Ocwen Financial Corp.'s (OCN) long-term Issuer Default Rating
(IDR) has been downgraded by Fitch Ratings, while keeping Rating
Watch Negative on the same. Now, the long-term IDR stands at 'B',
down from the previous rating of 'B+'. Moreover, the rating
agency has put the company's short-term IDR on Rating Watch
Negative.
The downgrade by Fitch follows Ocwen's continued acquisitions
in mortgage servicing over the last months. Moreover, the agency
took the step on the assumption of negative impact of this
acquisition strategy on the company's financial metrics,
integration risks associated with the acquisitions and
operational flexibility.
Last month, Ocwen announced that it is going to acquire
Homeward Residential Holdings Inc. - an integrated mortgage firm
with prime lending and mortgage servicing operations - from WL
Ross & Co. LLC. The company will be paying about $588 million
in cash and $162 million in Ocwen convertible preferred stock for
this buyout.
Later in the month, Ocwen also won a bid to acquire
Residential Capital's (ResCap) mortgage-servicing rights (MSRs)
in collaboration with Walter Investment Management Corp. (WAC)
for a sum of $3 billion. The offer needs to be approved by the
bankruptcy court in a hearing scheduled for November 19.
On approval, the deal states that Ocwen will take over
ResCap's business, which includes nearly $830 million of mortgage
servicing rights, master servicing and subservicing contracts,
along with $1.63 billion of advances. On approval, a part of the
ResCap transaction is anticipated to be funded by the amount
received on selling a portion of Ocwen's servicing assets to Home
Loan Servicing Solutions Ltd. The remainder is expected to be
funded through an issuance of senior secured debt.
According to Fitch, despite these acquisitions being a
strategic fit for Ocwen's current operations, the near-term
execution and integration risks could lead to disruption in
servicing the loan portfolios. This in turn, would adversely
impact the financials of the company. Further, the regulatory
scrutiny of the mortgage servicing sector will weigh on Ocwen's
risk profile.
Additionally, the rating agency expects the resolution of the
Rating Watch will be based on the successful integration of the
ResCap and Homeward acquisitions as well as the impacts of these
on Ocwen's balance sheet. The Rating Watch will also be dependent
on the company's future acquisitions.
Yet, Fitch believes that the rating could be affirmed if Ocwen
sustains sufficient liquidity over a period of time. Progress in
its operating performance may result in a ratings affirmation as
well.
Our Viewpoint
At a time when major mortgage servicers are shying away from
mortgage servicing business owing to stringent regulations and
balance sheet risk, Ocwen has however made a series of
acquisitions. Although the company will have to comply with the
regulations related to mortgage servicing, it is better
positioned than its peers as it focuses only on servicing
operations unlike the others. However, we remain concerned about
the integration-related risks and the regulatory scrutiny.
Ocwen currently retains a Zacks #2 Rank, which translates into
a short-term Buy rating. However, considering the fundamentals we
maintain a long-term 'Neutral' recommendation on the stock.
Ocwen Financial Corp.
's (
OCN
) long-term Issuer Default Rating (IDR) has been downgraded by
Fitch Ratings, while keeping Rating Watch Negative on the same.
Now, the long-term IDR stands at 'B', down from the previous
rating of 'B+'. Moreover, the rating agency has put the
company's short-term IDR on Rating Watch Negative.
The downgrade by Fitch follows Ocwen's continued
acquisitions in mortgage servicing over the last months.
Moreover, the agency took the step on the assumption of
negative impact of this acquisition strategy on the company's
financial metrics, integration risks associated with the
acquisitions and operational flexibility.
Last month, Ocwen announced that it is going to acquire
Homeward Residential Holdings Inc. - an integrated mortgage
firm with prime lending and mortgage servicing operations -
from WL Ross & Co. LLC. The company will be paying about
$588 million in cash and $162 million in Ocwen convertible
preferred stock for this buyout.
Later in the month, Ocwen also won a bid to acquire
Residential Capital's (ResCap) mortgage-servicing rights (MSRs)
in collaboration with
Walter Investment Management Corp.
(
WAC
) for a sum of $3 billion. The offer needs to be approved by
the bankruptcy court in a hearing scheduled for November
19.
On approval, the deal states that Ocwen will take over
ResCap's business, which includes nearly $830 million of
mortgage servicing rights, master servicing and subservicing
contracts, along with $1.63 billion of advances. On approval, a
part of the ResCap transaction is anticipated to be funded by
the amount received on selling a portion of Ocwen's servicing
assets to Home Loan Servicing Solutions Ltd. The remainder is
expected to be funded through an issuance of senior secured
debt.
According to Fitch, despite these acquisitions being a
strategic fit for Ocwen's current operations, the near-term
execution and integration risks could lead to disruption in
servicing the loan portfolios. This in turn, would adversely
impact the financials of the company. Further, the regulatory
scrutiny of the mortgage servicing sector will weigh on Ocwen's
risk profile.
Additionally, the rating agency expects the resolution of
the Rating Watch will be based on the successful integration of
the ResCap and Homeward acquisitions as well as the impacts of
these on Ocwen's balance sheet. The Rating Watch will also be
dependent on the company's future acquisitions.
Yet, Fitch believes that the rating could be affirmed if
Ocwen sustains sufficient liquidity over a period of time.
Progress in its operating performance may result in a ratings
affirmation as well.
Our Viewpoint
At a time when major mortgage servicers are shying away from
mortgage servicing business owing to stringent regulations and
balance sheet risk, Ocwen has however made a series of
acquisitions. Although the company will have to comply with the
regulations related to mortgage servicing, it is better
positioned than its peers as it focuses only on servicing
operations unlike the others. However, we remain concerned
about the integration-related risks and the regulatory
scrutiny.
Ocwen currently retains a Zacks #2 Rank, which translates
into a short-term Buy rating. However, considering the
fundamentals we maintain a long-term Neutral recommendation on
the stock.
OCWEN FINL CORP (OCN): Free Stock Analysis
Report
WALTER INV MGMT (WAC): Free Stock Analysis
Report
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