Fitch Affirms PHH at 'BB-' & Removes Negative Watch; Assigns Negative Outlook

Tue Jul 8, 2014 11:13am EDT

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(The following statement was released by the rating agency) CHICAGO, July 08 (Fitch) Fitch Ratings has affirmed PHH Corporation's (PHH) long-term Issuer Default Rating (IDR) and senior unsecured debt rating at 'BB-'. Fitch has also removed the ratings from Rating Watch Negative and assigned a Negative Rating Outlook. A detailed list of rating actions follows at the end of this press release. Fitch previously downgraded PHH to 'BB-' on Rating Watch Negative from 'BB' on Rating Watch Evolving on June 4, 2014, following the announced sale of PHH's auto fleet leasing business. The downgrade reflected Fitch's view that the credit risk profile of the entity was at least one notch weaker as a monoline business focused on mortgage servicing/origination. The Rating Watch Negative reflected uncertainty around the use of proceeds from the sale of the fleet business. KEY RATING DRIVERS - IDRS AND SENIOR DEBT The affirmation of PHH's ratings and the removal of the Rating Watch Negative follow the closing of the auto fleet leasing business sale and the company's announced capital allocation plan for its stand-alone mortgage business, which results in improved in capitalization, leverage and liquidity primarily due to $420m in identified debt pay downs using cash proceeds received from the spin-off of PHH's auto fleet leasing business. The Negative Outlook reflects uncertainty and execution risk associated with the planned re-investing in and re-engineering of the company's mortgage origination and servicing business, in order to improve profitability, particularly in light of up to $450 million in announced share repurchases which will modestly reduce financial flexibility. The company has identified ambitious plans to improve its mortgage origination and servicing business, including renegotiating existing private label mortgage servicing contracts with clients at more favorable economic terms. Fitch believes that there is significant uncertainty and execution risk with this strategy due to the inherently cyclical nature of the mortgage origination business and the capital intensive nature and highly volatile earnings profile of the mortgage servicing business. Furthermore, the overall mortgage business remains subject to intensive regulatory and legislative scrutiny, which could potentially be a drain on cash resources. Pro forma March 31, 2014 for the sale of PHH's fleet business, the standalone mortgage business has equity of $1.87 billion and total debt of $1.88 billion, resulting in leverage, as measured by debt to tangible equity, of 1.01x, which compares favorably to the company's year-end 2013 leverage of 3.4x. Fitch expects leverage to moderately increase from its current pro forma levels but also expects that PHH will manage leverage conservatively. Liquidity, as measured by balance sheet cash, is bolstered by the $821 million in net cash proceeds after payment of taxes and transaction expense received from the fleet business sale. The company has identified uses for liquidity, which in addition to debt paydown and reinvestment in mortgage business, include share buybacks. Factoring in the planned debt paydowns, the company does not have any other unsecured debt maturities until 2017, when $250 million of convertible notes come due. Fitch views the company's liquidity profile as appropriate for the ratings. RATING SENSITIVITIES - IDRS AND SENIOR DEBT Inability to renegotiate existing private label contracts at more favorable economic terms, loss of clients, weakening in PHH's competitive position, and/or sustained operating losses would lead to negative rating actions. In addition, a sustained increase in leverage, reduction in liquidity due to higher than expected operational and contingency needs, or higher than planned share repurchases would also be viewed negatively. Successful execution of management's strategic objectives as measured by strengthened competitive position, higher client contract renewals, and sustained increased in earnings and cash flows, while maintaining appropriate capital and liquidity levels could result in the Outlook being revised to Stable from Negative. Even the expected time it will take to implement the proposed strategic changes and observe meaningful change, Fitch expects that resolution of the Negative Rating Outlook could be towards the outer end of the 12 to 24 month Outlook horizon. Fitch removes from Rating Watch Negative and affirms the following ratings: PHH Corporation --Long-term IDR at 'BB-'; --Senior unsecured debt at 'BB-'; --Short-term IDR at 'B'; --Commercial paper at 'B'. The Rating Outlook is Negative. Contact: Primary Analyst Johann Juan Director +1-312-368-3339 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Mohak Rao, CFA Director +1-212-908-0559 Committee Chairperson Julie Solar Senior Director +1-312-368-5472 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Jan. 31, 2014); --'Finance and Leasing Companies Criteria' (Dec. 11, 2012). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Finance and Leasing Companies Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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