Moody's assigns definitive ratings to FTA PYMES SANTANDER 4's SME CDO notes
Madrid, November 13, 2012 -- Moody's Investors Service has assigned the following definitive ratings to the debt to be issued by FTA PYMES SANTANDER 4 (the Fondo):
....EUR2252.5M Serie A notes, Assigned A3 (sf)
....EUR397.5M Serie B notes, Assigned Baa2 (sf)
....EUR530.0M Serie C notes, Assigned Ca (sf)
FTA PYMES SANTANDER 4 is a securitisation of standard loans and credit lines granted by Banco Santander (Baa2/P-2; Negative Outlook) to small and medium-sized enterprises (SMEs) and self-employed individuals.
At closing, the Fondo -- a newly formed limited-liability entity incorporated under the laws of Spain -- will issue three series of rated notes. Santander will act as servicer of the loans and credit lines for the Fondo, while Santander de Titulización S.G.F.T., S.A. will be the management company (Gestora) of the Fondo.
As of October 2012, the provisional asset pool of underlying assets was composed of a portfolio of almost 32,000 contracts granted to SMEs and self-employed individuals located in Spain. In terms of outstanding amounts, around 67.1% corresponds to standard loans and 32.9% to credit lines. The assets were originated mainly between 2009 and 2012, with a weighted average seasoning of 0.62 years and a weighted average remaining term of 3.33 years. Around 7.5% of the portfolio is secured by first-lien mortgage guarantees. Geographically, the pool is concentrated mostly in Madrid (19.7%), Catalonia (20.7%) and Andalusia (13.6%). At closing, there will be no loans more than 30 days in arrears.
In Moody's view, the strong credit positive features of this deal include, among others: (i) a relatively short weighted average life of 2.0 years; (ii) a granular pool (effective number of obligors over 2,000); and (iii) a geographically well-diversified portfolio. However, the transaction has several challenging features: (i) a strong linkage to Santander related to its originator, servicer, accounts holder and liquidity line provider roles; (ii) a relatively high exposure to the construction and building industry sector (20% according to Moody's industry classification); (iii) no swap in place; and (iv) a complex mechanism that allows the Fondo to compensate (daily) the increase on the disposed amount of certain credit lines with the decrease of the disposed amount from other lines, and/or the amortisation of the standard loans. These characteristics were reflected in Moody's analysis and ratings, where several simulations tested the available credit enhancement and 20% reserve fund to cover potential shortfalls in interest or principal envisioned in the transaction structure.
The ratings are primarily based on the credit quality of the portfolio, its diversity, the structural features of the transaction and its legal integrity.
In its quantitative assessment, Moody's assumed a mean default rate of 9.88%, with a coefficient of variation of 53.7% and a recovery rate of 35.0%. Moody's also tested other set of assumptions under its Parameter Sensitivities analysis. For instance, if the assumed default probability of 9.88% used in determining the initial rating was changed to 12.88% and the recovery rate of 35% was changed to 25%, the model-indicated rating for Serie A, Serie B and Serie C of A3(sf), Baa2(sf) and Ca(sf) would be Baa1(sf), Ba2(sf) and Ca(sf) respectively. For more details, please refer to the full Parameter Sensitivity analysis included in the New Issue Report of this transaction.
The global V Score for this transaction is Medium/High, which is in line with the score assigned for the Spanish SME sector and representative of the volatility and uncertainty in the Spanish SME sector. V-Scores are a relative assessment of the quality of available credit information and of the degree of dependence on various assumptions used in determining the rating. The main source of uncertainty in the analysis relate to the Transaction Complexity. This element has been assigned a Medium/High V-Score, as opposed to Medium assignment for the sector V-Score. For more information, the V-Score has been assigned accordingly to the report " V Scores and Parameter Sensitivities in the EMEA Small-to-Medium Enterprise ABS Sector " published in June 2009.
The methodologies used in this rating were "Moody's Approach to Rating CDOs of SMEs in Europe" published in February 2007, "Refining the ABS SME Approach: Moody's Probability of Default assumptions in the rating analysis of granular Small and Mid-sized Enterprise portfolios in EMEA", published in March 2009 and "Moody's Approach to Rating Granular SME Transactions in Europe, Middle East and Africa", published in June 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
In rating this transaction, Moody's used ABSROM to model the cash flows and determine the loss for each tranche. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the Inverse Normal distribution assumed for the portfolio default rate. On the recovery side Moody's assumes a stochastic (normal) recovery distribution which is correlated to the default distribution. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario; and (ii) the loss derived from the cash flow model in each default scenario for each tranche.
As such, Moody's analysis encompasses the assessment of stressed scenarios.
On 21 August 2012, Moody's released a Request for Comment seeking market feedback on proposed adjustments to its modelling assumptions. These adjustments are designed to account for the impact of rapid and significant country credit deterioration on structured finance transactions. If the adjusted approach is implemented as proposed, the rating of the notes affected by today rating action may be negatively affected. See "Approach to Assessing the Impact of a Rapid Country Credit Deterioration on Structured Finance Transactions", (http://www.moodys.com/research/Approach-to-Assessing-the-Impact-of-a-Rapid-Country-Credit--PBS_SF294880) for further details regarding the implications of the proposed methodology changes on Moody's ratings.
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Luis Mozos Vice President - Senior 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 SUBSCRIBERS: 44 20 7772 5454 Monica Curti Vice President - Senior Analyst Structured Finance Group Telephone:+39-02-9148-1100 Releasing Office: Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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