Pricing wider and more reinsurance in latest Arch MILN

The pricing was wider than Arch anticipated in its recent Bellemeade Re 2022-02, says the borrower.

Levels across CRT capital markets products have been sharply higher since the spring due to a host of economic and geopolitical factors, and this was certainly reflected in this trade - which was Arch’s first in the mortgage insurance-linked note (MILN) sector since January.

The $52.86m M1-A tranche was priced at SOFR plus 400bp, the $105m M1-Bs were priced at plus 750bp, the $21.57m M2s came in at SOFR plus 925bp and the $21.57m B1s yielded SOFR plus 1200bp. The trade settled at the end of September.

“Pricing in the fixed income market was wider than expected. However, our blended approach of using both the fixed income market and the reinsurance market in our execution delivered results that were in line with our expectations,” says Jim Bennison, executive vice president, alternative markets at Arch.

The 100% fully funded deal was worth $358m and it is believed Arch sought $251m of this through the capital markets, say reports. However, the unfriendly nature of the fixed income sector meant Arch sold only $201m with investors and the remainder was placed in the reinsurance market.

“In this transaction, reinsurance accounted for 43.9%, which is greater than prior deals and is reflective of current market conditions,” says Bennison.

The progress of this trade underlines the trends of this year: less credit risk transfer has been accomplished in the debt market and an increasing share has gone to the reinsurance market.

Essent brought Radnor Re 2022-01 earlier in September, and less was fully funded in this transaction than was initially expected as well.

Market sources have suggested that Arch brought Bellemeade 2022-02 to demonstrate its commitment to the market rather than because it made strict economic sense but Bennison refutes that notion.

“We only do transactions that make economic sense for the business. The overall execution for this transaction was accretive from an economic standpoint while demonstrating our continued commitment to both the fixed income and reinsurance markets,” he says.

Only four MILN deals have been done this year with an overall dollar value of $6.3bn, compared to 14 in 2021. Nonetheless, Bennison also believes that the MILN market will survive and prosper despite the current dislocation.

“Since 2015, tens of billions in capital have been raised from capital markets investors. The MILN market has evolved significantly since 2015 accommodating several periods of volatility while continuing to grow,” he says.

Simon Boughey