Core Viewpoint - KBRA has assigned preliminary ratings to 15 classes of notes issued by Pagaya AI Debt Grantor Trust 2026-2 & Pagaya AI Debt Trust 2026-2, indicating a significant unsecured consumer loan ABS transaction with varying levels of credit enhancement [1][2]. Group 1: Transaction Details - The total issuance of notes for PAID 2026-2 amounts to $586.20 million, with KBRA rating all classes of notes except for the Certificates, Class FR Securities, and Class F2R Securities [2]. - The transaction features initial hard credit enhancement levels ranging from 80.36% for Class A-1 Notes to 4.03% for Class F-2 Notes, utilizing overcollateralization, subordination, cash reserve accounts, and excess spread [1]. Group 2: Company Background - Pagaya Structured Products LLC, the sponsor and administrator of the transaction, is a wholly owned subsidiary of Pagaya US Holding Company LLC, which is fully owned by Pagaya Technologies Ltd., an Israeli corporation listed on NASDAQ (PGY) [3]. - Pagaya Technologies operates in the financial technology sector, focusing on AI-driven credit and analysis technology within the lending marketplace [3]. Group 3: Methodology and Analysis - KBRA employed its Consumer Loan ABS Global Rating Methodology, Global Structured Finance Counterparty Methodology, and ESG Global Rating Methodology to analyze the transaction's capital structure and Pagaya's historical data [4]. - The agency also conducted operational reviews of Pagaya and its Platform Sellers, along with periodic update calls, to ensure a comprehensive evaluation prior to closing [4].

Market Overview - In 2025, the issuance of credit ABS reached a historical peak with 238 issuances, a year-on-year increase of 23.96%, and a total issuance scale of 291.52 billion yuan, up 7.82% year-on-year[4] - NPL products became the most issued category, driving the growth of the credit ABS market, while normal ABS products, particularly Auto ABS, showed a declining trend in issuance scale[5] NPL Products - The issuance of NPL products increased significantly, with 178 issuances and a scale of 82.06 billion yuan, marking a 61.32% year-on-year growth[24] - The rise in NPL issuance is attributed to increasing credit risks and the urgent need for banks to manage non-performing assets effectively[5] Normal ABS Products - Auto ABS issuance remained stable in terms of the number of issuances but saw a 9.38% decline in scale, indicating a contraction in the market[9] - Micro-enterprise loan ABS saw a decrease in both issuance numbers and scale, with 10 issuances totaling 58.645 billion yuan, down 10.49% year-on-year[17] - Consumer loan ABS issuance increased by 32.70% year-on-year, totaling 32.277 billion yuan, but remained at a low level overall[21] Market Dynamics - The overall economic environment in 2025 was characterized as an early stage of recovery, with weak consumer demand and insufficient credit supply impacting normal ABS issuance[5] - The demand for NPL products surged due to the pressure on banks to dispose of non-performing assets, leading to a robust issuance environment for these products[5] Asset Performance - By the end of 2025, the total outstanding scale of credit ABS was 430 billion yuan, a decrease of 12.02% year-on-year, with NPL products accounting for 11% of the total outstanding scale[30] - The asset quality of Auto ABS showed volatility, while RMBS experienced a significant decline in outstanding balance due to early redemptions and lack of new issuances since 2022[42] Future Outlook - The credit ABS market is expected to continue evolving, with NPL products remaining a key focus for banks under pressure to manage non-performing assets effectively[71] - The diversification of asset types and the introduction of new financing channels are anticipated to influence the issuance dynamics and investor confidence in the credit ABS market moving forward[73]

