PINNACLE BANK
Fitch Ratings expects to assign ratings and Rating Outlooks to the notes issued by
RATING ACTIONS
Entity / Debt
Rating
A
LT
Expected Rating
B
LT
AA(EXP)sf
Expected Rating
C
LT
A(EXP)sf
Expected Rating
D
LT
BBB(EXP)sf
Expected Rating
E
LT
NR(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
The BHG 2023-A trust is a discrete trust backed by a static pool of consumer and commercial loans originated by
KEY RATING DRIVERS
Collateral Pool Comprised of High FICO Borrowers: The BHG 2023-A receivables pool has a weighted average (WA)
Default Assumption Reflects Loan and Borrower Characteristics: The base case default assumptions are 10.21% and 13.47% for commercial and consumer loans, respectively, resulting in a portfolio WA assumption of 11.01%. The default assumption was established by loan type (commercial or consumer), BHG's proprietary risk grade and loan term. Fitch set assumptions on segmented performance data from 2014, which included loans that were re-scored utilizing BHG's updated underwriting and scoring model, which became effective in 2018. Through-the-cycle loan performance and characteristics were also reviewed by Fitch.
Credit Enhancement Mitigates Stressed Losses: Initial hard credit enhancement (CE) totals 50.30%, 33.20%, 22.18% and 16.41% for class A, B, C and D notes, respectively. Initial CE is sufficient to cover Fitch's stressed cash flow assumptions for all classes. Fitch applied a 'AAAsf' rating stress of 5.0x the base case default rate for commercial loans and 5.25x for consumer loans. The stress multiples decrease for lower rating levels according to Fitch's 'Consumer ABS Rating Criteria'. The default multiple reflects the absolute value of the default assumption, the length of default performance history for each loan type (shorter for consumer loans), high WA borrower FICO scores and income and the WA original loan term, which increases the portfolio's exposure to changing economic conditions.
Counterparty Risks Addressed: BHG has a long operational history and demonstrates adequate abilities as the originator, underwriter and servicer, as evidenced by historical portfolio and previous securitization performance. Fitch deems BHG as capable to service this transaction. Other counterparty risks are mitigated through the transaction structure and such provisions are in line with Fitch's counterparty rating criteria.
True Lender Uncertainty for Partner Bank Loan Origination Continues: BHG, similar to peers, purchases consumer loans originated by partner banks, in this case
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unanticipated increases in the frequency of defaults or chargeoffs could produce loss levels higher than the base case and would likely result in declines of CE and remaining net loss coverage levels available to the notes. Decreased CE may make certain ratings on the notes susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Fitch conducts sensitivity analysis by stressing a transaction's initial base case default assumption by an additional 10%, 25% and 50% and examining the rating implications. These increases of the base case default rate are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of a trusts performance. As additional sensitivity run of lowering recoveries by 10%, 25% and 50% is also conducted.
During the sensitivity analysis, Fitch examines the magnitude of the multiplier compression by projecting the expected cash flows and loss coverage levels over the life of investments under higher than the initial base case default assumptions. Fitch models cash flows with the revised default estimates while holding constant all other modeling assumptions.
Rating sensitivity to increased defaults and reduced recoveries (class A/class B/class C/class D):
Current Ratings: 'AAAsf'/'AAsf'/'Asf'/'BBBsf'.
Increased default base case by 10%:'AA+sf'/'AA-sf'/'Asf'/'BBB-sf';
Increased default base case by 25%:'AA+sf'/'A+sf'/'A-sf'/'BB+sf';
Increased default base case by 50%:'AA-sf'/'A-sf'/'BBBsf'/'BBsf';
Reduced recovery base case by 10%: 'AAAsf'/'AAsf'/'Asf'/'BBBsf';
Reduced recovery base case by 25%: 'AAAsf'/'AAsf'/'Asf'/'BBBsf';
Reduced recovery base case by 50%: 'AAAsf'/'AA-sf'/'A-sf'/'BBB-sf';
Increased default base case by 10% and reduced recovery base case by 10%: 'AA+sf'/'AA-sf'/'A-sf'/'BBB-sf';
Increased default base case by 25% and reduced recovery base case by 25%: 'AAsf'/'Asf'/'BBB+sf'/'BB+sf';
Increased default base case by 50% and reduced recovery base case by 50%: 'A+sf'/'BBB+sf'/'BBB-sf'/'BB-sf'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stable to improved asset performance driven by stable delinquencies would lead to increasing CE levels and consideration for potential upgrades. If defaults are 20% less than the projected base case default rate, the expected ratings for the class B, C and D notes could be upgraded by up to two notches.
Rating sensitivity from decreased defaults (class A/class B/class C/class D):
Current Ratings: 'AAAsf'/'AAsf'/'Asf'/'BBBsf'.
Decreased default base case by 20%: 'AAAsf'/'AAAsf'/'AA-sf'/'A-sf'.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
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