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

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

One- to four-family residential mortgages that PacWest owns will secure the deal.  A number of originators had contributed the loans to the guaranteed portfolio, including AmWest Funding, Guaranteed Rate and Fairway Independent Mortgage Corp., which each contributed at least five percent of the overall pool total, according to FitchRatings.

PacWest Reference Notes, 2022-1, Fitch notes, will uncapped floaters benchmarked to the Secured Overnight Financing Rate. Some loans in the guaranteed portfolio have adjustable-rate coupons where the index is based off of Libor, however Fitch says that PacWest will make the interest payments based on the SOFR index. The Libor exposure will not impact the bondholders.

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

PacWest will be solely responsible for the payment of interest to class M and B noteholders. 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 expects to assign ratings of ‘BBB-‘ on the M-1 and M-2 notes. In addition to subordination, the notes benefit from initial credit enhancement (CE) of 4.35% and 3.00% on the M-1 and M-2 notes, which Fitch will rate.

Otherwise, the $2.5 billion, A-R1 class has initial credit enhancement of 5.00%. Through the rest of the capital structure CE ranges from 1.50% through zero percent on the $20.1 million, class B notes.

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

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