Financial Data and Key Metrics Changes - For Q4 2025, the company reported GAAP net income applicable to common stockholders of $5.3 million, or $0.14 per diluted share, compared to a book value per common share of $3.44, up from $3.36 at the end of Q3 2025 [5][15] - The NAV increased by approximately $3.1 million, or 1.3%, relative to September 30, 2025 [5] - Financial leverage remained consistent at 5.4x, indicating a prudent leverage strategy [6] Business Line Data and Key Metrics Changes - The MSR portfolio had a UPB of $15.9 billion with a market value of approximately $215 million, representing about 40% of equity capital [10] - The RMBS portfolio accounted for approximately 40% of equity capital and 79% of investable assets, excluding cash [10] - The RMBS portfolio's net interest spread was 2.52%, lower than the previous quarter due to reduced dollar roll income [13] Market Data and Key Metrics Changes - The company noted a stabilization in the interest rate environment and a steeper yield curve, which positively impacted performance [9] - The RMBS portfolio's prepayment speeds rose to 8.5% CPR for the three-month period ended December, compared to 6.1% for the prior quarter [11] - The market environment showed a flight to quality, with net spreads tightening initially but then widening in February [20] Company Strategy and Development Direction - The company aims to seek out investment opportunities that are accretive to its business while maintaining strong liquidity and prudent leverage [8] - The strategic partnership with Realgenius LLC is expected to facilitate growth as mortgage rates potentially decrease [7] - The company is focused on growing thoughtfully while managing its capital structure to enhance shareholder value [14] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism regarding the potential for additional Fed rate cuts, which could lead to lower mortgage rates and increased refinancing activity [7] - The company anticipates a low recapture rate and relatively low net CPR in the near term due to the characteristics of its MSR portfolio [11] - Management noted that the market has changed from Q4 2025 to early 2026, with tightening spreads in January followed by a widening in February [20] Other Important Information - Operating expenses for the quarter were reported at $3.3 million, reflecting a normalization after non-recurring expenses in the previous quarter [16] - A dividend of $0.10 per common share was declared for Q4 2025, paid in cash on January 30, 2026 [16] Q&A Session Summary Question: Market conditions at the start of 2026 compared to 2025 - Management noted that net spreads tightened initially but then widened in February, indicating a flight to quality in the market [20] Question: Normalized level for CPR - Management indicated that the CPR could normalize around 15% if mortgage rates decrease, with current speeds around 8.5% [25] Question: Drop in G&A expenses - The decrease in G&A expenses was attributed to the normalization of expenses after non-recurring costs in the previous quarter [34] Question: Share buybacks and preferred stock strategy - Management is considering strategies for preferred stock buybacks and is focused on growing the company rather than immediate share repurchases [36] Question: Update on book value - As of March 31, 2026, the book value is expected to increase by about 1% compared to December 31, 2025 [46]

Financial Data and Key Metrics Changes - For Q4 2025, the company reported GAAP net income applicable to common stockholders of $5.3 million, or $0.14 per diluted share, compared to a book value per common share of $3.44, up from $3.36 as of September 30, 2025 [5][16] - The NAV increased by approximately $3.1 million, or 1.3%, relative to September 30, 2025 [5] - Financial leverage remained consistent at 5.4x, indicating a prudent leverage strategy [5] Business Line Data and Key Metrics Changes - The MSR portfolio had a UPB of $15.9 billion with a market value of approximately $215 million, representing about 40% of equity capital [10] - The RMBS portfolio accounted for approximately 40% of equity capital and 79% of investable assets, excluding cash [10] - The RMBS portfolio's net interest spread was 2.52%, lower than the previous quarter due to reduced dollar roll income [13] Market Data and Key Metrics Changes - The company noted a stabilization in the interest rate environment and a steeper yield curve, which contributed to gains in spread and equity markets [9] - The RMBS portfolio's prepayment speeds rose to 8.5% CPR for the three-month period ended December, compared to 6.1% for the prior quarter [11] - The market experienced tightening in January followed by widening in February, indicating a flight to quality in the mortgage market [21] Company Strategy and Development Direction - The company aims to seek out investment opportunities that are accretive to its business while maintaining strong liquidity and prudent leverage [8] - The strategic partnership with Real Genius LLC is expected to facilitate growth as mortgage rates potentially decrease [6][7] - The company plans to continue managing its portfolio proactively to enhance shareholder value through improved performance and earnings [13] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism regarding the potential for reduced mortgage rates to accelerate growth for Real Genius as more homebuyers look to refinance [7] - The company is monitoring the mortgage rate environment closely, particularly the impact of Fed rate cuts on refinancing opportunities [12] - Management acknowledged a softer tone in the market compared to the previous quarter, with a focus on quality in investment decisions [21] Other Important Information - Operating expenses for the quarter were reported at $3.3 million, reflecting a normalization from non-recurring expenses in the previous quarter [17] - The company declared a dividend of $0.10 per common share for Q4 2025, paid in cash on January 30, 2026 [17] Q&A Session Summary Question: Market conditions at the start of 2026 compared to 2025 - Management noted that net spreads tightened initially due to GSEs reinvesting in mortgage-backed securities, but the market has since shown signs of widening and a flight to quality [20][21] Question: Normalized level for CPR - Management indicated that the CPR could normalize around 20% if mortgage rates drop to 5.5%, with current speeds around 8.5% [27] Question: Drivers of the drop in G&A expenses - The decrease in G&A expenses was attributed to the normalization of costs following non-recurring expenses related to personnel changes in the previous quarter [35] Question: Share buybacks and preferred stock strategy - Management is considering strategies regarding preferred stock buybacks and is focused on growing the company rather than immediate share repurchases [37] Question: Update on book value - As of March 31, the book value is expected to show about a 1% increase compared to December 31 [47]

