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
Fitch has taken the following rating actions:
Ocwen Financial Corporation
--Long-term IDR downgraded to 'B' from 'B+'; maintained on Rating Watch
--Short-term IDR placed on Rating Watch Negative.