Approximately EUR234 million of debt securities affected
Paris, March 30, 2010 -- Moody's Investors Service has today downgraded the ratings of the
outstanding Series D, E and F notes issued by Santander Empresas
2, FTA (Santander 2), to Ba2, Caa1, and C,
from Baa3, Ba1, and Ca, respectively and confirmed the
Aa2 ratings of the Series B and A2 ratings of the Series C notes.
A detailed list of the rating actions can be found at the end of this
press release. Today's rating actions conclude the review
for possible downgrade of the Series B through F notes, which Moody's
initiated on 23 March 2009. The Aaa ratings of the Series A2 notes
were not on review and remain unchanged.
Today's rating downgrades resulted from Moody's update of
its ABS SME approach, as described in the Rating Methodology report
"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 on 17 March 2009,
which had prompted the rating review of all but the most senior outstanding
class of notes in the Santander 2 transaction. Under the updated
methodology, Moody's has increased its cumulative default
expectation for the outstanding portfolio (as described in detail below).
The rating confirmations of the Class B and C notes result from the build-up
of credit enhancement due to the amortisation of the portfolio,
combined with some of Moody's revised rating assumptions (as described
in detail below), which outweighed the effect of Moody's increased
default probability expectation for the portfolio of loans backing all
As part of its review, Moody's considered the potential for further
performance deterioration in the current economic cycle, and the
exposure of the transaction to the real estate sector. The deterioration
of the Spanish economy has been reflected in Moody's negative sector outlook
for Spanish SME securitisation transactions ("EMEA ABS & RMBS:
2009 Review and 2010 Outlook", published in January 2010).
Moody's rating review also takes into account the commitment of
the originator, Banco Santander S.A. (rated Aa2/P-1)
to repurchase all but one of the outstanding bullet loans in the portfolio
in April 2010 - as notified to Moody's by the management
company, Santander de Titulización. Bullet loans accounted
for EUR57 million or approximately 6% of the portfolio balance,
based on March 2010 data from the servicer. The single bullet loan
that will remain in the portfolio has a balance of EUR14.5 million
outstanding and should account for approximately 2% of the portfolio
after the repurchase. According to the servicer, the cash
from the repurchase will be treated as loan amortisation in the next payment
date. It will therefore result in accelerated amortisation on the
Class A2 notes on the next payment date.
Outstanding 90+ delinquencies (i.e. the balance of
loans with arrears for more than 90 days) reached 0.75%
of the portfolio current balance, as of the February 2010 investor
report. While this is down from the peak of 1.37%
reported in April 2009, Moody's notes that the cumulative
balance of defaulted loans has now increased to 0.67% of
the original portfolio balance (January 2010 report). In addition,
the reserve fund has been reported drawn since January 2009 and it was
at only 84% of its target balance in February 2010. Finally,
the balance of "transitory properties", which are handed
over by borrowers as payment in kind for their outstanding debt and not
accounted for in reported delinquencies or defaults, has increased
to 1.2% of the portfolio balance (February 2010).
During its review, Moody's was unable to obtain detailed and
complete information on some of the characteristics of the outstanding
pool of loans, particularly at the loan level, as was also
the case for the Santander Empresas 3 and 4 and the FTPYME Santander 1
transaction reviews (see press releases on 4 February, 12 and 23
March 2010). Therefore, in some instances Moody's made
assumptions relying on aggregate information or loan-level data
obtained at closing, as detailed below.
Default Probability Adjustments
Moody's first revised its assumption for the default probability
(DP) of the SME debtors to an equivalent rating in the single B-range
for debtors operating in the real estate sector, and in the low
Ba-range for non-real estate debtors. Based on December
loan-level data, approximately 33% of the outstanding
pool balance relates to borrowers in the "building and real estate"
sector according to Moody's industry classification. However,
Moody's was unable to verify the sector of activity for nearly 5%
of the outstanding pool balance and assumed that a large proportion of
these loans related to activities in the building and real estate sector.
The concentration in the "building and real estate" sector was approximately
38% of the portfolio balance at closing.
In addition, Moody's made DP adjustments to reflect the size
of the debtors' companies. Based on stratification data at
closing, Moody's assumed that approximately 30% of
the loans were to micro-size SMEs (including self-employed
borrowers) and therefore notched down its rating proxy to reflect additional
default risk associated with these debtors.
Moody's also increased its DP assumption for the single bullet loan
that will remain in the portfolio after taking into account Banco Santander's
committed repurchase of all other outstanding bullet loans in April 2010.
The rating agency believes there is a payment shock risk associated with
the end of non-amortising periods and that bullet loans are also
exposed to refinancing risks.