Market Overview - In Q4 2025, the asset securitization market issued a total of 658 transactions, amounting to 6,920.4 billion yuan, representing a year-on-year growth of 7.8%[9] - The total issuance for the year reached 23,170.8 billion yuan, with a year-on-year increase of 13.4%[9] Market Composition - In Q4 2025, the composition of the market by issuance amount was as follows: Credit ABS at 15.2%, ABN at 22.8%, and Corporate ABS at 62.0%[9] - The issuance of Credit ABS in Q4 2025 was 1,049.1 billion yuan, showing a significant year-on-year growth of 32.2%[9] Product Performance - The issuance of auto loan ABS in Q4 2025 was 649.9 billion yuan, marking the first quarterly year-on-year rebound for the year[9] - NPAS products remained the most active, with 44 transactions and a slight year-on-year increase of 6.0% in issuance amount[9] ABN Market Trends - ABN issuance in Q4 2025 totaled 1,578.7 billion yuan, reflecting a year-on-year decline of 7.7%[10] - For the entire year, ABN issuance reached 5,680.8 billion yuan, an increase of 8.4% compared to 2024[10] Corporate ABS Highlights - Corporate ABS issuance in Q4 2025 reached 4,292.5 billion yuan, with a year-on-year growth of 9.6%, achieving the highest quarterly issuance since 2022[10] - The top four product types in Corporate ABS accounted for over 60% of the total issuance for the year[10] Secondary Market Activity - The total transaction amount in the secondary market for asset securitization in Q4 2025 was 4,769.1 billion yuan, a year-on-year increase of 10.8%[13] - The turnover rate for Credit ABS in Q4 was 9.2%, indicating a significant increase in market activity compared to the beginning of the year[13] Credit Enhancement Levels - The number of outstanding priority securities for Credit ABS increased in Q4 2025, with RMBS showing a stable distribution of credit enhancement levels primarily between 2%-6%[16] - No negative anomalies were observed in the credit enhancement levels for outstanding securities during the quarter[16] Future Outlook - New guidelines from the People's Bank of China regarding small loan companies may impact ABS financing, potentially leading to lower loan rates and tighter credit risk preferences[17]

Core Viewpoint - The article emphasizes the need for a comprehensive system to address non-performing real estate assets in China's banking sector during the 14th Five-Year Plan period (2026-2030), focusing on market-oriented, professional, legal, and social approaches, while drawing lessons from successful experiences in the US, Japan, South Korea, and Ireland [1]. Group 1: Policy Recommendations for Asset Disposal - Establish a national joint conference for the disposal of real estate non-performing assets, led by the Ministry of Finance, involving key financial and regulatory bodies, with a mandate for the four major Asset Management Companies (AMCs) to acquire and manage these assets [1]. - The Ministry of Finance will inject 500 billion yuan into each of the four major AMCs to facilitate the acquisition of non-performing real estate assets, with a target of acquiring at least 3 million units within three years [1]. - Create a cooperative mechanism between AMCs and local governments, establishing a special fund of approximately 2 trillion yuan to support the "guarantee delivery" of housing projects and the revitalization of quality assets [1]. Group 2: Legal and Policy Framework - Introduce a specific legislative framework for the disposal of non-performing real estate assets, including clear pricing rules and streamlined judicial processes to reduce disposal time from 18-24 months to 6-8 months [3]. - Implement differentiated tax incentives, including a 50%-100% reduction in taxes related to the disposal of non-performing assets, to lower costs and attract market participation [3]. - Establish a unified national real estate mortgage registration platform to enhance transparency and simplify property transfer processes [3]. Group 3: Market-Oriented Disposal Tools - Promote bulk transfers and asset securitization, expanding the scale of real estate asset securitization to attract long-term capital from insurance and pension funds [4]. - Develop a combination model of "debt restructuring + asset development" to support quality developers and revive stalled projects [4]. - Introduce international advanced disposal tools and experiences, including a fixed price plus performance sharing model to incentivize asset value enhancement [4]. Group 4: Targeted Risk Mitigation Strategies - Differentiate disposal strategies for developers based on risk levels, employing rapid recovery methods for high-risk assets and supportive measures for medium-risk assets [5]. - Implement humane solutions for individual housing loan defaults, prioritizing non-judicial methods and providing debt relief options for families in distress [5]. - Enhance the value of commercial real estate through transformation and professional management, utilizing asset securitization for efficient exits [5]. Group 5: Risk Prevention and Long-term Mechanisms - Establish a comprehensive risk management system for real estate loans, limiting concentration ratios for banks to prevent excessive risk accumulation [6]. - Encourage financial innovation in real estate, such as developing Real Estate Investment Trusts (REITs) to reduce reliance on bank credit [6]. - Create a monitoring and early warning mechanism for real estate market risks, including a risk indicator system to prevent risk accumulation [6]. Group 6: Balancing Financial Stability and Social Welfare - Prioritize the "guarantee delivery" of housing projects, establishing a collaborative mechanism among government, banks, developers, and contractors to protect buyers' rights [7]. - Guide the banking sector towards supporting affordable housing and new real estate development models, reducing reliance on traditional development loans [7]. - Allocate 30% of net proceeds from the disposal of non-performing assets to a housing security fund to support affordable rental housing and subsidies for struggling families [7].

