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BHG aims to diversify earnings with foray into health care loan ABS

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Bankers Healthcare Group, in a bid to defer more of its fast-rising earnings down the road, is securitizing a small portion of loans it has made to high-earning medical professionals.

BHG, a Florida lender affiliated with Pinnacle Financial Partners in Nashville, Tenn., is marketing a $159.6 million bond offering backed by a pool of commercial and unsecured consumer loans issued to doctors, registered nurses, dentists, pharmacists and other licensed health care workers and entrepreneurs.

The transaction was disclosed on Monday in a presale ratings agency report published by Kroll Bond Rating Agency.

The securitization strategy is a major shift for BHG, which over the course of 19 years has offloaded its professional loans via whole-loan auction or direct sale to small community banks eager to add low-risk, prime-credit assets. Last year, BHG averaged $5.9 million in daily sales volume involving 570 unique banks.

While direct sales will remain the bulk of BHG’s business, “we thought it would be interesting to diversify” the company's books with ABS paper alongside “the gain-on-sale model,” said Al Crawford, BHG’s co-founder, chairman and CEO.

Crawford said BHG, which is 49% owned by Pinnacle, had been considering the ABS deal since June 2019 to spread out its recent rapid earnings growth over several years. The company’s fiscal 2019 earnings more than doubled that of a year earlier, totaling $192 million.

Instead of realizing immediate gains on asset sales of loan pools to banks, the company can book seven- to 10-year earning assets that will help further its goal to limit annual income growth at 5% to 10% annually, Crawford said.

“It kind of reverses the process a little bit,” Crawford said.

"The cash flows cover any type of reserves that we would have to put out there with the ABS model,” he added. “It’s just another diversified structure for our back end.”

Al Crawford, Dan McSherry

The loans assigned to the pool have a total current balance of $177.3 million, which will back three classes of notes, including a $113.23 million Class A senior tranche with a preliminary AA rating from Kroll. (ABS issuers commonly back bonds with pool loan balances outstripping notional values to provide cushions against possible delinquencies and defaults that impair cash flow.)

The pool of loans involve 2,838 accounts from borrowers with an average FICO score of 731, annual income averaging $285,226 and a practice license held at least 17 years. The loans average 7.8 years in original terms, and have a seasoned payment performance averaging 8 months, according to Kroll. Nearly all of the loans, including commercial, carry personal guarantees from the borrower.

None of the loans have been granted a deferment based on pandemic-related causes.

After being approached by Credit Suisse Securities with the idea to explore ABS in early 2019, BHG opened a $223 million warehouse credit facility last fall with Credit Suisse to compile loans for a planned spring 2020 launch.

The coronavirus outbreak prompted BHG and the arranger to pull the deal in March as ABS markets generally dried up during the early stages of macroeconomic stress. The deal was to set the stage for $600 million to $800 million in total asset-backed securities BHG planned to issue this year, said Chief Financial Officer Dan McSherry. That schedule has been scaled back.

Instead of proceeding with a securitization in a tough market, BHG ramped up direct sales and loan auctions to community banks this year to build up its cash reserves that totaled $382 million as of March 31. (Kroll considers that liquidity boost a strong factor that will help BHG weather any COVID-19 stresses in servicing the transaction.)

The company had record direct sales volume over a three-month period, including whopping $189 million in April. (The annualized 2020 sales volume year-to-date is between $8 million and $9 million daily, the BHG executives estimate.)

The ABS deal was put back into motion in mid-May. BHG stands to yield returns on an estimated 9% excess spread on the deal over its lifetime, Kroll said.

BHG has carried on with strong levels of originations as well, underwriting $666 million of loans this year through May 2020. Mirroring the ABS pool mix, about 80% of originations are business loans and the remainder are unsecured loans issued through Pinnacle's consumer lending platform.

BHG first offered personal loans in 2014, and has ramped up that area of the business through its partnership with Pinnacle after the bank acquired its first stakes in BHG in 2015.

The asset pool is similar to other prime consumer and small-business installment loan securitizations sponsored by global lenders such as Marlette Funding (which operates as Best Egg), Funding Circle and Prosper. BHG’s target borrower is most similar to that of SoFI, which markets ABS deals featuring unsecured personal and refinanced student loans of advanced-degree professionals in medical, legal and business fields.

But BHG’s offering is the first to mix commercial and personal loans in the same pool, according to Kroll.

Kroll is comfortable providing the investment-grade ‘AA’ rating to the pool, said Eric Neglia, one of the firm’s managing directors.

“There are several positive factors that contributed to the ratings, including how long the company has been in business, the consistency in the [loan] performance data, the quality of commercial borrowers and their resiliency through the early part of this economic downturn," Neglia said.

"They've proven that they are able to make money since inception and have consistently reported positive net income," said Bill Carson, a Kroll senior director.

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