BANCO SANTANDER, S.A. 
Fitch Ratings has assigned expected ratings and Rating Outlooks to the notes issued by
RATING ACTIONS
Entity / Debt
Rating
Santander Bank Auto Credit-Linked Notes 2021-1
A-1
LT
NR(EXP)sf
Expected Rating
A-2
LT
NR(EXP)sf
Expected Rating
B
LT
BBB(EXP)sf
Expected Rating
C
LT
BB(EXP)sf
Expected Rating
D
LT
B(EXP)sf
Expected Rating
E
LT
NR(EXP)sf
Expected Rating
R
LT
NR(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Collateral Performance - Strong Credit Quality: 2021-1 has a weighted average (WA)
Payment Structure - Only Note Subordination for CE: Initial hard CE totals 4.50%, 3.50% and 2.80% for classes B, C and D, respectively, consistent with the prior transaction, entirely consisting of subordinated note balances, including the additional class E and R notes. There is no additional enhancement provided, including no excess spread. Initial CE is sufficient to withstand Fitch's base case CNL proxy of 1.80% at the applicable rating loss multiples.
Seller/Servicer Operational Review - Stable Origination and Servicing:
Pro-Rata Pay Structure (Negative): Auto loan cash flows are allocated among the class B and C notes based on a pro-rata pay structure, with the class A certificates (retained by SBNA) receiving a pro-rata allocation payment, and the subordinate class D, E and R notes are to remain unpaid until all other classes are paid in full, in sequential order.
In addition, lower-rated subordinated classes will be locked out of principal entirely if the transaction CNL exceeds a set CNL schedule. The lockout feature helps maintain subordination for a longer period should CNL occur earlier in the life of the deal. This feature redirects subordinate principal to classes of higher seniority sequentially, except class A certificates. Further, if the pool CNL exceeds 4.00%, the transaction switches from pro rata and pays fully sequentially, including for class A certificates.
CE Floor (Positive): To mitigate tail risk, which arises as the pool seasons and fewer loans are outstanding, class E and R notes are locked out of payments until other classes of notes are paid in full, leading to a floor amount of subordination of 2.50% below the class D notes at issuance.
Excessive Counterparty Exposure: The excessive exposure in the transaction arises due to SBNA's role providing a material degree of credit support to the transaction. Noteholders will not have recourse to the reference portfolio or to the cash generated by the assets. Instead, the transaction relies on SBNA to make interest payments based on the note rate and principal payments based on the performance of the reference pool. The monthly payment due will be deposited by SBNA into a segregated trust account held at
SBNA is also the servicer and will retain the class A certificates. Given this dependence on the bank, ratings on the notes are directly linked to, and capped by, the IDR of the counterparty, SBNA (BBB+/F2/Stable).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Changes in loss timing have the potential to shift the paydown of the outstanding notes, due to the timing of when performance triggers are tripped. Additionally, unanticipated increases in the frequency of defaults could produce CNL levels higher than the base case and would likely result in declines of CE and remaining net loss coverage levels available to the notes. Weakening asset performance is strongly correlated to increasing levels of delinquencies and defaults that could negatively affect CE levels.
Additionally, unanticipated declines in recoveries could also result in lower net loss coverage, which may make certain note ratings susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
For this transaction, Fitch conducted sensitivity analyses by stressing the transaction's assumed loss timing, the transaction's initial base case CNL and recovery rate assumptions, examining the rating implications on all rated classes of issued notes. The loss timing sensitivity modifies the base case loss timing curve to delay the sequential payment triggers to the middle of the transaction's life while maintaining overall loss levels.
The CNL sensitivity stresses the CNL proxy to the level necessary to reduce each rating by one full category, to non-investment grade (BBsf) and to 'CCCsf', based on the break-even loss coverage provided by the CE structure.
Additionally, Fitch conducts a 1.5x and a 2.0x increase to the CNL proxy, representing both moderate and severe stresses, respectively. Fitch also evaluates the impact of stressed recovery rates on an auto loan ABS structure and rating impact with a 50% haircut. These analyses are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance. A more prolonged disruption from the pandemic is accounted for in the severe downside stress of 2.0x and could result in downgrades of up to two rating categories for the subordinate notes.
Due to the pandemic, the
For sensitivity purposes, Fitch assumed a 2.0x increase in delinquency stress. The results below indicate no adverse rating impact to the notes. However, Fitch acknowledges that lower prepayments and longer recovery lag times due to delayed ability to repossess and recover on vehicles may result from the pandemic. However, changes in these assumptions, all else equal, would not have an adverse impact on modeled loss coverage. Fitch has maintained its stressed assumptions.
