Preston Hollow Community Capital: KBRA assigns Preston Hollow $230 million unsecured notes BBB rating
KBRA assigns BBB rating to Preston Hollow’s $230 million unsecured notes
NEW YORK (March 3, 2022) – KBRA is assigning a BBB rating to $230 million of unsecured notes issued by PHCC LLC d/b/a Preston Hollow Community Capital (“PHCC” and, together with Preston Hollow Capital, LLC, “Preston Hollow”, “PH” or “the Company”), a wholly owned subsidiary of Preston Hollow Capital, LLC. Preston Hollow is a private investment firm founded in 2014 and based in Dallas, Texas, specializing in direct and secondary investments in municipal securities. This follows KBRA’s assignment of a BBB issuer rating to PHCC on January 31, 2022. The Outlook rating is stable.
Key Credit Considerations
The rating reflects Preston Hollow’s deep and experienced management team with decades of experience in municipal finance and home lending, primarily senior, well secured and covenanted secured debt investments diversified by region and by sector, acceptable leverage with a long-term target of up to 2x the total leverage ratio and approximately 1x the recourse leverage ratio (excluding term-bound non-recourse trusts), strong underwriting and risk management, strong earnings metrics, ongoing equity from established institutional investors and PH’s management team, including Chairman/CEO and adequate funding/liquidity profile with d important unencumbered assets.
PH’s funding strategy focuses primarily on non-recourse fixed term trusts (TMTs) which provide a more stable source of borrowing than short-term recourse facilities. KBRA views PH’s TMT funding as relatively stable as the maturities are long-term and generally match the maturities of the assets backing the TMT, there is no mark-to-market margin deposit required and the TMTs are entirely without recourse to PH. Additionally, the rating considers the strong underwriting demonstrated by PH with low losses and successful workouts of distressed credits during the Covid-19 pandemic. These strengths are offset by the risks associated with investment activity in illiquid lower quality or unrated municipal debt, relatively high single credit concentration (top 5 credits represent 29% of the portfolio), dividend payouts and a focus on secured debt financing with fewer funding sources compared to higher rated finance companies.
The rating of unsecured notes to be issued by PHCC is matched to the issuer rating reflecting the Company’s acceptable target leverage and significant unencumbered assets that could support potential recovery prospects. The notes include a covenant requiring the Unencumbered Assets (excluding TMT B certificates) / Unsecured Debt ratio to be greater than 1.50x. Additionally, at higher rating levels, KBRA focuses more on the probability of default and less on the severity of potential losses that could be reflected by the notch of debt instruments. The proceeds of the issuance will be used for general corporate purposes, including new investments with a portion (25%-50%) for distribution of dividends, depending on PH’s volume of new investment origination.
The stable outlook reflects the company’s low leverage, low write-offs and losses through the Covid-19 pandemic to date and adequate liquidity with large unencumbered assets.
Michael Dodge, Principal (Senior Analyst) +353 1 588 1190 [email protected]
Danise Chui, Managing Director (Ratings Committee Chair) +1 (646) 731-2406
Marjan Riggi, Senior Managing Director +1 (646) 731-2354[email protected]
Business Development Contact Information
Arielle Smelkinson, Senior Director +1 (646) 731-2369[email protected]
Further information on key credit considerations, sensitivity analyzes that consider factors that may affect these credit ratings and how they could lead to an upgrade or downgrade, and ESG factors(where they are a key factor in changing the credit rating or rating outlook) can be viewed in the full rating report mentioned above.
A description of all substantially significant sources that were used to prepare the credit rating and information on the methodology(ies) (including all significant models and sensitivity analyzes of the main relevant rating assumptions, the where applicable) used to determine the credit rating are available in the information disclosure form(s) located here.
Additional information relating to this rating metric is available in the information disclosure form(s) referenced above. Additional information regarding KBRA’s policies, methodologies, grading scales and disclosures is available at www.kbra.com.
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