DBRS Morningstar Assigns Ratings to Three Radnor Transactions

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following three Radnor (RMIR) transactions:

Radnor Re 2018-1 Ltd.
-- Class M-1 at A (sf)
-- Class M-2 at BB (high) (sf)
-- Class B-1 at BB (sf)

Radnor Re 2019-1 Ltd.
-- Class M-1A at AA (sf)
-- Class M-1B at BBB (low) (sf)
-- Class M-2 at B (high) (sf)
-- Class B-1 at B (sf)

Radnor Re 2019-2 Ltd.
-- Class M-1A at AA (low) (sf)
-- Class M-1B at BBB (sf)
-- Class B-1 at BBB (low) (sf)

The above-referenced securities are currently also rated by DBRS, Inc.’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these securities Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about March 31, 2020. In accordance with MCR’s engagement letter covering these securities, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at https://ratingagency.morningstar.com/mcr.

These three RMIR transactions are generally classified as mortgage insurance (MI) linked-notes transactions.

DBRS Morningstar performed the following rating analysis on the transactions:

-- Loan-level default probability, loss severity, and expected loss review;
-- Cash flow analysis to evaluate the form and sufficiency of available credit enhancement;
-- Historical performance analysis as reflected in delinquencies, cumulative losses, and constant prepayment rates (CPRs);
-- Third-party due diligence sample size review; and
-- Representations and warranties (R&W) framework review.

POOL EXPECTED LOSSES
DBRS Morningstar used its proprietary RMBS Insight 1.3 model to derive the probability of default on the underlying insured loans with active insurance policies, loss severities on the insurance policies, and expected losses for each of the transactions. DBRS Morningstar recalculated or remapped certain collateral attributes in its analysis. The size of the pools of insured loans for the transactions are large and geographically diverse, which generally suggests a low level of concentration and asset correlation. In its analysis, DBRS Morningstar floored the asset correlation in accordance with its published principal methodology. The expected losses for each transaction are generally stepped up from the raw model results.

CASH FLOW ANALYSIS
A structural analysis that encompassed 12 cash flow stress scenarios was performed, which focused on prepayment speeds, timing of losses, and interest rate stresses.

OPERATIONAL RISK REVIEW
DBRS Morningstar performed an onsite operational risk review of Essent Guaranty’s insurance platform and believes the company is an acceptable mortgage loan insurer.

HISTORICAL PERFORMANCE
DBRS Morningstar reviewed the historical performance of each transaction, as reflected in delinquencies, cumulative losses, and CPRs. Overall delinquencies benefitted from robust industry underwriting practices, a strong employment and economic backdrop, and rising home prices.

THIRD-PARTY DUE DILIGENCE
DBRS Morningstar reviewed the sample size for each of the due diligence review categories, including credit, valuation, and data integrity. The sample sizes in the RMIR 2019-1 and RMIR 2019-2 transactions do not meet DBRS Morningstar’s due diligence criteria threshold. Some mitigating factors for the lower due diligence sample include the following: (1) The majority of the underlying insured mortgage loans for these transactions conform to government-sponsored enterprise (GSE) guidelines. DBRS Morningstar believes that GSEs have robust originator and servicer approval and monitoring processes. (2) The insurer can generally rescind MI claims (subject to rescission relief). DBRS Morningstar did not review the loan-level due diligence findings for each of the transactions; rather, it relied on the analysis done by MCR at the time of assigning ratings to the transactions on or prior to the closing dates, as well as the satisfactory performance of the transactions to date.

R&W FRAMEWORK
The transactions are backed by MI policies, and no loans are pledged to the trusts. Hence, the insurer will not directly make any R&W to noteholders regarding the underlying insured mortgage loans. Some mitigating factors for these transactions are as follows: (1) The master policy generally gives the insurer the right to rescind (subject to rescission relief) when there is material misrepresentation and fraud in the origination of an underlying insured loan. (2) In its analysis, DBRS Morningstar made a conservative assumption to not give any benefit for potential rescissions by the insurer. This assumption resulted in a higher projected MI claim payout and provides additional credit protection to the noteholders. (3) The insurer retains risk in the capital structure, which would align the ceding insurer’s interest with that of investors.

OTHER REVIEWS
DBRS Morningstar notes that a legal analysis, which included but was not limited to legal opinions and various transaction documents, was performed by MCR as part of its process of assigning ratings to each transaction on or prior to their closing dates. For the purpose of assigning ratings to the transactions, DBRS Morningstar did not perform additional document reviews unless otherwise indicated in this press release.

In its analysis, DBRS Morningstar also took into consideration the financial strength of the mortgage insurer in conjunction with the remaining principal balances of the rated tranches. On the closing date of each transaction, the insurer established a cash and securities account, the premium deposit account, and deposited an amount generally covering two months of interest payments on the rated classes. In case the insurer defaults on paying coverage premium payments to the issuer, the amount available in this account will be used to make interest payments to the noteholders. Certain transaction documents do not require the insurer to cure any deficient amounts in the premium deposit account post-closing. For such transactions, the bond ratings may be capped based on the insurer’s financial strength, unless the rated tranches are expected to pay off shortly and there are no deficiencies in the premium deposit account.

SUMMARY
The ratings are a result of DBRS Morningstar’s application of the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” published in December 2019 unless otherwise indicated in this press release.

DBRS Morningstar’s ratings address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related notes.

The ratings for the RMIR classes are being initiated by DBRS Morningstar as part of the announced analytical integration of certain U.S. RMBS asset classes (see the November 22, 2019, press release “DBRS and Morningstar Credit Ratings Confirm GSE CRT and MI-Linked Notes Asset Class Coverage”). As such, the ratings are deemed to be solicited DBRS Morningstar ratings.

The ratings assigned to certain securities may differ from the ratings implied by the quantitative model, but no such difference constitutes a material deviation. When assigning the ratings, DBRS Morningstar takes into account the rating analysis detailed in this press release and may have made qualitative adjustments for the analytical considerations not fully captured by the quantitative model.

Notes:
The principal methodology is the RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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