KBRA Assigns K2 Rating to Preston Hollow’s Secured Commercial Paper Notes
NEW YORK (August 17, 2022) – KBRA assigns a K2 rating to Preston Hollow’s up to $200 million Secured Commercial
Paper Notes Series 2022 (“CP Notes”), including the initial $39 million CP 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 company
founded in 2014 and headquartered in Dallas Texas, specializing in direct and secondary market investments in
municipal securities. The rating Outlook is Stable.
Key Credit Considerations
The short-term K2 rating on the CP Notes reflects the Company’s BBB issuer rating, the secured nature of the CP Notes
that are recourse obligations of PHCC, and KBRA’s assessment of the PH’s liquidity management. The CP Notes are
secured and overcollateralized by eligible securities including municipal securities at appropriate advance rates. KBRA
believes PH has adequate liquidity management to support the size of the CP program. PH’s liquidity management plan
includes maintaining a minimum level of contingent liquidity and staggering CP maturities. PH will ensure that:
▪ PHCC has no more than $15 million in total par value of CP Notes maturing within any seven-day period.
▪ PHCC has no more than $50 million in total par value of CP Notes maturing within any 30-day period and
▪ Total amount of CP Notes issued will not exceed $200 million.
▪ 30 days prior to the maturity date of any CP Note, the Company will maintain cash & cash equivalents or unfunded
capacity under PH’s existing $150 million credit facility equal to cover 100% of CP Notes maturing within the next 30-
day period. In addition, PH maintains significant cash and unencumbered assets ($206 million in unrestricted cash, $150
million margin credit facility with MUFG and $1.3Bn of unencumbered assets as of 6/30/22).
PHCC’s rating reflects the Company’s deep and experienced management team with decades of municipal finance and
real estate lending experience, primarily senior secured, well-collateralized and covenant-heavy debt investments diversified
by region and sector, acceptable leverage with a long-term target of up to 2x Total Debt-to-Equity and approximately 1x
Recourse Debt-to-Equity (excluding non-recourse term-matched trusts), strong underwriting and risk management, strong
earnings metrics, permanent equity capital from established institutional investors and PH’s management team including the
President/CEO and an adequate funding/liquidity profile with significant unencumbered assets.
PH’s funding strategy is focused primarily on non-recourse term matched trusts (TMTs) which provides a more stable source of
borrowing compared to short-term recourse facilities. KBRA views PH’s TMT funding as relatively stable given maturities are
long-term and generally matched with the maturities of assets collateralizing the TMT, there is no mark to-market collateral
posting required, and TMTs are fully non-recourse to PH. In addition, the rating considers PH’s demonstrated strong underwriting
with low losses and successful workouts of distressed credits through the Covid-19 pandemic. These strengths are
counterbalanced by the risks related to the business of investing in illiquid noninvestment grade or unrated municipal debt,
relatively high single credit concentration (top 5 credits comprise 26% of portfolio), high dividend payouts and a largely secured
funding profile although PH expanded its funding sources into unsecured debt markets in 1Q22.
The issuer rating of PHCC is the same as PHC’s given PHCC is the wholly-owned operating subsidiary of PHC and holds
substantially all assets and liabilities of the Company. On January 1, 2022, the Company rebranded to emphasize its
social impact finance strategy by creating PHCC and transferring all operations of Preston Hollow to PHCC. The Stable
Outlook reflects the Company’s low leverage, low non-accruals and losses through the Covid-19 pandemic and adequate
liquidity with significant unencumbered assets.
Click here to view the report. To access ratings and relevant documents, click here.
Michael Dodge, Senior Director (Lead Analyst)
+353 1 588 1190
Danise Chui, Managing Director
+1 (646) 731-2406