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
BB(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
The BHG 2024-1CON trust is a discrete trust backed by a static pool of consumer loans originated or purchased by
The actual pool of loans acquired by the grantor trust on the closing date will include a significant amount of loans that are not included in the statistical loan pool, as the pool upon closing is expected to have a current principal balance of at least
KEY RATING DRIVERS
Collateral Pool Comprised of High FICO Borrowers: The BHG 2024-CON pool shared with Fitch has a weighted average (WA)
Default Assumption Reflects Loan and Borrower Characteristics: The base case default assumption based on the pool is 14.26%. The default assumption was established by 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. For certain segments, where Fitch considered the loans did not have significant historical performance data, Fitch considered the segment's equivalent commercial loan performance to arrive at the base case default assumption. Commercial loan performance was considered given similar borrower characteristics and BHG's comparable underwriting policies for the guarantor of commercial loans.
Credit Enhancement Mitigates Stressed Losses: Initial hard credit enhancement (CE) totals 54.70%, 30.20%, 18.40%, 13.90% and 9.40% for class A, B, C, D and E notes, respectively. Initial CE is sufficient to cover Fitch's stressed cash flow assumptions for all classes. Fitch applied a 'AAAsf' rating stress of 4.5x the base case default rate for consumer loans. Fitch revised the multiple from 4.25x for consumer loans applied for BHG 2023-B, primarily due to the pool composition consisting of 100% consumer loans which have limited performance history compared to previous pools consisting predominantly commercial loans.
The stress multiples decline 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 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. We deem 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
If there are challenges to the true lender status, and if such challenges are successful, the consumer loans and certain commercial loans could be found to be unenforceable, or subject to reduction of the interest rate, paid or to be paid. If any such challenges are successful trust performance could be negatively affected, which would increase negative rating pressure. For this risk, Fitch views as positive
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Unanticipated increases in the frequency of defaults or charge-offs 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.
Current Ratings: 'AAAsf'/'AA-sf'/'A-sf'/'BBB-sf'/'BBsf'.
Increased default base case by 10%:'AA+sf'/'Asf'/'BBB+sf'/'BBB-sf'/'BB';
Increased default base case by 25%:'AAsf'/'A-sf'/'BBBsf'/'BB+sf'/'BB-sf';
Increased default base case by 50%:'A+sf'/'BBB+sf'/'BBB-sf'/'BBsf'/'Bsf';
Reduced recovery base case by 10%: 'AA+sf'/'A+sf'/'A-sf'/'BBB-sf'/'BBsf';
Reduced recovery base case by 25%: 'AA+sf'/'A+sf'/'BBB+sf'/'BBB-sf'/'BBsf';
Reduced recovery base case by 50%: 'AA+sf'/'A+sf'/'BBB+sf'/'BB+sf'/'BBsf';
Increased default base case by 10% and reduced recovery base case by 10%: 'AA+sf'/'Asf'/'BBB+sf'/'BB+sf'/'BBsf';
Increased default base case by 25% and reduced recovery base case by 25%: 'AA-sf'/'A-sf'/'BBBsf'/'BBsf'/'B+sf';
Increased default base case by 50% and reduced recovery base case by 50%: 'Asf'/'BBBsf'/'BB+sf'/'B+sf'/'CCCsf'.
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/class E):
Current Ratings: 'AAAsf'/'AA-sf'/'A-sf'/'BBB-sf'/'BBsf'.
Decreased default base case by 20%: 'AAAsf'/'AA+sf'/'A+sf'/'BBB+sf'/'BBB-sf'.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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