KBRA Assigns Ratings to PNMAC GMSR ISSUER TRUST, Series 2016-MSRVF1 and Series 2020-SPIADVF1 Variable Funding Notes

Kroll Bond Rating Agency (KBRA) assigns a final rating of ‘BBB (sf)’ to the Series 2016-MSRVF1 and the Series 2020-SPIADF1 Variable Funding Notes issued by PNMAC GMSR ISSUER TRUST, a master trust issuer of PennyMac Loan Services, LLC (PLS). These notes are backed by participation certificates evidencing participation interest in mortgage servicing rights (MSR) and servicer advance receivables on loans underlying Ginnie Mae guaranteed mortgage-backed securities. KBRA’s rating on the notes is primarily dependent upon the rating of Private National Mortgage Acceptance Company, LLC (PNMAC) (KBRA Rating: BBB-/Stable), the repurchase guarantor under a repo facility in support of the MSRs and advance receivables. Downward revisions to PNMAC’s issuer rating will likely result in a commensurate rating movement to the rated notes.

This report does not constitute a recommendation to buy, hold, or sell securities.

In addition to the currently offered notes, the following series of notes were previously issued by the master trust.

Transaction Overview

KBRA’s original Series 2018-GT1 term note rating report and Series 2018-GT2 term note rating report and comprehensive surveillance report for the previously-rated Series 2018-GT1 and Series 2018-GT2 describe the rating rationale which is also applicable to the rating for the currently outstanding variable funding notes (VFNs) for a which a rating is now provided, with some distinctions as described herein.

As with the previously-assigned Term Note ratings, the ratings on the VFNs are primarily dependent on the credit rating of PNMAC as repurchase guarantor under a repo facility in support of the Issuer’s rights to MSRs and advance receivables granted by Ginnie Mae to PLS and advance receivables due to PLS, with certain transaction features providing one notch uplift on the rating of the notes. It is noted that an upgrade of the issuer rating for PNMAC from ‘BB+/Stable’ to ‘BBB-/Stable’ on August 18, 2020, was the primary consideration for the upgrade of the previously rated term notes from ‘BBB-‘ to ‘BBB’.

Credit Considerations for Variable Funding Notes and Distinguishing Features

Series 2016-MSRVF1

These notes are backed by the same participation interests created in the underlying MSRs that support the previously rated term notes. They are also subject to the same risks, including extinguishment, presented to the term note holders subject to the priority claims of Ginnie Mae (GNMA).

From a credit perspective the MSRVF1 notes stand in a somewhat preferential position relative to the term note holders, as the MSRVF1 notes are paid down by the issuer to cure periodic borrowing base deficiencies, while the term notes are not paid prior to maturity unless certain events occur. These events include early amortization of the term notes when the MSRVFN balance falls below $50.0 million. As described in our previous reports, this creates an alignment of interest between the VFN holder(s) once the holder reaches a minimum amount of lending exposure. Furthermore, in the event of default, the VFN holders share payments pro rata with the term noteholders.

The advance rate for the 2016-MSRVF1 is 72.0%, which from an effective leverage perspective is approximately the same effective advance rate as the 60.0% advance rate provided to the term notes. This is because the underlying repurchase agreement with the VFN holder is already subject to a 10% advance market value haircut prior to inclusion in the master trust. As described in the underlying term note reports, any holder of the 2016-MBSADV1 Notes may only be transferred to a party that has a direct or beneficial interest in the Series 2016-MSRVF1 Notes. The unrated 2016-MBSADV1 Notes are available to allow the MSRVFN holder fund advances in the event that PLS fails to do so, allowing the Indenture Trustee to preserve its rights under the Acknowledgement Agreement with GNMA. As is expected, absent an event of default, the 2016-MBSADV1 notes have never been drawn upon to fund such advances as PLS has performed its advancing obligations.