Core Viewpoint - The structural financing assets in China and South Korea are expected to remain under pressure through 2026 due to ongoing uncertainties in global trade policies, although ratings are likely to remain stable due to risk mitigation measures and existing credit enhancement levels [4]. Group 1: Asset Performance Outlook - Fitch Ratings projects a "deterioration" in the asset performance outlook for China's RMBS and personal auto loans, as well as for South Korean credit cards, while Japan's personal auto loans are expected to have a "neutral" outlook [4]. - The weak economic and income growth prospects in China will exert pressure on RMBS and personal auto loan performance, exacerbated by industry-specific drivers [4]. - If global trade flows are disrupted again, it will further suppress consumer confidence and economic recovery prospects [4]. Group 2: Borrower Pressure and Economic Factors - The ongoing uncertainties in global trade will continue to pressure borrowers, leading to a slight weakening in the performance of unsecured assets in South Korea, despite some relief from loose monetary policies [4]. - In Japan, persistent inflation effects and rising interest rates will continue to pressure household repayment capacity in 2026, although overall asset performance is expected to remain stable [4]. Group 3: Rating Stability - The ratings for structural financing in China, Japan, and South Korea are expected to remain stable in 2026, supported by improved credit enhancement levels and existing structural protection measures [4].

Financial Data and Key Metrics Changes - For Q3 2025, the company reported GAAP net income applicable to common stockholders of $2 million, or $0.05 per diluted share, with comprehensive income of $4.5 million, or $0.12 per diluted share [14][15] - Book value per common share increased to $3.36 from $3.34 as of June 30, 2025, reflecting a slight growth [5][15] - Earnings available for distribution (EAD) were $3.3 million, or $0.09 per share [15] Business Line Data and Key Metrics Changes - The MSR portfolio had an unpaid principal balance (UPB) of $16.2 billion and a market value of approximately $219 million, representing about 41% of equity capital [10] - The RMBS portfolio stood at approximately $782 million, up from $756 million in the previous quarter, indicating a strategic shift towards lower and middle-of-the-coupon stack mortgages [12] - The net interest spread for the RMBS portfolio was approximately 2.87%, higher than the previous quarter, driven by increased asset purchases [12] Market Data and Key Metrics Changes - The 10-year yield ended the quarter marginally lower at 4.15%, with mortgage rates hovering around 6% [4][7] - The average net CPR for the MSR portfolio was approximately 5.9%, consistent with the previous quarter, while the RMBS portfolio's prepayment speeds held steady at 6.1% CPR [10][11] Company Strategy and Development Direction - The company adjusted its dividend to $0.10 per share, aligning it with earnings power for sustainability [6] - A strategic partnership with Real Genius LLC was highlighted, focusing on enhancing the digital mortgage experience, which is expected to accelerate growth as mortgage rates decrease [6][8] - The company aims to monitor the economic environment closely while seeking investment opportunities that are accretive to its business [8] Management's Comments on Operating Environment and Future Outlook - Management noted a reduction in macro volatility and anticipated continued easing from the Fed, which could lead to higher prepayment speeds for high coupon mortgages [4][5] - The company expressed optimism regarding the potential for accelerated growth due to lower mortgage rates, which may encourage refinancing and home purchases [8] Other Important Information - Financial leverage remained consistent at 5.3 times, with $55 million of unrestricted cash, indicating a solid liquidity profile [5] - Operating expenses for the quarter were reported at $3.8 million [16] Q&A Session Summary Question: Regarding the Real Genius partnership, was it opportunistic, or can more partnerships be expected? - Management indicated that while they are not prepared to forecast, they are open to exploring interesting and creative opportunities that align with their skill set [19][20] Question: Thoughts on expenses going forward, particularly G&A and compensation? - Management acknowledged a 12.5% sequential rise in G&A and compensation, attributing it to personnel changes and professional fees, but anticipates costs to decrease moving forward [25][28] Question: Update on current book value? - Management reported that the book value per share as of October 31 was up about 1.2% from September 30, before any fourth-quarter dividend accrual [33]

