DBRS Morningstar Finalizes Provisional Ratings on Eagle Re 2020-2 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Mortgage Insurance-Linked Notes, Series 2020-2 (the Notes) issued by Eagle Re 2020-2 Ltd. (EMIR 2020-2 or the Issuer):

-- $130.1 million Class M-1A at BB (high) (sf)
-- $65.1 million Class M-1B at BB (sf)
-- $65.1 million Class M-1C at BB (low) (sf)
-- $97.6 million Class M-2 at B (sf)
-- $32.5 million Class M-2A at B (high) (sf)
-- $32.5 million Class M-2B at B (high) (sf)
-- $32.5 million Class M-2C at B (sf)
-- $32.5 million Class B-1 at B (sf)

The BB (high) (sf), BB (sf), BB (low) (sf), B (high) (sf), and B (sf) ratings reflect 5.250%, 4.750%, 4.250%, 3.750%, and 3.250% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

EMIR 2020-2 is Radian Guaranty Inc.’s (Radian Guaranty or the ceding insurer) fourth rated mortgage insurance (MI) linked note transaction. The Notes are backed by reinsurance premiums, eligible investments, and related account investment earnings, in each case relating to a pool of MI policies linked to residential loans. The Notes are exposed to the risk arising from losses the ceding insurer pays to settle claims on the underlying MI policies. As of the cut-off date, the pool of insured mortgage loans consists of 196,160 fully amortizing first-lien fixed- and variable-rate mortgages. They all have been underwritten to a full documentation standard, have original loan-to-value ratios (LTVs) less than or equal to 97%, and have never been reported to the ceding insurer as 60 or more days delinquent. The mortgage loans have MI policies effective in or after October 2019 and in or before July 2020. On March 1, 2020, a new master policy was introduced to conform to government-sponsored enterprises’ revised rescission relief principles under the Private Mortgage Insurer Eligibility Requirements guidelines. Approximately 57.6% of the mortgage loans were originated under the new master policy.

On the closing date, the Issuer will enter into the Reinsurance Agreement with the ceding insurer. Per the agreement, the ceding insurer will receive protection for the funded portion of the MI losses. In exchange for this protection, the ceding insurer will make premium payments related to the underlying insured mortgage loans to the Issuer.

The Issuer is expected to use the proceeds from selling the Notes to purchase certain eligible investments that will be held in the reinsurance trust account. The eligible investments are restricted to AAA or equivalently rated U.S. Treasury money market funds and securities. Unlike other residential mortgage-backed security (RMBS) transactions, cash flow from the underlying loans will not be used to make any payments; rather, in MI-linked note (MILN) transactions, a portion of the eligible investments held in the reinsurance trust account will be liquidated to make principal payments to the noteholders and to make loss payments to the ceding insurer when settling claims on the MI policy.

The Issuer will use the investment earnings on the eligible investments, together with the ceding insurer’s premium payments, to pay interest to the noteholders.

The calculation of principal payments to the Notes will be based on a reduction in aggregate exposed principal balance on the underlying MI policy. The subordinate Notes will receive their pro rata share of available principal funds if the minimum credit enhancement test and the delinquency test are satisfied. The minimum credit enhancement test will purposely fail at the closing date, thus locking out the rated classes from initially receiving any principal payments until the subordinate percentage grows to 7.25% from 6.25%. The delinquency test will be satisfied if the three-month average of 60-plus days delinquency percentage is below 75% of the subordinate percentage. Unlike MILN transactions that were rated prior to the Coronavirus Disease (COVID-19) pandemic, where the delinquency test is satisfied when the delinquency percentage falls below a fixed threshold, this transaction incorporates a dynamic delinquency test.

On the closing date, the ceding insurer will establish a cash and securities account, the premium deposit account. If the ceding insurer defaults in paying coverage premium payments to the Issuer, the amount available in this account will cover interest payments to the noteholders. Unlike prior EMIR transactions, the premium deposit account will not be funded at closing. Instead, the ceding insurer will make a deposit into this account up to the applicable target balance only when one of the premium deposit events occur. Please refer to the related report and/or offering circular for more details.

The Notes are scheduled to mature on the payment date in October 2030 but will be subject to early redemption at the option of the ceding insurer (1) for a 10% clean-up call or (2) on or following the payment date in October 2027, among others. The Notes are also subject to mandatory redemption before the scheduled maturity date upon the termination of the Reinsurance Agreement.

Radian Guaranty, will be the ceding insurer. The Bank of New York Mellon (rated AA (high) with a Stable trend by DBRS Morningstar) will act as the Indenture Trustee, Paying Agent, Note Registrar, and Reinsurance Trustee.

The coronavirus and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many RMBS asset classes, some meaningfully.

Various MI companies have set up programs to issue MILNs. These programs aim to transfer a portion of the risk related to MI claims on a reference pool of loans to the investors of the MILNs. In these transactions, investors’ risk increases with higher MI payouts. The underlying pool of mortgage loans with MI policies covered by MILN reinsurance agreements are typically conventional/conforming loans that follow government-sponsored enterprises’ acquisition guidelines and therefore have LTVs above 80%. However, a portion of each MILN transaction’s covered loans may not be agency eligible.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under the moderate scenario in its commentary, see Global Macroeconomic Scenarios: September Update, published on September 10, 2020. For the MILN asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than what it previously used. Such MVD assumptions are derived through a fundamental home price approach based on the forecast unemployment rates and GDP growth outlined in the aforementioned moderate scenario. In addition, DBRS Morningstar may assume a portion of the pool (randomly selected) to be on forbearance plans in the immediate future. For these loans, DBRS Morningstar assumes higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the MILN asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans with layered risk (low FICO score with high LTV/high debt-to-income ratio) may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Additionally, higher delinquencies might cause a longer lockout period or a redirection of principal allocation away from outstanding rated classes because performance triggers failed.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: “DBRS Morningstar Provides Update on Rating Methodologies in Light Of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: September Update,” dated September 10, 2020.

The ratings reflect transactional strengths that include the following:

-- Agency-eligible loans.
-- High-quality credit and loan attributes.
-- MI termination.
-- A well-diversified pool.
-- Alignment of interest.

The transaction also includes the following challenges:

-- Counterparty exposure.
-- A weak representation and warranties framework.
-- Limited third-party due diligence.
-- Eligible investment losses.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com or contact us at [email protected].

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