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Rating Action:

Moody's downgrades non-senior notes in Santander Empresas 3, Spanish SME ABS

12 Mar 2010

Approximately EUR273 million of debt securities downgraded

Paris, March 12, 2010 -- Moody's Investors Service has today downgraded the ratings of the outstanding Series B, C, D and E notes issued by Santander Empresas 3, FTA (Santander 3), to Aa3, Baa3, B3 and Ca, from Aa2, A3, Baa3 and Ba1, respectively and confirmed the Aaa ratings of the Series A2 and A3 notes. A detailed list of the rating actions can be found at the end of this press release. These rating downgrades conclude the review for possible downgrade that Moody's initiated on 18 March 2009.

Today's downgrades were prompted by the weaker-than-expected collateral performance of the pool of loans backing the notes. The rating review also incorporated Moody's refinement of its ABS SME approach, as described in the Rating Methodology report "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.

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 took into account the repurchase by the originator, Banco Santander S.A. (rated Aa2/P-1), on 25 February and 5 March 2010, of all outstanding 121 bullet loans (total principal balance of EUR136 million) - as notified to Moody's by the servicer, Santander de Titulización. Bullet loans accounted for approximately 9% of the portfolio balance before the repurchase. According to the servicer, the cash from the repurchase will be treated as loan amortisation. It will therefore result in accelerated amortization on the Class A1 and A2 notes on the next payment date.

Collateral Performance

Outstanding 90+ delinquencies (i.e. the balance of loans with arrears for more than 90 days) reached 1.30% of the portfolio current balance, as of the January 2010 investor report. While this is down from the peak of 1.98% reported in April 2009, Moody's notes that the cumulative balance of defaulted loans has now increased to 0.97% of the original portfolio balance (January 2010 report). In this transaction, a loan is in default if it has been in arrears for 12 months or over. In addition, the reserve fund has been reported drawn since January 2009 and it was at only 71% of its target balance in January 2010.

As a result of the increased delinquencies, the balance of loans in arrears first exceeded the threshold of 1.50% of the outstanding portfolio balance in October 2008, prompting the pro-rata amortisation of the Series A2 and A3 notes (the Series A1 notes were redeemed in June 2008). Although in the latest reporting period, the delinquency ratio fell below the threshold (1.30% in the January 2010 report), the pro-rata amortisation of the senior notes is irreversible.

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 4 transaction review (see press release from 4 February 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. Approximately 28% of the outstanding December 2009 pool balance related to borrowers in the building and real estate sector based on loan-level data. However, Moody's was unable to verify the sector of activity for nearly 12% of the outstanding pool balance and assumed that a proportion of these loans related to activities in the building and real estate sector. According to Moody's industry classification, the concentration in the "building and real estate" sector was approximately 37% 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 40% 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. Similarly, Moody's assumed that approximately 10% of the outstanding portfolio comprised loans to large-size SMEs and accordingly notched up its rating proxy for these debtors.

Moody's also increased its DP assumptions for the loans that have not made any principal payment since the transaction closed. Non-amortised loans amount to approximately 5% of the remaining outstanding portfolio balance after taking into account Banco Santander's repurchase of all outstanding bullet loans on 25 February and 5 March 2010. The servicer has indicated that all non-amortised loans remaining in the pool following the repurchase were still in their principal payment grace periods. The rating agency believes there is a payment shock risk associated with the end of non-amortising periods and therefore made a 10% DP adjustment for such loans.

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 contributed nearly half of the outstanding portfolio balance (including loans in the building and real estate sector) in December 2009.

Revised WAL and DP Assumptions

Moody's separately revised its weighted-average remaining life assumption for the pool of loans to 4.5 years. With a 4.5-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 12.5% of the current outstanding portfolio amount. Moody's DP 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 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 6.5% (assuming cumulative defaults on a 90-day basis of 1.9% of the original portfolio). This compares to an initial mean cumulative DP assumption of 2.64% at closing.

Recovery and Prepayment Assumptions

Moody's increased its initial mean recovery expectation to 45% from 42.5% to reflect the increased proportion of properties backed by mortgage guarantees (approximately 58% of the outstanding balance against 42% 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%-50% range. Stochastic recoveries were modelled assuming a 20% standard deviation.

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 revised default rate expectation for the remainder of the transaction.

Large Loan Concentrations

Although the portfolio remains granular with more than 10,000 outstanding loans in January 2010, exposures to some very large borrowers have increased. In particular, the largest single loan, now over 3% of the portfolio outstanding balance, has not amortised since closing (it was confirmed by the servicer as still in its grace period). Therefore, the exposure of the transaction to very large loans should continue to increase in the short to medium term, as smaller loans amortise.

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 of large loans 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 43% from 60% at closing.

The Transaction

Santander 3 is a securitisation fund which purchased a pool of loans granted by Banco Santander, S.A. to Spanish SMEs. At closing, in May 2007, the portfolio consisted of over 25,000 loans. The loans were originated between 1994 and 2006, with a weighted-average seasoning of 1.85 years and a weighted-average remaining term of 9.3 years. Geographically the pool was well diversified with the highest concentrations in Madrid (25%), Catalonia (17.5%) and Andalusia (12%) at closing.

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 A2: Confirmed at Aaa; previously on 18 March 2009 Aaa placed under review for possible downgrade

Series A3: Confirmed at Aaa; previously on 18 March 2009 Aaa placed under review for possible downgrade

Series B: Downgraded to Aa3; previously on 18 March 2009 Aa2 placed under review for possible downgrade

Series C: Downgraded to Baa3; previously on 18 March 2009 A3 Placed Under Review For Possible Downgrade

Series D: Downgraded to B3; previously on 18 March 2009 Baa3 placed under review for possible downgrade

Series E: Downgraded to Ca; previously on 18 March 2009 Ba1 placed under review for possible downgrade

Paris
Carole Gintz
VP - Senior Credit Officer
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Ariel Weil
Vice President - Senior Analyst
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades non-senior notes in Santander Empresas 3, Spanish SME ABS
No Related Data.
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