KBRA Affirms Rating for Private National Mortgage Acceptance Company, LLC

18 Aug 2023   |   New York


KBRA affirms the issuer rating of BBB- for Private National Mortgage Acceptance Company, LLC (PNMAC). The Outlook for the rating is Stable. PNMAC is a principal subsidiary of publicly traded PennyMac Financial Services, Inc. (NYSE: PFSI).

Key Credit Considerations

The rating affirmation is driven by management’s successful track record in a variety of interest rate environments, including the demonstrated ability to hedge the large and growing interest rate sensitive MSR asset, as well as its successful efforts to reduce its reliance on short-term and MTM debt (excluding warehouse loan financings).

Revenue generation tied to loan production (or origination) had been stellar (since the Federal Reserve aggressively began its most recent monetary easing policies in 1Q20), through YE2021, but has fallen meaningfully as the sharp increase in 30-year mortgage rates has chilled production and therefore gain on sale revenue. The near-term outlook for industry residential mortgage production remains subdued, and will therefore continue to weigh on GAAP earnings somewhat; nonetheless, earnings performance is favorable compared to 2018-19, for example, which is considered a more normal interest rate environment (as compared to 2020-21).

Earnings performance has been buoyed by the steady growth in the loan servicing portfolio, and the inherent profitability from servicing loans, especially if hedged well, which has been the case at PNMAC over an extended timeframe. While the loan servicing business will likely continue to generate a substantial level of cash earnings, KBRA notes that PNMAC has faced modest pressure from higher short-term rates connected to its sizeable level of floating rate debt. Still, coverage of interest expense tied to its corporate debt remains solid for the rating.

Financial leverage remains modest overall and commensurate for the current rating. KBRA anticipates that management will maintain leverage in the current range, given the uncertain outlook for both loan production and U.S. economic performance.

Rating Sensitivities

Rating pressure would most likely emanate from either 1) deterioration in 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 at PFSI.

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