Rating Action: Moody’s confirms PennyMac Mortgage Investment Trust’s long-term issuer rating at B2 concluding review; outlook is negative
Global Credit Research – 27 Aug 2020
New York, August 27, 2020 — Moody’s Investors Service, (“Moody’s”) has confirmed PennyMac Mortgage Investment Trust’s (PMT) corporate family rating at Ba3 and its long-term issuer rating at B2, concluding the review for downgrade initiated on 21 May 2020. The outlook is negative.
The review followed financial losses reported in the first quarter of 2020. The confirmation of PMT’s ratings reflects the company’s improved capitalization and the expectation that profitability will continue to benefit from strong origination volumes over the next 12-18 months. In addition, the company has maintained a solid liquidity profile, with a lessened reliance on mark-to-market financing, making it more resilient to market shocks.
The rapid and widening spread of the coronavirus outbreak has led to a severe and extensive credit shock across many sectors, regions and markets. Given Moody’s expectation for deteriorating asset quality, profitability, capital and liquidity, the residential mortgage Real Estate Investment Trust (REIT) sector is among those most affected by this credit shock. Moody’s regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.
The confirmation of PMT’s ratings reflects an unchanged ba3 standalone assessment, following the large financial loss PMT reported in the first quarter of 2020, which significantly reduced its capitalization. While Moody’s expects the mortgage market to remain volatile over the next 12-18 months in this challenging operating environment, PMT’s standalone credit profile benefits from strengthened, higher capital levels.
The company experienced an approximately 29% decline in book equity in the first quarter of 2020 due to a $600.9 million net loss driven by a $1 billion non-cash fair value decline on its government-sponsored enterprise (GSE) credit risk transfer (CRT) investments.
However, in the second quarter of 2020, PMT reported net income of $458.4 million, driven by record correspondent mortgage loan production segment results and a partial recovery of approximately $453 million in the fair value of its GSE CRT investments.
The company’s capitalization as measured by tangible common equity to tangible managed assets (TCE/TMA) increased to 24.6% as of 30 June 2020 from 15.3% as of 31 March 2020. The improved capitalization was achieved through strong profitability, as well as a decline in assets in the second quarter, resulting in higher capital metrics, evidencing the company’s greater ability to absorb unexpected losses.
Elevated origination volumes, strong gain-on-sale margins and reduced reliance on mark-to-market financing should support solid profitability for PMT over the next 12-18 months, from what it experienced in the first quarter of 2020 when it reported a net loss of $600.9 million, driven by a non-cash fair value loss of approximately $1 billion on its CRT investments. Furthermore, the company’s liquidity profile benefits from lessened reliance on mark-to-market financing through term financing, which does not contain mark-to-market provisions, for all of its funded CRT investments. As a result of the term financing structure, PMT has not been subject to margin calls.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The residential mortgage Real Estate Investment Trust (REIT) sector has been one of the sectors affected by the shock and PMT has experienced significant volatility in the fair value of its CRT investments, incurring a sizable net loss in the first quarter of 2020 and a partial recovery in the second quarter of 2020, which led to volatility in its capital levels for the first half of 2020. Moody’s regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today’s actions reflect the impact on PMT of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.
The negative outlook reflects Moody’s view that challenging operating conditions will continue, including uncertainty and volatility in the mortgage market, over the next 12-18 months. The negative outlook reflects the risks for creditors from the volatility of the company’s performance in this challenging environment, with uncertainty about future mortgage loan delinquencies and related realized, actual losses on PMT’s CRT investments, as well as volatility of capital levels stemming from fair value changes to PMT’s CRT investments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook indicates that a ratings upgrade is unlikely over the next 12-18 months. The outlook could return to stable if the company continues to maintain its strong profitability and capital levels; for example, net income to average managed assets and TCE/TMA remain above 4.0% and 20.0%, respectively.
The ratings could be downgraded if the company’s liquidity position deteriorates beyond an adequate buffer to its debt covenants, its franchise deteriorates demonstrated by materially weakened profitability, or its capitalization as measured by tangible common equity to tangible managed assets deteriorates below 15%.
The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
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Gene Berman Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Ana Arsov MD - Financial Institutions Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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