May 30 - Fitch Ratings has downgraded PHH Corporation's (PHH)
long-term Issuer Default Ratings (IDR) and senior unsecured debt rating to 'BB'
from 'BB+' and removed them from Rating Watch Negative. The Rating Outlook is
Negative. Approximately $1.5 billion of debt is affected by these actions. A
full list of ratings is detailed at the end of this release.
The downgrade reflects increased potential repurchase risk associated with PHH's
mortgage origination business, the impact of reduced origination activity on the
company's natural hedge policy, on-going uncertainties regarding the company's
liquidity profile, the impact of potential mortgage regulation on servicing
costs, and material senior management turnover over the recent year.
The removal from Rating Watch Negative reflects that immediate liquidity
concerns have largely abated, although the steps taken to address this near-term
concern have introduced other, longer-term challenges which are reflected in the
Negative Rating Outlook.
PHH has generated significant liquidity over the past few months including $250
million in five-year convertible notes issuance in January 2012, extension of
the $530 million bank credit facility until February 2013, the subsequent
pay-off of the $250 million in senior notes in April 2012, and the sale of some
non-strategic assets. As a result, unrestricted cash increased to $875 million
in first quarter 2012 (1Q'12), up from $414 million in 4Q'11. Unrestricted cash
was $676 million subsequent to the April 2012 debt paydown and the company will
be facing $420 million and $250 million in debt maturities in March 2013 and
September 2014, respectively.
However, liquidity on hand and cash flow from operations will be negatively
affected by increase in mortgage repurchase related expenses. Repurchase claims
from government sponsored entities increased by 42% to $315 million in 1Q'12
from $222 million at the end of 4Q'11. The company added $65 million to its
repurchase related reserves in 1Q'12, compared to $15 million in 1Q'11 and $80
million for full-year 2011, which is mainly related to loans originated prior to
2008, and is expected to remain elevated through 2013. The unpaid principal
balance of loans originated prior to 2008 measured $61 billion, of which 6.5%
were 90-days past due as of 1Q'12. This risk is further heightened by the
covenant put into the amended Fannie Mae mortgage funding facility, which
restricts the aging of repurchase pipeline to 270 days.
Operating performance has been inconsistent and affected by fair value changes
in the mortgage servicing rights (MSR) portfolio. PHH reported a pre-tax loss of
$202 million in 2011, compared to pre-tax income of $115 million in 2010,
primarily due a $510 million noncash MSR valuation charge resulting from
declining interest rates. Earnings improved to $75 million in 1Q'12 from $49
million in 1Q'11, primarily due to strong gain on sale margins and positive fair
value marks on the MSR portfolio from increased interest rates in the first
quarter. Based on the historical volatility in both gain on sale margins and
interest rates, Fitch believes that gains made in 1Q'12 have the potential to be
reversed over the course of the year.
PHH does not use derivatives to hedge its MSR portfolio from changes in interest
rates. Instead, the company maintains what it deems to be a natural hedge
between the lost servicing value from prepayments and new originated loans.
Fitch believes that this strategy introduces greater volatility to the company's
GAAP operating results, particularly if PHH's focus on managing liquidity and
capital position comes at the expense of new origination activity.
PHH's funding profile is pre-dominantly secured, with a relatively shorter
tenure, which continually exposes it to market disruptions and refinance risk.
Lengthening the tenure on both mortgage and fleet debt facilities will be viewed
positively by Fitch.
Fitch also notes the continued senior management changes that have occurred
since January 2012, including the resignation of the CEO, Treasurer and
President of the mortgage segment. Fitch will evaluate new management's ability
to execute on its strategy, particularly with a focus on liquidity and funding
management, in light of upcoming debt maturities.
The Negative Outlook reflects expected pressure on operating performance in 2012
from contemplated liquidity actions, reduced loan origination in the
correspondent channel, MSR-related volatility inherent in the company's business
model, and potential increase in losses from loan repurchases. Fitch will
monitor liquidity levels, particularly unrestricted cash balances, until the
2013 senior debt maturity is repaid.
Ratings could be lowered if losses from loan put-backs 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 extend the unsecured bank revolver beyond its scheduled maturity.
Conversely, the Outlook could be returned to Stable if the company executes on
its liquidity plan without materially sacrificing operating performance; obtains
a multi-year extension on the unsecured bank revolver at reasonable terms; and
demonstrates access to unsecured public debt markets at economic levels.
Established in 1946, PHH is the leading outsource provider of mortgage and fleet
management services in the U.S. The company conducts its business through three
operating segments: mortgage production, mortgage servicing and fleet management
Fitch has taken the following actions on PHH ratings:
--Long-term IDR downgraded to 'BB' from 'BB+;
--Senior unsecured debt downgraded to 'BB' from 'BB+';
--Short-term IDR affirmed at 'B';
--Commercial paper affirmed at '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