KBRA Affirms Rating for Private National Mortgage Acceptance Company, LLC

KBRA affirms the issuer rating of BBB- for Private National Mortgage Acceptance Company, LLC (PNMAC or "PennyMac"). The Outlook for the rating is Stable. PNMAC is an intermediate holding company that controls PennyMac Loan Services, LLC (“PLS”), a leading residential mortgage loan originator and servicer. PennyMac is owned by PennyMac Financial Services, Inc. (NYSE: PFSI), the top-tier holding company. PLS accounts for the preponderance of consolidated PFSI’s total assets.

Key Credit Considerations

Management’s longstanding track record, as demonstrated by relatively stable operating results during variable market and interest rate environments, continues to anchor the rating. In addition, management’s willingness to hedge interest rate sensitive assets (the bulk of consolidated assets), together with the long-term effectiveness of these hedge strategies, are key elements of overall operating performance and remain essential to the rating.

The intrinsic value of loan servicing, where profit margins are consistently high, drives the earnings of PennyMac on a consolidated basis. In recent years, the challenges and costs associated with interest rate risk hedging using financial instruments – which are designed to protect the market value of assets, such as MSRs – have increased, due principally to increased interest rate volatility but also to other factors. KBRA recognizes management’s ongoing commitment to interest rate risk management, despite the current challenges, and believes that the effectiveness of the hedging strategies (measured over time) can help maintain balance sheet stability and the earnings profile of residential mortgage companies, including PennyMac.

Adjusted financial leverage (which excludes loan warehouse debt) at that operating subsidiary remains low and relatively stable but has trended higher at PennyMac (or PFSI), compared to a year ago, primarily due to higher levels of unsecured debt (the proceeds of which are ultimately used to fund MSR assets and other corporate needs such as interest rate hedging activities). KBRA anticipates that financial leverage, at PFSI on a consolidated basis, will be managed conservatively going forward.

Consolidated liquidity and funding remains solid; the bulk of assets, excluding MSRs and loans eligible for repurchase, are short-term loans held for sale, which are also hedged while awaiting sale or securitization, typically about 30 days after origination. On a consolidated basis, PFSI’s funding profile benefits from relatively low leverage against certain assets and substantial in-place borrowing capacity.

KBRA notes that with the announced business reorganization at affiliated PennyMac Mortgage Investment Trust (PMT), which is externally managed by a subsidiary of PFSI, the relationship will change over time as certain activities decline or are eliminated. However, KBRA also anticipates that the pending acquisition of Cenlar offers significant revenue opportunities and economies of scale benefits, while also limiting any meaningful balance sheet effects, as is the case with the PMT relationship.

Rating Sensitivities

The ratings for PennyMac are tied to its consolidated performance, including that of its principal operating subsidiary. Rating pressure would most likely emanate from ineffective MSR hedge performance such that accounting earnings were to become highly volatile on a consolidated basis or from a deterioration in liquidity or funding that caused measurably higher debt balances at PFSI (consolidated or standalone).

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Methodology