TEXT-Fitch expects to rate PHH notes 'BB'
Aug 10 - Fitch Ratings expects to assign a rating of 'BB' to PHH Corporation's (PHH) $275 million 7.375% senior unsecured notes issuance with expected maturity of 2019. Proceeds from the issuance, along with cash on hand, will be used to repay approximately $418 million of 7.125% senior notes due March 2013, by means of a tender offer. Given that the proceeds will be used to repay outstanding debt via a tender offer, Fitch does not envision there being a material impact on the company's leverage levels as a result of the issuance. PHH reported a net loss of $57 million for the three months ended June 30, 2012, primarily due to $145 million negative fair value mark on its mortgage servicing rights (MSR) portfolio and $36 million in foreclosure related expense related to the representation and warranty claims from GSEs. The loss is within Fitch's expectations. On an adjusted basis, which excludes the non-cash negative fair value charge, net income was $27 million, driven by strong margins on new mortgage originations and increased profitability in the fleet leasing segment. PHH reported $700 million in unrestricted cash as of June 30, 2012, which together with the proposed senior notes issuance offers considerable cushion to pay off the upcoming $418 million in debt. Consequently, Fitch views the near-term debt refinancing risk as manageable but believes that higher liquidity levels are appropriate in light of potential mortgage repurchase related expenses and the $250 million of convertible notes due in April 2014. RATING DRIVERS AND SENSITIVITIES PHH's ratings remain on Negative Outlook reflecting expected pressure on operating performance in 2012 from contemplated liquidity actions, reduced loan origination in the correspondent channel and its impact on the natural hedge ratio, MSR-related volatility inherent in the company's business model, and potential increase in losses from loan repurchases. Ratings could be lowered if losses from loan repurchases significantly exceed operating cash flows and other liquidity sources; mortgage origination decline causes the company's natural hedge ratio to materially worsen; or the company is unable to maintain adequate covenant cushion under its debt agreements, including the bank revolving credit facility. Conversely, the Outlook could be returned to Stable if the company executes on its liquidity plan without materially sacrificing operating performance. Fitch currently rates PHH as follows: --Long-term IDR 'BB'; --Senior unsecured debt 'BB'; --Short-term IDR 'B'; --Commercial paper 'B'. The Rating Outlook is Negative. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Criteria', Aug. 16, 2011; --'Finance and Leasing Companies Criteria' Dec. 12, 2011. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Finance and Leasing Companies Criteria