Pinnacle Financial affiliate tries its hand at asset securitization
Bankers Healthcare Group, in a bid to defer more of its earnings to future years, is securitizing a small portion of the loans it has made to high-earning medical professionals.
BHG, a Florida lender affiliated with Pinnacle Financial Partners in Nashville, Tenn., is marketing a $159.6 million bond offering backed by a pool of commercial and unsecured consumer loans issued to doctors, registered nurses, dentists, pharmacists and other advanced-degree health care workers and entrepreneurs.
The transaction was disclosed on Monday in a presale ratings agency report by Kroll Bond Rating Agency.
The securitization strategy is a major shift for BHG, which over the course of 19 years has offloaded its professional loans via auction or direct sale to small community banks eager to add low-risk, prime-credit assets. Last year, BHG averaged $5.9 million in daily sales volume to banks.
While direct sales will remain the bulk of BHG’s business, “we thought it would be interesting to diversify” its books with ABS paper alongside “the gain-on-sale model,” said Al Crawford, BHG’s co-founder, chairman and CEO.
Crawford said BHG, which is 49% owned by Pinnacle, had been considering the ABS deal since June 2019 to spread out its rapid earnings growth over several years. The company’s profit in its 2019 fiscal more than doubled from a year earlier to $192 million.
Instead of realizing immediate gains on asset sales of loan pools to banks, the company can book seven- to 10-year earning assets that will help further its goal keep annual income growth at 5% to 10% annually, Crawford said.
“It kind of reverses the process a little bit,” he said.
“The cash flows cover any type of reserves that we would have to put out there with the ABS model,” he added. “It’s just another diversified structure for our back end.”
The loans assigned to the pool have a total current balance of $177.3 million, which will back three classes of notes, including a $113.2 million Class A senior tranche with a preliminary AA rating from Kroll. (ABS issuers commonly back bonds with loan balances outstripping notional values to provide cushions against possible delinquencies and defaults that impair cash flow.)
The pool of loans involve 2,838 accounts from borrowers with an average FICO score of 731, annual income averaging $285,226 and a practice license of at least 17 years. The loans average 7.8 years in original terms.
BHG opened a $223 million warehouse credit facility last fall with Credit Suisse to compile loans for a planned spring 2020 launch.
The coronavirus outbreak prompted BHG and Credit Suisse to pull the deal in March as ABS markets generally dried up during the early stages of economic stresses. The deal was to set the stage for $600 million to $800 million in asset-backed securities BHG planned to issue this year, said Chief Financial Officer Dan McSherry.
Instead of proceeding with a securitization in a tough market, BHG instead ramped up direct sales and loan auctions to community banks. The company had record volume, including whopping $189 million in April. (The annualized 2020 sales volume year-to-date is between $8 million and $9 million daily, the BHG executives estimate.)
The deal was revisited in mid-May. BHG stands to yield over 9% on the transaction over its lifetime, Kroll said.
The asset pool is similar to other prime consumer and small-business loan securitizations offered by lenders such as Marlette Funding, Funding Circle and Prosper. BHG’s target borrower is similar to that of SoFI, which markets ABS deals featuring personal loans and refinanced student loans of advanced-degree professionals in medical, legal and business fields.
But BHG’s offering is the first to mix commercial and personal loans in a pool, according to Kroll.
Kroll is comfortable providing the investment-grade ‘AA’ rating to the pool, said Eric Neglia, one of the firm’s managing directors.
“There are several positive factors that contributed to the ratings, including how long the company has been in business, the consistency in the [loan] performance data, the quality of commercial borrowers and their resiliency through the early part of this economic downturn," Neglia said.
"They've proven that they are able to make money since inception and have consistently reported positive net income," said Bill Carson, a Kroll senior director.