OREANDA-NEWS. S&P Global Ratings today assigned its 'AA - (sf)' preliminary credit rating to Fondo de Titulizacion RMBS Prado III's class A mortgage-backed floating-rate notes. At closing, the issuer will also issue an unrated subordinated loan (see list below).

RMBS Prado III will be a securitization of a pool of approximately 67.8 months seasoned first-lien Spanish residential mortgage loans, which Union de Creditos Inmobiliarios S. A., Establecimiento Financiero de Credito (UCI) originated.

In our credit analysis, we considered the borrowers' credit characteristics. We have calculated our default and recovery rate expectations for the portfolio by determining our weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS) assumptions by applying our Spanish residential mortgage-backed securities (RMBS) criteria (see "Italy And Spain RMBS Methodology And Assumptions," published on Sept. 18, 2014).

We have also considered our outlook for the Spanish economy and real estate sector by projecting arrears in our default calculations. In our opinion, the outlook for the Spanish residential mortgage and real estate market is not benign and we have therefore increased our expected 'B' foreclosure frequency assumption to 3.33% from 2.00%, when we apply our Spanish RMBS criteria, to reflect this view (see "Outlook Assumptions For The Spanish Residential Mortgage Market," published on June 24, 2016). We base these assumptions on our expectation of modest economic growth, continuing high unemployment, and house prices leveling off in the rest of 2016 and 2017.

We have assessed the transaction's documented structural features by applying our RMBS criteria. Our preliminary rating reflects the available credit enhancement (provided through the notes' subordination features), the notes' amortization features, and the reserve fund's amortization mechanism. Our analysis indicates that the available credit enhancement for the class A notes is sufficient to mitigate their exposure to credit and cash flow risks at the 'AA-' rating level under our RMBS criteria.

Under our updated criteria for structured finance ratings above the sovereign rating (RAS criteria), we applied a hypothetical sovereign default stress test to determine whether a tranche has sufficient credit and structural support to withstand a sovereign default and so pay timely interest and repay principal by legal final maturity (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016).

Our RAS criteria designate the country risk sensitivity for RMBS as moderate. Under our RAS criteria, transactions could be rated up to four notches above the sovereign rating, if they have sufficient credit enhancement to pass a minimum of a severe stress and up to six notches (two additional notches) if they have sufficient credit enhancement to pass an extreme stress and the pool is seasoned (see "Understanding Standard & Poor's Rating Definitions," published on June 3, 2009).

As our long-term sovereign rating on Spain is 'BBB+', our RAS criteria cap at 'AA+ (sf)' the maximum potential rating in this transaction.

Under our RAS criteria, the class A notes have sufficient credit enhancement to withstand the severe stress scenario up to 'AA - (sf)', which is four notches above the rating on the sovereign. Our RAS criteria therefore cap at 'AA - (sf)' our rating on the class A notes.

Following the application of our RAS criteria and our RMBS criteria, we have determined that our rating on the class A notes should be the lower of (i) the rating as capped by our RAS criteria, and (ii) the rating that the class of notes can attain under our RMBS criteria. In this transaction, both our RMBS and our RAS criteria constrain our rating on the class A notes at 'AA - (sf)'.

The transaction is exposed to counterparty risk through UCI as loan servicer and Banco Santander S. A. as the guaranteed investment contract (GIC) provider and paying agent. Under our current counterparty criteria, the exposure to the GIC provider is documented in the transaction's rating requirements (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). The replacement mechanisms in place adequately mitigate the counterparty exposure at the 'AA-' rating level.

There is no swap mechanism proposed for this transaction. Therefore we have applied a basis stress in our cash flow analysis to account for the potential basis and reset mismatch between the referenced indices for the assets and notes.

Applying a commingling stress in our cash flow assumptions mitigates commingling risk arising from the transaction's exposure to UCI as the servicer.

Legal risk is mitigated in this transaction. We consider the issuer to be a bankruptcy remote entity, in line with our European legal criteria, and the assets will be transferred to the issuer by a true sale at closing (see "EuropeAsset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013).