Radnor Re, a trust that issues notes secured by premium payments on private mortgage insurance (MI), is preparing a $557.7 million transaction for the securitization market.
The trust will provide reinsurance coverage to the ceding insurer, Essent Guaranty, which provide the MI coverage in exchange for coverage, initial expense and supplemental premiums, according to Moody’s Investors Service.
With proceeds from the sale of notes, Radnor Re will reinvest some of the proceeds in eligible investments, and repay the notes in the form of principal and the SOFR rate plus spread.
While Essent Guaranty must pay coverage premiums to the reinsurer – and those proceeds are used to make note interest payments – Moody’s says it will not cap the note ratings to the ceding insurer’s financial strength. The ceding insurer’s non-payment would not prevent the noteholders from getting paid in full. In fact, any non-payment would trigger a mandatory termination event.
After Radnor Re pays Essent Guaranty the former owes, amounts in the trust account will pay note holders and funds in the premium deposit account will cover 70 days’ worth of the noteholders’ interest payments.
Due to this arrangement, Moody’s believes it will be very unlikely for the insurer to stop making the interest payments, even in the case of insolvency. Also, Essent Guaranty will still have strong incentive to keep making interest payments to avoid losing the reinsurance protection from the credit risk transfer (CRT) transaction.
Moody’s analyzed the probability of default and loss given default of the insured loans in a reference pool using its US MILAN model. To reflect the likely performance deterioration resulting from a slowdown in U.S. economic activity and stemming from ongoing COVID-19 effects, Moody’s also increased the expected losses on its reference model by 7.5%, and losses on the ‘Aaa’ notes by 2.5%.
The risks to Radnor Re were weighted against the quality of the insured pool, which consists of high-quality mortgage loans, underwritten with full documentation and satisfy GSE underwriting requirements. Just 56 loans, representing 0.02% of the pool balance, have low docs, which were not conforming loans.
Four of the classes are expected to receive ratings, ranging from ‘Baa3’ on the M-1A class, with $139 million, to ‘B2’ on the $97.6 million M-2 class.
