DBRS Morningstar Assigns Provisional Ratings to Eagle Re 2021-2 Ltd.

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Mortgage Insurance-Linked Notes, Series 2021-2 (the Notes) to be issued by Eagle Re 2021-2 Ltd. (EMIR 2021-2 or the Issuer):

-- $118.3 million Class M-1A at BBB (high) (sf)
-- $102.2 million Class M-1B at BBB (low) (sf)
-- $145.2 million Class M-1C at BB (sf)
-- $48.4 million Class M-1C-1 at BB (high) (sf)
-- $48.4 million Class M-1C-2 at BB (high) (sf)
-- $48.4 million Class M-1C-3 at BB (sf)
-- $91.4 million Class M-2 at B (high) (sf)
-- $26.9 million Class B-1 at B (sf)
-- $26.9 million Class B-2 at B (sf)

The BBB (high) (sf), BBB (low) (sf), BB (high) (sf), BB (sf), B (high) (sf), and B (sf) ratings reflect 5.65%, 4.70%, 3.80%, 3.35%, 2.50%, and 2.00% of credit enhancement, respectively.

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

EMIR 2021-2 is Radian Guaranty Inc.'s (Radian Guaranty or the Ceding Insurer) sixth 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 153,373 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 less than or equal to 97%, have never been reported to the Ceding Insurer as 60 or more days delinquent, and have never been reported to be in a payment forbearance plan as of the cut-off date. The mortgage loans have MI policies effective on or after August 2020 and on or before July 2021.

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 99.97% 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. As per the agreement, the Ceding Insurer will get 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 the sale of the Notes to purchase certain eligible investments that will be held in the reinsurance trust account. The eligible investments are restricted to AAA or equivalent 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 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 claims are settled with respect to 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 the reduction in aggregate exposed principal balance on the underlying MI policy that is allocated to the Notes. 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 has been set to fail at the closing date, thus locking out the rated classes from initially receiving any principal payments until the subordinate percentage grows to 7.75% from 6.75%. The delinquency test will be satisfied if the three-month average of 60+ days delinquency percentage is below 75% of the subordinate percentage.

The coupon rates for the Notes issued by EMIR 2021-2 are based on the Secured Overnight Financing Rate (SOFR). There are replacement provisions in place in the event that SOFR is no longer available, please see the Offering Circular for more details. DBRS Morningstar did not run interest rate stresses for this transaction, as the interest is not linked to the performance of the underlying loans. Instead, interest payments are funded via (1) premium payments that the Ceding Insurer must make under the reinsurance agreement and (2) earnings on eligible investments.

On the Closing Date, the Ceding Insurer will establish a cash and securities account, the premium deposit account. In case of the Ceding Insurer’s default in paying coverage premium payments to the Issuer, the amount available in this account will be used to make interest payments to the noteholders. The premium deposit account will not be funded at closing. Please refer to the related presale report for more details.

This is the second EMIR transaction issued with a 12.5-year term. The Notes are scheduled to mature on April 25, 2034, 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 2028, among others. The Notes are also subject to mandatory redemption before the scheduled maturity date upon the termination of the Reinsurance Agreement. Additionally, this is the first transaction where there is a provision for the Ceding Insurer to issue a tender offer to reduce all or a portion of the outstanding Notes.

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.

Coronavirus Disease (COVID-19) Impact
The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the coronavirus, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearance, which are generally short-term periods of payment relief, that may perform differently from traditional delinquencies. At the onset of coronavirus, the option to forebear mortgage payments was widely available, droving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 2021.

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 presale report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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