Pennymac Financial Services, Inc. current report, 28 April 2021

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PennyMac Financial Services, Inc. — Form 8-K Summary

Business Context and Reporting Period

Filed May 3, 2021, for an event dated April 28, 2021. The filing reports that PennyMac Financial Services, Inc., through PennyMac Loan Services, LLC (PLS), Private National Mortgage Acceptance Company, LLC (PNMAC), and PFSI Issuer Trust - FMSR, entered into a structured finance transaction to finance Fannie Mae mortgage servicing rights (MSRs) and related excess servicing spread (ESS).

Transaction and Key Financial Terms

  • The issuer trust issued a variable funding note (VFN) to PLS with a maximum principal balance of $1.0 billion.
  • The VFN and any future term notes are secured pari passu by participation certificates representing interests in the MSRs and ESS.
  • PLS entered into a VFN repurchase agreement with Credit Suisse AG, Cayman Islands Branch, with an initial term through March 31, 2023 and a maximum committed purchase price of $250 million.
  • Interest under the VFN repurchase agreement is based on a market spread above LIBOR, with provisions addressing LIBOR replacement.
  • PNMAC guarantees PLS’s obligations under both the participation certificate repurchase agreement and the VFN repurchase agreement.
  • The filing does not provide revenue, profit, cash flow, margin, debt balance, liquidity balance, or other operating-period financial results.

Material Changes and New Obligations

The transaction created direct financial obligations and obligations under an off-balance-sheet arrangement, as reported under Item 2.03. PLS pledged or sold participation certificates backed by Fannie Mae MSRs and ESS to the issuer trust and separately sold the VFN to Credit Suisse under an agreement to repurchase it.

The agreements include margin-call provisions. Declines in the market value of the MSRs, ESS, or VFN may require PLS to transfer cash, pledge eligible securities or assets, fund a reserve account, or make additional note payments.

Covenants, Risks, and Contingencies

  • PLS must maintain, among other requirements, a Fannie Mae servicing portfolio with at least $4 billion of unpaid principal balance and a base servicing-fee market value of at least $10 million.
  • Additional triggers relate to delinquency levels, unresolved representations and warranties claims, Fannie Mae lender-contract breaches, servicing profitability, lender-adjusted net worth, and Fannie Mae performance-improvement plans.
  • Breaches may reduce the available advance rate or trigger early amortization of the notes.
  • PLS must maintain minimum lender-adjusted net worth, liquidity, and lender-adjusted-net-worth-to-total-assets ratios consistent with applicable Fannie Mae requirements.
  • Events of default include payment defaults, covenant or representation breaches, cross-defaults, guarantor defaults, subservicer events, and bankruptcy or insolvency.
  • Remedies may include acceleration and liquidation of the MSRs, ESS, or VFN, subject to Fannie Mae’s superior rights under the acknowledgment agreement and lender contract.
  • The VFN is cross-collateralized for certain PLS obligations under repurchase agreements with Credit Suisse and its affiliates.

Investor Verification Items

  1. Review the executed base indenture and repurchase agreements filed as Exhibits 10.1 through 10.5.
  2. Verify the amount of VFN borrowings actually outstanding and the amount drawn under the $250 million committed VFN repurchase facility.
  3. Assess MSR and ESS valuation sensitivity, advance rates, margin-call exposure, and potential early-amortization triggers.
  4. Review PLS and PNMAC compliance with Fannie Mae servicing, liquidity, net-worth, delinquency, and profitability covenants.
  5. Confirm the accounting treatment, including whether the arrangements are recorded as secured financings or sales and the extent of any off-balance-sheet exposure.