Series 2020-SPIADVF1

The Series SPIADVF1 Note were added in April 2020 to finance servicer advance receivables (”servicer advances”), which are separate and distinct from the MSR rights being financed by the term notes and the Series 2016-MSRVF1. The participation interests for the 2020-SPIADVF1 Notes are backed by servicer advances which have been made and are due for principal and interest advances (MBS Advances), advances for taxes and insurance (Escrow Advances) and property preservation and disposition expenses (Corporate Expenses).

Servicer advances are generally recoverable at the top of the payment waterfall to a servicer from proceeds either from general collections on all GNMA mortgage loans serviced by a servicer (typical for MBS Advances) or from loan specific recovery proceeds prior to any recovery to the related mortgage lien holder (typical for Escrow Advances and Corporate Advances). MBS Advances and Escrow Advances are generally recovered at close to par value, subject to some debenture interest reimbursements amounts short of the applicable note rate, while Corporate Advances benefit from more limited reimbursement rates according to agency specific practices and applicable reimbursement rates.

Advance rates are correspondingly higher for certain servicer advances than have been provided for notes backed by MSRs, with average advance rates of approximately 91.0% based on recent collateral compositions in the servicer advance pool backing the Series 2020-SPIADVF1.

Note that periodic valuations, which influence borrowing base calculations, do not apply to the SPIADVF1 collateral which is assigned a par collateral value which is then discounted at the above advance rates to measure borrowing base sufficiency. Prior to full amortization, only advance recoveries are applied to pay down the SPIADVF1 notes. There is only limited cross-collateralization to the extent there is an event of default, following which the SPIADVF1 notes would be paid from all available trust proceeds, including those from MSR value realization as well as servicer advance receivable recoveries. This is a moderate negative for the SPIADVF1 VFN holders relative to MSRVF1 note holders and MSR term note holders, given the expected higher recovery amounts associated with the servicer advance receivables. Conversely, it may be an expected gain relative to expected recoveries for MSR-backed VFN and term note holders in such a scenario, given the pro rata disbursement of proceeds in a full amortization/default scenario.

Given the generally predictable recovery expectations, servicer advances are largely spared the volatility associated with MSR valuation. It is commonly recognized in servicer advance-backed transactions which take a structured finance-style cash flow recovery approach that the timing of recoveries is a critical liquidity consideration. Outstanding servicer advances do not accrue interest and the negative carry associated with such advances, as well as state-specific recovery timelines and servicer expertise will impact present value calculations. By contrast, this master trust is subject to monthly borrowing base calculations such that PLS is obligated to continually maintain advance rate minimums and serves as a buffer to noteholder losses.

Consistent with the approach taken to rating MSR-backed transactions, relying primarily on the issuer rating of the related servicer or applicable guarantor to back scheduled interest and ultimate principal payments, KBRA is providing a one notch uplift off of the issuer rating of PNMAC as repo guarantor by taking a holistic view of the collateral available in the event of guarantor non-performance.

Rating Sensitivities

The rating incorporates a degree of resiliency at the current level. Rating pressure, however, would most likely emanate from either 1) deterioration in liquidity, especially connected to the need to fund servicing advances, which could be substantial in the current environment or 2) MSR hedging performance that was not as effective as it has been historically, such that accounting earnings were to become highly volatile as a result, leading to episodes of net losses on a consolidated basis.

ESG Considerations

KBRA’s ratings incorporate all material credit factors including those that relate to Environmental, Social and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA’s ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit-relevant factors. More information on ESG Considerations for the Financial Institutions sector can be found here. Among the ESG factors that have impact on this rating analysis are the company’s strong risk management practices

KBRA analyzed the transaction using its Finance Company Rating Methodology (November 28, 2017), Corporate Instrument Notching Global Methodology (September 9, 2020), and ESG Global Rating Methodology (June 16, 2021), to the extent applicable.

To access ratings and relevant documents, click here.

Related Publications

• KBRA Upgrades Rating for Private National Mortgage Acceptance Company, LLC
• Private National Mortgage Acceptance Company, LLC
• Global Finance Company Rating Methodology
• Corporate Instrument Notching Global Methodology
• ESG Global Rating Methodology

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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