Loss Timing Sensitivity
As mentioned previously, prior to the triggering of a sequential payment event through the CNL schedule, the class B and C notes are paid pro rata until paid in full. This pro-rata paydown presents a risk to the notes, which may share in any losses incurred and not receive adequate principal paydown over time. In Fitch's front-loaded primary scenario, this trigger activates almost immediately, leading to higher loss coverage than the mid- and back-loaded scenarios presented previously.
While Fitch believes a more backloaded scenario is less likely, to evaluate the potential structural challenge, an additional timing scenario was considered in which 20% of the CNL is expected to occur within the first two years of the transaction's life was delayed to the second two years, in a 15%/15%/35%/35% loss curve.
The delayed loss curve leads to the sequential order event occurring later in the life of the transaction under the class B, C and D stress scenarios. However, due to the delay in defaults, the class B, C and D notes are able to pay down sooner than in the prior back-loaded curve, which delays the trigger events but sees a more significant portion of losses occurring earlier in the deal. Because of this, loss coverage improves in an extremely back-loaded scenario, due to the other subordinate notes (including the class D) being locked out until the B and C notes are paid in full under any scenario.
In the below scenario, class B and D notes would see no change in ratings, whereas the C notes, remaining pro rata with the B notes for the most part, achieve a rating multiple level with the class B notes.
Cumulative Net Loss Rating Sensitivity
In addition to the delayed timing mentioned above, Fitch stressed each class of notes prior to any amortization to its first dollar of default to examine the structure's ability to withstand the aforementioned stressed CNL scenarios.
Defined Rating Categories
The first sensitivity analysis consists of utilizing the break-even CNL loss coverage available to the notes and assessing the level of CNL it would take to reduce each rating by one full category, to non-investment grade and to 'CCCsf'. The implied CNL proxy necessary to reduce the ratings as stated above will vary by class based on the break-even loss coverage provided by the CE structure.
Under this analysis, all analytical assumptions are unchanged, with total loss coverage available to class B notes at 4.37%. Therefore, the implied CNL proxy would have to increase to 2.91% for class B notes to be downgraded by one rating category or a 1.5x multiple (4.37%/1.50 = 2.91%). Applying the same approach but increasing net losses to levels commensurate with rating downgrade to 'CCCsf' suggests net losses would have to increase to 5.83%.
The second sensitivity also focuses on stressing the impact of CNLs outside of base case expectations by a 1.5x and a 2.0x multiple relative to available loss coverage. This analysis provides a good indication of the rating sensitivity of the notes to unexpected deterioration of the trust's performance. In this example, under the 1.5x scenario, the base case proxy increases to 1.65% and an implied loss multiple of 2.84x, which would suggest a downgrade to the 'Asf' range. Under the more severe 2.0x stress, the base case proxy increases to 2.20%, which results in an implied multiple of 2.13x or a downgrade to the 'BBBsf' range.
Due to de-levering and structural features, a typical auto loan ABS transaction tends to build CE and loss coverage levels over time, absent any increase to projected defaults/losses beyond expectations. However, the current transaction, which is based on a reference pool and is not a standard auto loan ABS transaction, sees only limited de-levering and increases in enhancement over the life of the transaction, as classes B and C pay down pro rata.
The greatest risk of losses to an auto loan ABS transaction is over the first one to two years of the transaction, where the benefit of de-levering may be muted. This analysis does not give explicit credit to the de-levering and building CE typically afforded in auto loan ABS transactions.
Recovery Rate Sensitivity
Recoveries can have a material impact on auto loan pool performance, particularly in stressed economic environments where default frequency is higher. This sensitivity analysis evaluates the impact of stressed recovery rates on the considered structure and rating impact.
Historically, recovery rates on auto loan collateral have ranged from 40% to 70%. Utilizing the base case of 1.80% detailed in the CNL sensitivities above, recovery rate credit under Fitch's primary scenario is 50%, resulting in a cumulative gross default (CGD) base case proxy of 3.60%. Applying a 50% haircut to the 50% recovery rate results in a stressed recovery rate of 25% and a base case CNL proxy of 2.70% (3.60% x 75% = 2.70%). Under this stressed scenario, the implied multiple declines to 2.84x (4.67%/1.65% = 2.83x), resulting in an implied rating of 'BBsf'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Conversely, stable to improved asset performance driven by stable delinquencies and defaults would lead to marginally increasing CE levels and consideration for potential upgrades. If CNL is 20% less than the projected proxy, the expected ratings for the subordinate notes could be raised one notch for class B (which are capped at the originator's ratings) and upgraded by one category for classes C and D. However, this upgrade potential is very remote, as low losses would mean the transaction remains pro rata for a longer period, leading to less enhancement build over time and no enhancement build for the class D notes.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
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