Fitch Expects to Rate Santander Drive Auto Receivables Trust 2016-3; Presale Issued
--$195,000,000 class A-1 notes 'F1+sf';
--$295,000,000 class A-2-A & A-2-B notes 'AAAsf'; Outlook Stable;
--$125,860,000 class A-3 notes 'AAAsf'; Outlook Stable;
--$144,260,000 class B notes 'AAsf'; Outlook Stable;
--$155,450,000 class C notes 'Asf'; Outlook Stable;
--$85,380,000 class D notes 'BBBsf'; Outlook Stable;
--$58,880,000 class E notes 'BBsf'; Outlook Stable.
KEY RATING DRIVERS
Declining Credit Quality: 2016-3 is backed by collateral relatively consistent with the 2014-2016 pools, with a WA FICO score of 600 and internal WA loss forecast score (LFS) of 555. However, obligors with no FICO scores increased to the highest level to date at 18.7% of the pool. Fitch considers the growing no FICO originations a negative trend considering the weaker loss performance observed for these obligors.
Increased Extended-Term Contracts: The concentration of 73-75 month loans increased to 7.9% from 4.7% in 2016-2, and 60+ month loans account for 92.2% of the pool, towards the higher end of the range historically for the platform. Consistent with prior Fitch-rated transactions, an additional stress was applied to the 73-75 month loans when deriving the loss proxy.
Weakening Performance: Although within range of the 2010-2012 performance, recent 2013-2015 portfolio and securitization losses are tracking higher. Loss frequency has been driven higher by looser underwriting, while loss severity has risen due to slightly weaker wholesale vehicle values and early stage defaults on extended term collateral. Fitch expects the 2015-2016 vintages to perform relatively in line with 2013-2014, if not weaker.
Sufficient Credit Enhancement: The cash flow distribution is a sequential pay structure. Initial hard credit enhancement (CE) totals 49.70% for the class A notes, slightly down from 49.85% in recent transactions. Excess spread is expected to be 10.24% per annum, down from recent transactions due to the decline in the WA APR.
Stable Corporate Health: SC's recent financial results have been weaker due to higher losses on the managed portfolio. However, the company has been profitable since 2007 and Fitch currently rates Santander, SC's majority owner, 'A-/F2'/Outlook Stable.
Consistent Origination/Underwriting/Servicing: SC demonstrates adequate abilities as originator, underwriter, and servicer as evidenced by historical portfolio and securitization performance. Fitch deems SC capable to service this series.
Legal Structure Integrity: The legal structure of the transaction should provide that a bankruptcy of SC would not impair the timeliness of payments on the securities.
Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than the base case. This in turn could result in Fitch taking negative rating actions on the notes.
Fitch evaluated the sensitivity of the ratings assigned to Santander Drive Auto Receivables Trust 2016-3 to increased credit losses over the life of the transaction. Fitch's analysis found that the transaction displays some sensitivity to increased defaults and credit losses. This shows a potential downgrade of one or two categories under Fitch's moderate (1.5x base case loss) scenario, especially for the subordinate bonds. The notes could experience downgrades of three or more rating categories, potentially leading to distressed ratings (below 'Bsf') or possibly default, under Fitch's severe (2x base case loss) scenario.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from Deloitte and Touche, LLP. The third-party due diligence focused on comparing or recomputing certain information with respect to 150 loans from the statistical data file. Fitch considered this information in its analysis and the findings did not have an impact on our analysis/conclusions. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of this rating action commentary.
Fitch's analysis of the Representations and Warranties (R&W) of this transaction can be found in the reports titled 'Santander Drive Auto Receivables Trust 2016-3 -- Appendix'. These R&W are compared to those of typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated March 31, 2016.