Fitch Ratings-London-20 June 2014: Fitch Ratings has assigned SC Poland Auto 2014-1 Limited's (SC Poland) notes an expected rating, as follows:
Class A notes, due May 2025: 'AA(EXP)sf'; Outlook Stable
Class B notes, due May 2025: 'A(EXP)sf'; Outlook Stable
Subordinated Loan: not rated
The final rating will be contingent upon the receipt of final documents conforming to the information already received and a satisfactory review of final legal opinions to support the agency's analytical approach.
The transaction is a securitisation of auto and unsecured consumer loans originated in Poland by Santander Consumer Bank, S.A. (SCB, ultimately owned by Banco Santander, S.A. (BBB+/Stable/F2)). The Polish zloty-denominated portfolio is static and the notes will amortise from closing. About 56% of loans bear floating interest rates. The notes will pay interest linked to one-month WIBOR plus a margin. The interest on the class B notes will be paid subject to a cap of 7.0%.
KEY RATING DRIVERS
Decreasing Default Rates
Default rates on auto loans have significantly decreased in recent years, which in Fitch's view is a result of improved economic conditions and tightened underwriting standards. Fitch expects a lifetime default rate of 7% for the auto pool and 1.75% for the hire purchase pool, which has a short residual life and has performed well historically.
Limited Recovery Prospects
A large portion of auto loan recoveries stems from unsecured cash recoveries, rather than from the sale of repossessed vehicles. The recovery prospects are therefore significantly lower than for most European auto loan pools. Fitch assumed base case recovery rates of 35% for both auto and unsecured loan recoveries.
Interest Rate Risk
Of the assets, 44% pay a fixed rate while the notes (78.5%) pay WIBOR. In a rising interest rate scenario, this exposes the structure to a mismatch between the partially fixed asset income and the floating liability costs. However, the negative effect of rising interest rates is muted by the short life of the fixed asset portfolio, which is less than one year.
Cap on Asset Yield
Polish legislation allows a maximum interest rate of 4x the Lombard rate (currently 4%; ie a cap of 16%). If maintained by the authorities, this cap could negatively affect the excess spread if interest rates and correspondingly Lombard decrease. However, given the current excess spread of 5.4%, only a significant reduction of the interest rate cap would have a material effect.
Stable Macroeconomic Outlook
The mid-term forecasts for unemployment and interest rates are stable and in line with current levels. Unemployment, which has been around 10% since 2009, is forecast to remain flat through 2014 and 2015, as are short-term interest rates at around 3.0% for the same period. GDP growth is expected to pick up to 2.8% and 3.2% in 2014 and 2015 respectively, from 1.6% in 2013.
From closing, SCB will continue to act as servicer of the portfolio. Banco Santander S.A. will be appointed as servicer facilitator, in case SCB is unable to take over the servicing activity upon servicer termination. No back-up servicer will be initially appointed.
The transaction benefits from a liquidity mechanism, initially 2.0% of the class A and B notes, which can cover at least three months of note interest and senior expenses if needed. After the notes have amortised to 50% of their initial balance, the liquidity reserve will start amortising to 4% of the then current class A and B balance, subject to a floor of 0.5%.
The structure features an implicit provisioning mechanism for defaults, whereby the amortisation amount applied to the most senior outstanding class in each month aims at equalising the outstanding note balance with the performing asset balance net of the initial subordinated loan balance (target principal amount).
Credit enhancement will be provided to the class A and B notes by overcollateralisation (OC) of 33.5% and 21.5% respectively as well as a liquidity reserve of initially 1.6% (2.0% of class A and B notes), whose amortisation amounts are part of the available distribution amount.
As of 31 March 2013, the preliminary pool comprises 70% auto and 30% HP loans with an average outstanding balance of PLN29,073 and PLN1,895, respectively. Within the auto loan pool, 27% of loans are backed by used vehicles and 73% by new vehicles. Individuals account for 70% of obligors, and 30% are business entities or self-employed individuals. Floating rate loans amounted to 56% of the portfolio and the WA remaining term was 18 months for the HP and 40 months for the auto loan pool.
Rating sensitivity to increased default rate assumptions
Class A / Class B Current default base case: 'AAsf' / 'Asf'
Increase in default rate base case by 10%: 'AA-sf' / 'A-sf'
Increase in default rate base case by 25%: 'Asf' / 'BBBsf'
Increase in default rate base case by 50%: 'BBB+sf' / 'BBB-sf'
Rating sensitivity to reduced recovery rate assumptions
Class A / Class B
Current recovery rate (RR) base case: 'AAsf' / 'Asf'
Reduce RR base case by 10%: 'AAsf' / 'A-sf'
Reduce RR base case by 25%: 'AAsf' / 'A-sf'
Reduce RR base case by 50%: 'AA-sf' / 'BBB+sf'
Rating sensitivity to multiple factors
Class A / Class B
Current base case assumptions: 'AAsf' / 'Asf'
Mild stress: Increase in default rate by 10%, reduce recovery rate by 10%: 'AA-sf' / 'BBB+sf'
Moderate stress: Increase in default rate by 25%, reduce recovery rate by 25%: 'Asf' / 'BBBsf'
Severe stress: Increase in default rate by 50%, reduce recovery rate by 50%: 'BBBsf' / 'BBsf'
A presale report, including further information on transaction related stress and sensitivity analysis, and material sources of information that were used to prepare the credit rating is available at www.fitchratings.com.
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