigned (P) Baa3 (sf)
....EURM Class D Notes due September 2032, Provisional Rating Assigned (P) Ba3 (sf)
....EURM Class E Notes due September 2032, Provisional Rating Assigned (P) B3 (sf)
Moody's has not assigned any rating to the subordinated EURM Class F Fixed Rate Notes due September 2032.
The Notes are backed by a one year revolving pool of Spanish unsecured consumer loans originated by Banco Santander S.A. (Spain) ("Santander"), (A2/P-1 Bank Deposits; A3(cr)/P-2(cr)). This represents the 4th issuance out of the Santander Consumo programme. Santander is acting as originator and servicer of the loans while Santander de Titulizacion S.G.F.T., S.A. (NR) is the Management Company ("Gestora").
The preliminary portfolio size is approximately 1,896 million as of 10th December 2020 pool cut-off date. 100% of the loans are paying fixed rate. The weighted average seasoning of the portfolio is 1.4 years and its weighted average remaining term is 5.3 years. Around 53.4% of the outstanding portfolio are loans without specific loan purpose and 24.2% are loans to finance small consumer expenditures. Geographically, the pool is concentrated mostly in Madrid (19.1%), Andalucía (17.2%) and Catalonia (11.2%). The portfolio, as of its pool cut-off date, contained 0.3% loans in arrears less than 30 days.
The ratings are primarily based on the credit quality of the portfolio, the structural features of the transaction and its legal integrity.
According to Moody's, the transaction benefits from various credit strengths such as the granularity of the portfolio, securitisation experience of Santander, a reserve fund sized at 2.0% of the total rated notes balance at closing, subordination of the notes (Class A subordination backed by the portfolio at closing is 15.8%) and the significant excess spread. However, Moody's notes that the transaction features a number of credit weaknesses, such as a complex structure including interest deferral triggers for juniors notes, pro-rata payments on all rated classes of notes from the first payment date, the incremental risk due to loans being added during the revolving period and the relatively high linkage to Santander representing the originator, servicer, cap counterparty, account bank and paying agent. Moody's also took into account the performance of other consumer loan ABS in Spain and the positive selection of consumer loans in this portfolio not being originated through brokers and excluding the highest internal PDs. These characteristics, amongst others, were considered in Moody's analysis and ratings.
The interest rate mismatch between the fixed rate portfolio and the floating rate Class A and B notes is partially covered by an interest rate cap. Banco Santander S.A. (Spain) (A2/P-1 Bank Deposits; A3(cr)/P-2(cr)) is the cap counterparty will be pay any positive difference between the three-month EURIBOR and the strike rate of 0.75% on a notional linked to the scheduled amortization of the floating Class A and B notes to the issuer.
Moody's determined the portfolio lifetime expected defaults of 4.25%, expected recoveries of 15% and Aa1 portfolio credit enhancement ("PCE") of 17% related to borrower receivables. The expected defaults and recoveries capture our expectations of performance considering the current economic outlook, while the PCE captures the loss we expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and PCE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the cash flow model to rate Consumer ABS.
Portfolio expected defaults of 4.25% are lower than the Spanish Consumer Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator and the positive selection of consumer loans in this portfolio not being originated through brokers and excluding the highest internal PDs, (ii) the pool composition in terms of the exposure to certain products i.e. pre-approved loans where the borrower was offered an unsecured consumer loan up to a maximum amount without initiating an application process, (iii) exclusion of Covid-19 related payment holidays granted before the date the relevant loan is securitised, as per the eligibility criteria, (iv) benchmark transactions, and (v) other qualitative considerations.
Portfolio expected recoveries of 15.00% are in line with the Spanish Consumer Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations.
PCE of 17.00% is lower than the Spanish Consumer Loan ABS average and is based on Moody's assessment of the pool which is mainly driven by: (i) evaluation of the underlying portfolio, complemented by the historical performance information as provided by the originator, and (ii) the relative ranking to originator peers in the Spanish Consumer Loan ABS market. The PCE of 17.00% results in an implied coefficient of variation ("CoV") of 52.7%.
CURRENT ECONOMIC UNCERTAINTY:
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of consumer assets from the current weak Spanish economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The principal methodology used in these ratings was Moody's Approach to Rating Consumer Loan-Backed ABS published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230138. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
Factors that would lead to an upgrade of the ratings include (i) a significantly better than expected performance of the pool, (ii) an increase in credit enhancement of the notes or (iii) an upgrade of Spain's local country currency (LCC) rating.
Factors that would lead to a downgrade of the ratings include (i) a decline in the overall performance of the pool, (ii) the deterioration of the credit quality of Santander, as Santander is acting as originator, servicer, cap counterparty, account bank and paying agent, or (iii) a downgrade of Spain's local country currency (LCC) rating.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Juan Miguel Martin-Abde Asst Vice President - Analyst Structured Finance Group Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Armin Krapf VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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