Arch MI has completed its first offering of insurance-linked notes of the year and has reinsured $ 528 million for a pool of 163,292 mortgages with an unpaid principal of $ 44 billion.
Coverage was achieved through the issuance of approximately $ 450 million of bonds and direct reinsurance of $ 78.5 million. The loans were taken out in the second half of 2019.
"We are pleased to have been able to launch this transaction in this period of uncertainty surrounding COVID-19," said Jim Bennison, Arch MI's executive vice president of alternative markets. "The response from both fixed income and reinsurers speaks for the attractiveness of our program. This is our eleventh Bellemeade transaction and the program remains an important tool for managing the risk and capital requirements of our US mortgage insurance business."
The company claimed this deal was the first mortgage transfer transaction since the pandemic began.
The first transaction with Bellemeade, a specialty insurer based in Bermuda, took place in 2015. United Guarantee – now part of Arch MI but at the time a subsidiary of the American International Group – received $ 299 million in cover for mortgages concluded between 2009 and 2009 in 2013.
There are three classes in this deal:
● The M-1A class with an unpaid principal of $ 252.1 million and a one-month Libor coupon plus 265 basis points.
● The $ 171.5 million M-1B class with a one-month Libor coupon plus 340 basis points.
● The B-1 class of $ 26.4 million with a coupon of one month Libor plus 440 basis points.
All Bellemeade transactions include a language that is responsible for a Libor transition when the index is discontinued, an Arch spokesman said. The changes for these are expected to follow in line with the credit risk transfer transactions of the government-sponsored companies.
A pre-sale report published by DBRS Morningstar rated the M-1A class A (low). The other two classes, M-1B and B-1, received BBB ratings.
Moody’s also rated this transaction, with M-1A class A1, M-1B class Baa1 and B-1 class Baa2.
Both rating agencies have considered a potential increase in coronavirus related delinquencies in their respective ratings of the transaction.
One of the strengths of the business, according to DBRS Morningstar, is the fact that almost all of the loans it contains are approved by an agency, are of high credit quality and do not include mortgages that are currently in arrears.
Another strength: 95.2% of MI policies are paid for by the borrower. This means that they can be canceled automatically when a borrower whose payments are up to date reaches a credit value ratio of 78%.
"After the termination, the ceding insurer's risk on the mortgage loan will be eliminated, reducing the risk on the transaction," said DBRS Morningstar.
On the other hand, there is a counterparty risk due to the obligation of the service provider to ensure that premium payments for failed cover are paid to investors.
Another possible disadvantage lies in the representation and guarantee.
"The transaction is secured by MI guidelines and no loans are pledged to the trust, so the ceding insurer will not provide direct R & W to bondholders on the underlying insured mortgage loan," said DBRS Morningstar.
For Moody & # 39; s, the following factors could downgrade Bellemeade Re 2020-1 ratings:
● Credit protection is not sufficient to protect investors from current loss expectations.
● The losses are above original expectations due to a higher number of defaults or an impairment of the pledged property.
● the performance of the US economy and the real estate market; and poor service, transaction party errors, inadequate transaction control and fraud.
"Maintenance practices, including tracking COVID-19 related mitigation activity, may vary between service providers in the transaction. These inconsistencies may affect the reported collateral performance, the timing of a service trigger outbreak, the timing of policy termination, and the amount of impacting ultimate net loss, "said Moody's.