Unsecured consumer loans from Israeli lender Pagaya will secure $487.5 million in asset-backed securities to be issued from the Pagaya AI Debt Trust, a deal whose worst-case scenario that could still include higher concentrations of loans underwritten to its highest standards.
Pagaya Structured Products is sponsoring the transaction, known as PAID 2023-3. Analysts at Kroll Bond Rating Agency are comparing it to the 2023-1 deal, noting that the latter offered a zero-coupon principle on class C notes, as well as being a full turbo transaction. PAID 2023-3, however, will be a full turbo transaction, and certificate holders will receive no payments until all the notes are paid in full.
The company had addressed some asset performance deterioration in 2021 with tightened underwriting, which began to show up in deals after Q4 2021. As a result, KBRA said, gross default assumptions to all credit tiers remain the same compared with the 2023-1 deal, the rating agency said. Its lifetime expected cumulatvie net loss for the PAID 2023-3 deal is 15.75%.
As for credit enhancement to the notes, KBRA notes that initial hard credit enhancement for the class A notes is lower, at 37.30%, because of lower subordination in the deal. Initial hard credit enhancement in the class B notes is higher due to higher overcollateralization of 2.50%. KBRA also estimates that annual gross excess spread in the deal has decreased, to 10.72%.
Classes A and B notes can be exchanged for the class AB notes, in another buttress to the credit of the notes. The latter class of notes will be entitled to the portion of interest and principal payments that can be allocated to the corresponding exchange notes.
Other forms of enhancement include the deal's sequential pay cash flow structure, subordination, a reserve account equaling 2.31% of the prefunded pool balance. At closing it amounts to $11.55 million. The target reserve amount will equal an amount equal to the sum of 0.50% of amounts on deposit in the prefunding account, the funding accounts and the pool balance, according to KBRA.
KBRA expects to assign ratings of 'A-' to the $316 million, class A notes; and 'BBB-' to the class B notes. The class AB convertible notes could see 'BBB-' ratings.
