PacWest readies its first credit-linked note deal, raising $2.6 billion

Pacific Western Bank is preparing its first credit-linked note operation. The $2.6 billion deal will transfer the risk of more than 3,000 qualifying mortgage (QM) and non-QM residential loans, with reference to a hypothetical financial guarantee transaction.

One to four family residential mortgages held by PacWest will secure the deal. A number of originators had contributed the loans to the secured portfolio, including AmWest Funding, Guaranteed Rate and Fairway Independent Mortgage Corp., which each contributed at least 5% of the overall pool total, according to FitchRatings.

The PacWest benchmark notes, 2022-1, Fitch rating, will be uncapped free float indexed to the guaranteed overnight funding rate. Some secured portfolio loans have resettable coupons where the index is based on Libor, but Fitch says PacWest will make interest payments based on the SOFR index. Libor exposure will have no impact on bondholders.

The rating agency noted that its ratings will be capped at the lower of the quality of the secured mortgage portfolio and any credit enhancement provided by the agency’s issuer default rating (IDR) subordination. rating on PacWest and Fitch’s IDR of Citibank or the counterparty holding the collateral account, the company said.

PacWest will be solely responsible for paying interest to holders of Class M and B Notes. All funds from the sale of Notes will be placed in a collateral account, while principal will be paid directly from the collateral account based on the performance of the underlying loans in the guaranteed portfolio.

For its part, Fitch plans to assign ratings of ‘BBB-‘ to the M-1 and M-2 notes. In addition to subordination, the ratings benefit from an initial credit enhancement (CE) of 4.35% and 3.00% on the M-1 and M-2 ratings, which Fitch will rate.

Otherwise, the $2.5 billion A-R1 class has an initial credit enhancement of 5.00%. In the rest of the capital structure, the CE ranges from 1.50% to zero percent on the $20.1 million Class B Notes.

The notes, according to Fitch, have a final legal maturity of June 2052.

The underlying loans themselves are of good credit quality, the rating agency said. Borrowers have an average FICO score of 764, moderate leverage, with an initial combined loan-to-value ratio of 69.7% and a debt-to-income ratio of 39.5%.

Michael J. Birnbaum