DBRS Morningstar Assigns Provisional Ratings to Radnor Re 2022-1 Ltd.

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Mortgage Insurance-Linked Notes, Series 2022-1 (the Notes) to be issued by Radnor Re 2022-1 Ltd. (RMIR 2022-1 or the Issuer):

-- $84.1 million Class M-1A at BBB (low) (sf)
-- $126.2 million Class M-1B at BB (high) (sf)
-- $70.1 million Class M-2 at BB (low) (sf)
-- $23.4 million Class B-1 at B (high) (sf)

The BBB (low) (sf), BB (high) (sf), BB (low) (sf), and B (high) (sf) ratings reflect 5.60%, 4.25%, 3.50%, and 3.25% of credit enhancement, respectively.

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

RMIR 2022-1 is Essent Guaranty, Inc.'s (Essent Guaranty or the Ceding Insurer) eighth rated mortgage insurance (MI)-linked note (MILN) 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 151,740 fully amortizing first-lien fixed- and variable-rate mortgages underwritten primarily to a full documentation standard with original loan-to-value ratios less than or equal to 100%, which have never been reported to the Ceding Insurer as 60 or more days delinquent, and have not 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 October 1, 2021, and on or before July 31, 2022.

On March 1, 2020, a new master policy was introduced to conform to the government-sponsored enterprises’ revised rescission relief principles under the Private Mortgage Insurer Eligibility Requirements guidelines (see the Representations and Warranties section of the related report for more detail). All but one of the mortgage loans (by cut-off date) are insured 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-mf by Moody's 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 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 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 7.00% from 6.50%. The delinquency test will be satisfied if the three-month average of 60+ days delinquency percentage is below 75% of the subordinate percentage (see the Cash Flow Structure and Features section of the related report for more detail).

The coupon rates for the Notes issued by RMIR 2022-1 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 report for more details.

The RMIR 2022-1 transaction is issued with a 10-year term. The Notes are scheduled to mature on September 25, 2032, but are subject to early redemption at the option of the Ceding Insurer (1) for a 10% cleanup call or (2) on or following the payment date in September 2028, among others. The Notes are also subject to mandatory redemption before the scheduled maturity date upon the termination of the Reinsurance Agreement. Additionally, there is a provision for the Ceding Insurer to issue a tender offer to reduce all or a portion of the outstanding Notes.

Essent 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 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 pandemic, DBRS Morningstar saw an increase in delinquencies for many RMBS asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forbear mortgage payments was widely available, driving 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, 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: June 2022 Update,” dated June 29, 2022.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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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