OREANDA-NEWS. Fitch Ratings has affirmed Silk Finance no. 3's class A notes at 'A+sf' with a Positive Outlook. The transaction also features two unrated classes - class B notes and C notes.

Silk Finance no. 3 is a revolving securitisation of auto loan, lease and long-term rental receivables originated by Banco Santander Consumer Portugal S.A. (BSCP), a wholly owned subsidiary of Banco Santander S.A. (A-/Stable/F2).

KEY RATING DRIVERS

Sovereign Cap
The rating of the notes is capped at 'A+sf', six notches above the sovereign, in accordance with Fitch's Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds. The Positive Outlook on the notes reflects the Outlook on Portugal's Long-term Issuer Default Rating (BB+/Positive).

Large Credit Enhancement
The class A notes are supported by the junior class B notes and a EUR5.3m reserve fund, which to date has not been drawn. Total credit enhancement of the class A notes stands at 66.6%, compared with 27.5% at closing, and hence is able to withstand severely stressed scenarios. The levels of excess spread have also remained stable as the transaction benefits from an interest rate swap.

Strong Collateral Performance
Current 30 days plus delinquencies stand at 2.7% while cumulative defaults since closing (November 2012) amount to EUR15m, which represents around 2% of the initial balance. In addition, cumulative recoveries stand at close to 48% of defaulted loans. Fitch has reduced the lifetime default base case to 3% from 5% while the recovery base case has been revised to 30% from 22% given the stronger-than-expected performance.

Decreased Asset Balance
The deal was revolving until December 2014 after the original end of the revolving period -June 2012- was extended. However, the outstanding asset balance has decreased significantly as not enough eligible loans were being originated. As a result, the class A note outstanding amount has decreased to EUR152m from EUR500m at closing, which has allowed the transaction to build up credit enhancement for the class A notes.

Commingling Reserve
Fitch notes that according to the transaction documentation the servicer should have funded a commingling reserve equal to one month of estimated collections. The agency took this fact into account in its analysis and concluded that the available credit enhancement is sufficient to withstand the loss of collections in a potential servicer event and hence the failure to fund the commingling reserve does not have rating impact.

RATING SENSITIVITIES

Fitch has revised its lifetime default base case to 3% from 5%. The recovery base case has been increased to 30% from 22%

Expected impact upon the note rating of increased defaults:
Current rating: 'A+sf'
Increase base case defaults by 25: 'A+sf'

Expected impact upon the note rating of decreased recoveries:
Current rating: 'A+sf'
Reduce base case recovery by 25%: 'A+sf'

Expected impact upon the note rating of increased defaults and decreased recoveries:
Current rating: 'A+sf'
Increase default base case by 25%; reduce recovery base case by 25%: 'A+sf'.