Why Essent's stock offering is a good sign for MI capital raises

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Essent Group's pricing of its secondary stock offering last week at an 11% discount to its May 27 closing price was actually a positive for the mortgage insurers, if they turn to the capital markets, according to a report from investment bank B. Riley FBR.

The analyst believes the chosen price point hits the sweet spot, as it reflects a minimal cut in value, supporting current stock holders, while also demonstrating to the rest of the mortgage insurers that there's a lower price for them to pay to raise funds.

Mortgage insurers have been concerned that they will need to raise funds to stay in compliance with capital rules if there is a large number of coronavirus-related missed monthly payments from borrowers.

"Our call on the MIs has noted that much of the downside risk would likely be in the form of a potentially dilutive capital raise," said B. Riley FBR's Randy Binner in the report. "The Essent raise sets a constructive precedent here."

Essent priced 12 million shares (upsized from a planned 11 million offering when first announced on May 28) at $33.25 per share before the market opened on May 29.

It intends to use the net proceeds for general corporate purposes, which may include capital contributions to support its mortgage insurance business along with paying down borrowings from its credit lines.

Essent expects to receive proceeds, net of underwriting discounts and commissions and estimated offering expenses, of approximately $382.4 million, if the underwriters do not exercise the option to purchase 1.8 million additional shares.

Essent is not the only mortgage insurer that is taking measures to shore up their capital base when it comes to compliance with the Private Mortgage Insurer Eligibility Requirements. On May 15, Radian Group sold $525 million of senior unsecured debt at an annual interest rate of 6.625%; the maturity date is March 15, 2025.

Similar to Essent, Radian intends to use the net proceeds for general corporate purposes, which may include future contributions to its insurance subsidiaries.

And on June 1, National MI announced it entered into a quota share reinsurance agreement to cede the risk on 10.5% of all new insurance written from April 1 through the end of this year.

"We are pleased with our ability to secure additional reinsurance capacity at this time," said NMI Holdings Chief Financial Officer Adam Pollitzer in a press release. "This transaction builds upon the success we have achieved in the risk transfer markets to date and is particularly valuable in light of the COVID-19 outbreak."

So far, forbearance requests, where the missed payments are considered to be delinquencies for private mortgage insurer regulatory reporting purposes, have run much lower than expectations, Binner noted.

"We published 15% as an expectation on Federal Housing Finance Agency-backed mortgages, which MIs insure, and this was similar to comments from Fannie Mae," he said. "That actual rate is now 6.4% and has held around this level for two weeks. We will continue to monitor this data, and economic pressure will remain on mortgage holders over time, but this trend is clearly favorable."

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