Moody’s Action to Soothe PMI

On June 26, PMI Group Inc. (PMI - Analyst Report), a California-based mortgage insurer, announced that Moody’s Investors Service (MCO - Analyst Report) confirmed its rating on PMI’s senior unsecured debt to “B3” and junior subordinated debt to “Caa1”. The outlook on the ratings was revised to developing.

While the past downgrades by rating agencies have had a negative effect on PMI’s eligibility to insure mortgage loans from GSEs and other private mortgage lenders, the recent action by Moody’s will definitely give some relief to PMI.

Moody’s took this action as PMI successfully executed its Amended and Restated Credit Agreement. The Amended Agreement reduces the size of the facility to $125 million and eliminates certain financial covenants and events of default contained in the previous revolving credit facility. According to Moody's, amended terms of the credit facility would reduce PMI’s near-term default risk. We think the Moody’s action should offset the downside potential of the stock somewhat.

Though the company may benefit from recent U.S. regulatory moves, we expect the losses to remain elevated in the coming quarters. At the current levels, shares of PMI trade at 0.15x the company’s 1Q09 book value of $14.16 per share. This is significantly below its historical 2.2x high and 22% below the median of its peers like MGIC Investment Corp. (MTG - Analyst Report), Radian Group Inc. (RDN - Snapshot Report) and Genworth Financial Inc. (GNW - Snapshot Report)

Though the rise in delinquencies and defaults on loan payments may continue for longer than expected and lead to increased losses for mortgage insurers, we think that the downside risk is rather limited and hence have a Hold recommendation on the shares.