Arch prices $432M PMI-linked notes offering
Arch Mortgage Insurance Co. on Friday priced a $423 million insurance-linked notes offering that provides the firm partial resinurance coverage on a pool of GSE-eligible residential mortgages.
In a deal representing its 12th credit-risk transfer transaction (and second of the year), Arch priced five classes of floating-rate bonds backed mainly by mortgage-insurance premiums from a pool of agency-backed loans with low homeowner equity. The capital stack includes a Class M-1A floating-rate notes offering — the senior-most tranche offered to investors — pricing at a spread of 230 basis points over one-month Libor, based on a 10-year legal maturity.
The $91.99 million in Class M-1A notes had preliminary ratings of A2 from Moody’s Investors Service and BBB (high) from DBRS Morningstar.
The four other note classes in the Bellemeade Re 2020-2 transaction totaling $331.4 million also priced with varying spreads between 320 and 850 basis-point spreads, according to market data.
The bonds are backed by the private mortgage-insurance premiums from 117,562 newly originated, first-lien mortgage loans, as well as proceeds from the sale of investments sold from the Bellemeade trust. Nearly all of the loans are underwritten with full documentation under Federal Housing Finance Agency guidelines for Freddie Mac/Fannie Mae purchase eligibility.
The insured loans referenced in the pool have an average balance of $274,360, or an aggregate unpaid balance of $32.25 billion. Approximately $7.2 billion of that balance is the "risk in force" insurance levels in the transaction — although nearly $6.5 billion of that exposure is tied to the senior Class A notes that Arch is retaining to align interests with investors. (Typically, only a portion of the credit risk in CRT deals is handed over to the capital markets.)
Under terms of the transaction, Arch will use proceeds from the sale of the notes to purchase investments in triple-A or equivalent-rated U.S. Treasury money-market funds or securities. Those assets will be held in the reinsurance trust account, from which a portion of assets will be periodically sold to make principal payments on the issued notes.
Asset sales will also be used to pay insurance claim settlements on the mortgage-insurance policies, which were issued by Arch Mortgage Insurance Co. or its affiliated United Guaranty Residential Insurance Co., a subsidiary of mutual parent Arch Capital Group.
The mortgage borrowers paying for the policies are mostly prime credit risks with a weighted average FICO of 749. But Moody’s stated the pool data does not detail how many of the insured loans were issued under Fannie and Freddie programs geared toward low- to moderate-income homebuyers that could represent riskier elements. The Fannie Mae HomeReady and Freddie Mac Home Possible programs involve “low down payments, lower risk-adjusted pricing, flexibility in sources of income and, in certain circumstances, lower than standard mortgage insurance coverage,” according to Moody’s.
None of the insured mortgages in the new 2020-2 pool (with only two months of average seasoning) were delinquent at the time Arch accumulated the pool assets, nor have any been enrolled in pandemic-related forbearance programs. But both DBRS Morningstar and Moody’s noted that 60-plus day delinquencies had risen in July among all of Arch’s outstanding securitizations on the Bellemeade shelf — a likely result of borrower stresses resulting from the economic pains of the coronavirus spread.
As of Dec. 31, 2019, Arch had approximately $287.2 billion of insurance in force, according to Moody’s.