Financial Data and Key Metrics Changes - For Q2 2025, the company reported a GAAP net loss applicable to common stockholders of $900,000 or $0.03 per diluted share, with a comprehensive loss of $600,000 or $0.02 per diluted share [17][19] - The book value per common share decreased to $3.34 from $3.58 as of March 31, 2025, reflecting a decline in NAV of approximately $6.2 million or 2.7% [7][19] - Earnings available for distribution (EAD) attributable to common stockholders were $3.2 million or $0.10 per share, impacted by the maturity of a significant hedge [17][19] Business Line Data and Key Metrics Changes - The mortgage servicing rights (MSR) portfolio had an unpaid principal balance (UPB) of $16.6 billion and a market value of approximately $225 million, representing about 43% of equity capital [12] - The residential mortgage-backed securities (RMBS) portfolio accounted for approximately 36% of equity capital, with a prepayment speed of 6.1 CPR [12][14] - The RMBS net interest spread was reported at 2.61%, lower than the previous quarter due to the impact of a maturing swap position [14] Market Data and Key Metrics Changes - The ten-year treasury yield ended the quarter at 4.23%, slightly higher than the previous quarter, with the Agency MBS sector experiencing negative performance due to mortgage basis underperforming [6] - The economic environment showed resilience with low inflation, and the company is closely monitoring the Fed's potential shift towards a rate cut cycle [6][9] Company Strategy and Development Direction - The company entered a strategic partnership with RealGenius LLC, a digital mortgage technology firm, to enhance its investment strategy and explore unique growth opportunities [7][9] - The management indicated a potential shift towards a more risk-on investment strategy as the economic environment stabilizes, while maintaining strong liquidity and prudent leverage [9][10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic recovery and the potential for rate cuts by the Fed, which could positively impact refinancing incentives and portfolio performance [9][13] - The company plans to proactively manage its portfolio and adjust its capital structure to enhance shareholder value through improved performance and earnings [15] Other Important Information - The company raised approximately $9 million of capital through its common ATM program and ended the quarter with $58 million of unrestricted cash [7] - Operating expenses for the quarter were reported at $3.4 million, and dividends were declared for both common and preferred stockholders [20] Q&A Session Summary Question: What caused the lower servicing costs this quarter? - Management noted that lower servicing costs were due to deboarding fees from a prior quarter related to the Mr. Cooper acquisition, and a decrease in loan count [24] Question: What is the expectation for leverage moving forward? - Management expects leverage to gradually increase as the year progresses, influenced by economic conditions and potential Fed actions [26][28] Question: Can you provide details on the partnership with RealGenius and its projections? - The partnership is expected to be profitable within the first six to seven months, with dividends anticipated within the first year [33] Question: Are there any updates on the current book value? - The book value per share as of July 31 is expected to remain flat compared to June 30, prior to any third-quarter dividend accrual [39]

Group 1: Product Expiration Overview - In 2024, a total of 260 credit ABS products will expire, with NPL and RMBS products accounting for 89 and 78 products respectively, together representing nearly two-thirds of all expiring products[4] - The top five initiating institutions for expiring products include China Construction Bank, Bank of China, Ping An Bank, China Merchants Bank, and Minsheng Bank, with a focus on RMBS and NPL products[5] Group 2: Product Duration Analysis - Among the 260 expiring products, 237 have had their subordinate securities redeemed, while 23 products, all NPLs, have not been redeemed[9] - RMBS products have an average duration of 5.47 years, with the longest at 9.10 years, while other products like Auto ABS and consumer loan ABS have durations mainly concentrated between 1-2 years[11] Group 3: Product Liquidation Methods - Out of the 260 products, 226 have been liquidated, leaving 34 products unliquidated, which includes 12 normal loan ABS and 22 NPL products[12] - The predominant liquidation methods are warehouse repurchase and original distribution, accounting for over 98% of liquidated products[12] Group 4: Subordinate Securities Placement and Yield Analysis - Of the 260 products, 127 had subordinate securities placed externally, representing nearly 50% of the total[14] - The average yield for subordinate securities in normal loan ABS is significantly lower, typically in the 6-7% range, while NPL products have an average yield of 24.65%[17]