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 a principal subsidiary of publicly traded PennyMac Financial Services, Inc. (NYSE: PFSI).

Key Credit Considerations

Management’s track record, as reflected in relatively stable operating results during variable operating environments, underpins the rating. The willingness to hedge highly interest rate sensitive assets – production loans and, importantly, MSR assets – together with the long-term effectiveness of these hedge strategies, are key elements to the financial performance and essential to the rating.

Loan servicing activities (including corollary investment opportunities) tied to the large loan servicing portfolio anchor the consolidated earnings profile (prior to non-cash expenses and combined MSR MTM/interest rate hedge effects). While the operating environment for residential loan servicing has been favorable in recent years, due to a myriad of factors, including low loan delinquencies and helpful governmental assistance programs for certain borrowers, KBRA believes the loan servicing operation will continue to generate substantial profit margins and net cash flow (especially if the interest rate hedge effectiveness remains good).

Adjusted financial leverage on a consolidated basis has trended higher but remains within historic ranges and commensurate with the current rating. KBRA anticipates that consolidated adjusted leverage will continue to be managed in a relatively tight range, generally approaching upper and lower bands, depending upon the interest rate environment.

Consolidated liquidity and funding continue to be well managed, through the combination of free cash flow from loan servicing (net of MSR hedging effects) cash and short-term investment balances, and substantial unused borrowing capacity, notably connected to MSR assets. In recent years, management has focused on issuing term unsecured debt of various maturities. Effective funds management remains fundamental, given the varying degrees of cash usage that can come from largely unpredictable interest rate changes.

Rating Sensitivities

The issuer rating is well anchored at the current level. Rating pressure, although unlikely, would most likely emanate from either 1) deterioration in liquidity or funding or 2) MSR hedging performance that was not as effective as it has been historically, such that accounting earnings were to become highly volatile, leading to episodes of net losses on a consolidated basis.

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Methodologies