Finally, Moody's equivalent rating for loans in arrears for
more than 30 days was notched down depending on the length of time the
loans had been in arrears, and notched up for performing loans not
in the building and real estate sector originated prior to 2006,
depending on their actual seasoning. Loans originated prior to
2006 (including loans in the building and real estate sector) contributed
nearly 60% of the outstanding portfolio balance in December 2009.
Revised WAL and DP Assumptions
Moody's separately revised its weighted-average remaining
life assumption for the pool of loans to 4 years. With a four-year
average life, the high single-B overall DP equivalent rating
resulting from the above DP adjustments translate into an increased cumulative
mean default assumption of 11.5% of the current outstanding
Moody's PD assumption relates to the typical 90-day past
due default definition, which is different from the actual default
definition in this transaction (12-month past due). Moody's
recovery assumption (see section below) is consistent with the default
definition reflected in its DP assumption.
Expressed as a percentage of the original portfolio balance, Moody's
revised cumulative mean default rate is 4.8% (assuming non-reported
cumulative defaults on a 90-day basis of 1.3% of
the original portfolio). This compares to an initial mean cumulative
PD assumption of 2.3% at closing.
Recovery and Prepayment Assumptions
Moody's incrementally increased its initial mean recovery expectation
to 40% from 37.5% to reflect the increased proportion
of properties backed by mortgage guarantees (approximately 32%
of the outstanding balance against 19% at closing), but only
made a marginal adjustment given the lack of recovery data available and
the absence of detailed data on the type of properties serving as collateral
for these mortgage securities. However, Moody's tested
the sensitivity of results to recovery assumptions in a 40%-45%
range. Stochastic recoveries were modelled assuming a 20%
The constant prepayment rate (CPR) assumption used in Moody's cash
flow model has decreased to 5% from 15% at closing.
This rate is consistent with the most recently reported prepayment rate
data and Moody's expectation for the remainder of the transaction.
Large Loan Concentrations
Although the portfolio remains granular with more than 6,000 outstanding
loans in January 2010, exposures to some large borrowers have increased.
The 10 largest loans in the portfolio (excluding bullet loans to be repurchased)
contributed about 16% of the outstanding portfolio balance in December
2009, which included the EUR14.5 million outstanding balance
bullet loan that will remain in the portfolio after the April scheduled
Given the remaining granularity of the outstanding portfolio, Moody's
used a normal inverse distribution to derive the probabilities of its
default scenarios in its cash flow model, ABSROM. However,
to reflect increasing concentrations in the pool, Moody's
has increased its asset correlation assumption, driving up the standard
deviation of the loss distribution. As Moody's simultaneously
increased its mean cumulative DP in a larger proportion, it has
ultimately lowered its coefficient of variation assumption (standard deviation
over mean DP) to 50% from 55% at closing. Moody's
has also considered the sensitivity of ratings to COV assumptions in the
Santander 2 is a securitisation fund which purchased a pool of loans granted
by Banco Santander, S.A. to Spanish SMEs. At
closing, in December 2006, the portfolio consisted of nearly
15,000 loans. The loans were originated between 1990 and
2006, with a weighted-average seasoning of 1.5 years
and a weighted-average remaining term of 6.3 years.
Geographically the pool was well diversified with the highest concentrations
in Madrid (26%), Catalonia (13%) and Andalusia (12%).
Meaning of Rating and Methodologies
Moody's ratings address the expected loss posed to investors by the legal
final maturity of the notes. Moody's ratings address only the credit
risks associated with the transaction. Other risks have not been
addressed, but may have a significant effect on yield to investors.
Moody's monitored these transactions using the principal rating
methodology for granular SME transactions in EMEA as described in the
following Rating Methodology reports: "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. These reports are available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
website. In addition, Moody's publishes a weekly summary
of structured finance credit, ratings and methodologies, available
to all registered users of our website, at www.moodys.com/SFQuickCheck.
To obtain a copy of Moody's New Issue Report or periodic Performance Overviews,
please visit Moody's website at www.moodys.com or contact
our Client Service Desk in London (+44-20-7772 5454)
Detailed Rating Actions
Series B: confirmed at Aa2; previously on 23 March 2009 Aa2
placed under review for possible downgrade
Series C: confirmed at A2; previously on 23 March 2009 A2 placed
under review for possible downgrade
Series D: downgraded to Ba2 from Baa3; previously on 23 March
2009 Baa3 placed under review for possible downgrade
Series E: downgraded to Caa1 from Ba1; previously on 18 March
2009 Ba1 placed under review for possible downgrade
Series F: Downgraded to C from Ca; previously on 18 March 2009
Ca placed under review for possible downgrade
VP - Senior Credit Officer
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades junior, confirms mezzanine classes in Santander Empresas 2, Spanish SME ABS
Vice President - Senior Analyst
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454