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Second Eagle Re deal reflects pandemic’s impact on credit enhancement

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For investors seeking rich yields, mortgage-insurance provider Radian Guaranty is approaching the market with a $488 million transaction that is offering greater credit enhancement than a similarly structured deal earlier this year, pre-pandemic.

The notes are backed by reinsurance premiums, eligible investments and related account investment earnings, all related to a pool of mortgage insurance (MI) policies linked to residential mortgage loans.

“The Notes are exposed to the risk arising from losses the ceding insurer (Radian Guaranty) pays to settle claims on the underlying MI policies,” according to DBRS Morningstar in an Oct. 13 pre-sale report.

Compared to the Eagle Re 2020-1 deal that Radian completed in January, before the coronavirus pandemic, the current deal offers investors more credit enhancement on most of its several tranches, and it no longer provides a BBB, investment-grade tranche.

Yash Shah, vp, credit ratings at DBRS Morningstar, noted that the pandemic has prompted the rating agency to apply more severe market-value-decline assumptions and assume a portion of the pool to be in forbearance plans.

“Both of these assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement at all rating levels,” Shah said.

The earlier deal’s Class M-1A tranche for $84 million was rated BBB and provided credit enhancement of 6.15%; it priced at one-month Libor plus 90 basis points. In the current deal, the Class M-1A tranche is now $130 million and rated BB, providing credit enhancement of 5.25%.

The M1-B tranche is $133 million in both deals, with credit enhancement shrinking slightly to 4.75% in the current deal from 4.8% in the January transaction, which priced for a coupon of one-month Libor plus 145 basis points.

The M1-C piece is anticipated to be somewhat smaller than the earlier transaction, and credit enhancements remains nearly the same. However, the $157 million M-2 tranche, with credit enhancement of 2.30% is slated to shrink to $131 million from $157 million, and credit enhancement to increase to 3.50% or more, compared to 2.30% in the earlier deal.

The B-1 tranche in the current deal will be similar in size to the earlier one, but its credit enhancement will increase to 3.25% from 2.5%.

“We are of the view that the pandemic may have a more meaningful negative impact on lower ratings, as such rating levels represent the current economic environment,” Shah said. “Expected losses at higher rating levels may also increase, but may not be as pronounced as those in the lower rating levels.

Fitch’s pre-sale report notes certain changes that investors should be aware of. On March 1, a new mater policy was introduced to conform to the government-sponsored enterprises’ (GSEs) revised rescission relief principles under new guidelines, and 57.6% of the pool loans were originated under the new policy.

In addition, while mortgage-linked notes prior to the onset of the coronavirus employed a delinquency test that was satisfied when the delinquency percentage fell below a fixed threshold. The current Eagle Re transaction incorporates a dynamic delinquency test, which is met when the three-month average of the aggregate exposed principal balance is reported as 60 or more days delinquent.

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