KBRA Affirms Rating for Private National Mortgage Acceptance Company, LLC

18 Aug 2023   |   New York

Contacts

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.

To access rating and relevant documents, click here.

Methodologies

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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