PMI Mortgage Insurance Company Limited (PMI Europe) has announced the insurance of a mortgage credit default swap agreement between the KfW group, Germany's leading promotional bank, and Aareal Bank AG, a leading international property bank.
PMI Europe is providing a £63.6 million layer of credit protection in connection with the £1.8 billion Aareal Bank mortgage-backed synthetic security, Provide Home 2002-1.
£8.2 million of this protection from PMI is a “first loss” tranche. Aareal Bank is the arranger and co-manager for the deal and Deutsche Bank is the lead manager.
This type of security – a “synthetic” – enables an issuer, such as Aareal Bank, to transfer the credit risk on assets, in this case German residential mortgage loans, to third-parties while retaining ownership of the assets. With acceptable counterparties, the transfer reduces the amount of regulatory capital the issuer must hold against the assets. The “first loss” portion of the security is so described because early losses, literally the first losses, on the mortgage pool are attributed to it.