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 will provide MI coverage in exchange for the coverage, upfront expenses and additional premiums, according to Moody’s Investors Service.
With the proceeds from the sale of the Notes, Radnor Re will reinvest a portion of the proceeds in eligible investments and repay the Notes in the form of principal and the SOFR rate plus the spread.
Although Essent Guaranty must pay the coverage premiums to the reinsurer – and this proceeds are used to make interest payments on the Notes – Moody’s says it will not cap the ratings of the Notes on the financial strength of the ceding insurer. Non-payment by the ceding insurer would not prevent holders from being paid in full. In fact, any non-payment would trigger a mandatory termination event.
Once Radnor Re has paid Essent Guaranty first, the amounts in the trust account will pay the Noteholders and the funds in the Premium Deposit Account will cover 70 days of interest payments from the Noteholders.
As a result of this arrangement, Moody’s believes that the insurer will be very unlikely to stop paying interest, even in the event of insolvency. In addition, Essent Guaranty will always have a strong incentive to continue paying interest to avoid losing the reinsurance protection of the Credit Risk Transfer (CRT) transaction.
Moody’s analyzed the probability of default and loss on default of insured loans in a benchmark pool using its US MILAN model. To reflect the likely deterioration in performance resulting from a slowdown in economic activity in the United States and resulting from the lingering effects of COVID-19, Moody’s also increased the expected losses on its benchmark model by 7.5% and the 2.5% losses on “Aaa” notes.
The risks for Radnor Re have been weighted against the quality of the insured pool, which consists of high quality mortgages, taken out with full documentation and meeting the underwriting requirements of GSE. Only 56 loans, representing 0.02% of the pool balance, have low documents, which were not compliant loans.
Four of the classes are expected to receive grades, ranging from “Baa3” on the M-1A class, at $ 139 million, to “B2” on the M-2 class at $ 97.6 million.