TEXT-Fitch cuts Ocwen IDR to 'B'; maintains watch negative
Nov 8 - Fitch Ratings has downgraded Ocwen Financial Corporation's (Ocwen) long-term Issuer Default Rating (IDR) to 'B' and maintained it on Rating Watch Negative. In addition, Fitch has placed Ocwen's short-term IDR on Rating Watch Negative. The rating actions reflect Ocwen's continued aggressive mortgage servicing acquisition strategy, and the impact of this strategy on the company's financial metrics, operational/integration flexibility and potential legal liability associated with acquired entities/portfolios. On Oct. 24, 2012, the company successfully won a $3 billion joint bid with Walter Investment Management Corp. (Walter) for the mortgage servicing and origination platform assets of Residential Capital LLC (ResCap), subject to bankruptcy court approval. Ocwen's portion of the bid comprises of approximately $830 million of mortgage servicing rights, master servicing and subservicing contracts, as well as $1.63 billion of advances. This follows Ocwen's Oct. 3, 2012 announced acquisition of Homeward Residential Holdings, Inc. for $750 million, subject to regulatory approval. The ResCap transaction, if approved, is expected to be funded by sales of a portion of Ocwen's servicing assets to Home Loan Servicing Solutions Ltd. (HLSS), combined with senior secured debt issuance. Fitch remains concerned regarding the potential leverage implications and integration risks associated with the company's ongoing growth through large, opportunistic portfolio acquisitions. In Fitch's view, any positive impact from deleveraging could be constrained due to the shifting of balance sheet leverage from Ocwen to HLSS, on which a significant portion of the company's future subservicing revenue will be dependent. In addition, if all or a portion of the legal liabilities associated with loans originated by ResCap are extended to Ocwen, this would further weigh on Ocwen's overall risk profile. Regardless of whether either or both of the transactions are ultimately consummated, Fitch believes that Ocwen's broader acquisition strategy and increased willingness to assume direct or indirect (through HLSS) leverage indicate an increased level of credit risk. Rating Drivers and Sensitivities Resolution of the Rating Watch will be evaluated in the context of the success of the integration of the ResCap and Homeward platforms, the extent to which Ocwen is able to stabilize leverage, and any other acquisitions that Ocwen pursues in the near to intermediate term. The ratings could be downgraded further due to a material deterioration in revenue and cash flow generation resulting from potential integration risks and service disruptions, as well as the extent to which Ocwen is unable to mitigate potential litigation risks associated with the legal liabilities associated with acquired entities/portfolios. Should Ocwen pursue future acquisitions that result in a material increase in balance sheet leverage beyond Fitch's expectations for the current rating level, this could also yield negative rating actions. Conversely, the rating could be affirmed in the event that Ocwen is able to maintain sufficient liquidity and funding flexibility over an extended period of time, including a reduction of balance sheet leverage to pre-acquisition levels. Positive improvement in operating performance, including incremental EBITDA and cash flow generation through measured growth, also may lead to a ratings affirmation. Fitch has taken the following rating actions: Ocwen Financial Corporation --Long-term IDR downgraded to 'B' from 'B+'; maintained on Rating Watch Negative; --Short-term IDR placed on Rating Watch Negative.
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