S&P: Ratings Assigned To SC Germany Consumer 2016-1's German ABS Notes
The securitized portfolio comprises receivables from consumer loans, which Santander Consumer Bank AG granted to its German retail client base. This is Santander Consumer Bank's eight true sale consumer loan transaction.
During the transaction's revolving period, the issuer can purchase additional loan receivables. The revolving period is scheduled to last for 12 months, followed by sequential note amortization. A combination of subordination and excess spread provides credit enhancement for the rated classes of notes. A principal deficiency trigger is in place. Once hit, it subordinates the class B-Dfrd, C-Dfrd, D-Dfrd, and E-Dfrd notes' interest payments to the class A notes' principal payments and accelerates the repayment of the class A notes.
Santander Consumer Bank is an indirect subsidiary of Spanish Banco Santander S. A. It is the largest noncaptive provider of auto loans in Germany and is also a well-known originator in the European securitization market.
Our ratings on the rated classes of notes reflect our assessment of the underlying asset pool's credit and cash flow characteristics, as well as our analysis of the transaction's exposure to counterparty and operational risks. Our analysis indicates that the available credit enhancement for the class A, B-Dfrd, C-Dfrd, and D-Dfrd notes would be sufficient to absorb credit and cash flow losses in 'AA', 'A', 'BBB', and 'BB' rating scenarios, respectively.
There is no back-up servicer. The combination of a borrower notification process, a liquidity reserve, a commingling reserve, and general availability of substitute servicers mitigates servicer disruption risk.
Economic Outlook In our base-case scenario, we forecast that Germany will record GDP growth of 1.7% in 2016, 1.5% in 2017, and 1.4% in 2018, compared with 1.5% in 2015. At the same time, we expect unemployment rates to stabilize at historically low levels. We forecast unemployment to be 4.1% in 2016 and 2017, compared with 4.6% in 2015 (see "Europe's Economic Outlook After The Brexit Vote," published on July 4, 2016). In our view, changes in GDP growth and the unemployment rate are key determinants of portfolio performance. We set our credit assumptions to reflect our economic outlook. Our near - to medium-term view is that the German economy will remain resilient and record positive growth.
Credit Risk We have analyzed credit risk under our European consumer finance criteria using historical loss data from the originator's loan book since January 2004 until January 2016 (see "European Consumer Finance Criteria," published on March 10, 2000). We expect to see 6.5% of defaults in the securitized pool, which reflects our economic outlook for Germany, as well as our view on the originator's good servicing procedures. This is in line with its predecessor, SC Germany Consumer 2015-1 UG (haftungsbeschraenkt).
Payment Structure Our ratings reflect our assessment of the transaction's payment structure, cash flow mechanics, and the results of our cash flow analysis to assess whether the notes would be repaid under stress test scenarios. Taking into account subordination and the available excess spread in the transaction, we consider the available credit enhancement for the rated notes to be commensurate with the ratings that we have assigned. Additionally, the class B-Dfrd to D-Dfrd notes are deferrable-interest notes and we have treated them as such in our analysis. Under the transaction documents, the issuer can defer interest payments on these notes. Consequently, any deferral of interest on the class B-Dfrd to D-Dfrd notes would not constitute an event of default. While our 'AA (sf)' rating on the class A notes addresses the timely payment of interest and the ultimate payment of principal, our ratings on the class B-Dfrd to D-Dfrd notes address the ultimate payment of principal and the ultimate payment of interest. Furthermore, we note that there is no compensation mechanism that would accrue interest on deferred interest in this transaction. We have nevertheless assumed accrual of interest on deferred interest in our analysis.
Counterparty Risk The transaction's documented replacement language is in line with our current counterparty criteria for all of the relevant counterparties (see "CounterpartyRisk Framework Methodology And Assumptions," published on June 25, 2013). The transaction is exposed to The Bank of New York Mellon, Frankfurt Branch as bank account provider, to Santander Consumer Bank as commingling and setoff reserve provider, to Abbey National Treasury Services PLC as swap counterparty, and to Santander UK PLC as swap guarantor. The swap documentation allows for a maximum achievable rating of 'BB (sf)' for the class D notes.
Operational riskSantander Consumer Bank is an indirect subsidiary of Banco Santander. It is one of the largest German consumer banks, and Germany's largest noncaptive car finance bank. It is also a well-known originator in the European securitization market. We believe that the company's origination, underwriting, servicing, and risk management policies and procedures are in line with market standards and adequate to support the ratings assigned. Our operational risk criteria focuses on key transaction parties (KTPs) and the potential effect of a disruption in the KTP's services on the issuer's cash flows, as well as the ease with which the KTP could be replaced if needed (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014). In this transaction the servicer is the only KTP we have assessed under this framework. Our operational risk criteria do not constrain our ratings in this transaction based on our view of the servicer's capabilities.
Legal Risk The transaction may be exposed to deposit setoff and commingling risks, in our opinion. If it were to become ineligible as a counterparty, Santander Consumer Bank would fund the setoff and commingling reserves, which would mitigate these risks. A reserve partially mitigates commingling risk and we have sized the unmitigated exposure as an additional credit loss. We have analyzed legal risk, including the special purpose entity's bankruptcy remoteness, under our European legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013).
Ratings StabilityIn line with our scenario analysis approach, we have run two scenarios to test the stability of the assigned rating (see "Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance," published on May 12, 2009). The results show that under the scenario modeling moderate stress conditions (scenario 1), the rating on the notes would not suffer more than the maximum projected deterioration that we would associate with each rating level in the one-year horizon, as contemplated in our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010).