Feb 19 - Fitch Ratings has assigned a long-term Issuer Default Rating (IDR)
of 'B' to Ocwen Loan Servicing, LLC (OLS) and 'B/RR4' ratings to OLS' proposed
$1.3 billion senior secured term loan (term loan). OLS is the primary operating
company and wholly-owned subsidiary of OCN, a provider of mortgage servicing and
asset management services.
RATING ACTION RATIONALE
The 'B' ratings reflect the guaranty provided to OLS by Ocwen Financial
Corporation and its subsidiaries (rated 'B' by Fitch) for the due and punctual
payment in full of amounts due under its obligations and the modest impact of
the term loan issuance on OCN's overall leverage. The Recovery Rating of 'RR4'
reflects average recovery prospects in a distressed scenario based upon
collateral coverage for the term loan. The term loan is secured by a first
priority security interest in all unencumbered assets of the company and a
pledge of the capital stock of all current and future subsidiaries. Consistent
with OCN's IDR, the ratings of OLS have also been placed on Rating Watch
The proceeds of the issuance are expected to finance OLS' acquisition of
mortgage servicing advances and assets from Residential Capital, LLC (ResCap),
pay certain fees and expenses in connection with the ResCap transaction, and to
refinance OLS' existing $314 million senior secured term loan. The issuance of
the term loan coincided with the closing of the ResCap transaction, which
occurred on Feb. 15, 2013.
Fitch expects the $1.3 billion term loan will modestly increase OCN's overall
leverage on a pro forma basis and will have a marginal impact to OCN's credit
profile in the medium-term. Operating cash flow, mandatory repayment features
under the term loan and voluntary prepayments by OCN is expected to repay the
term loan within the next two to three years.
Fitch downgraded and placed the ratings of OCN on Rating Watch Negative on Nov.
8, 2012 following the announcement of its $3 billion joint winning bid to
purchase the servicing portfolio of ResCap in bankruptcy. This followed OCN's
announced acquisition of Homeward Residential Holdings, Inc. (Homeward) for $750
million on Oct. 3, 2012. The downgrade reflected Fitch's view that OCN's broader
acquisition strategy and increased willingness to assume direct or indirect
leverage indicated an increased level of credit risk. OCN closed the Homeward
transaction on Dec. 27, 2012.
Due to OCN's close operating and strategic relationship with Home Loan Servicing
Solutions, LLC (HLSS), Fitch views any positive impact from OCN's deleveraging
through sales to HLSS to be constrained due to the shifting of balance sheet
leverage to a related affiliate, on which a significant portion of its future
subservicing revenue will be dependent. Fitch views HLSS as important to OCN's
overall strategy to migrate to a 'capital light', fee-for-servicing model and
OCN is expected to remain the primary source of portfolio assets for HLSS in the
medium-term. To date, HLSS has purchased from OCN $3.2 billion of advance
receivables under an unpaid principal balance (UPB) of $82.7 billion since its
initial public offering in March 2012. HLSS expects OCN's purchase of Homeward
and ResCap's servicing portfolios will add an additional $120 billion of UPB to
its purchase pipeline.
SUSBIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES
OLS is the primary operating company and wholly-owned subsidiary of OCN. Its
IDRs are aligned because of the irrevocable and unconditional guaranty provided
by OCN and its subsidiaries. Therefore, the ratings are sensitive to the same
factors that might drive a change in OCN's IDR.
RATING DRIVERS AND SENSITIVITIES - IDRS AND TERM LOAN
The resolution of the Rating Watch will be evaluated based upon OCN's ability to
integrate the Homeward, ResCap and any potential other near-term acquisitions
with minimal impact to revenue and cash flow generation and service disruptions.
The ratings could be affirmed if OCN is able to maintain sufficient liquidity
and funding flexibility over an extended period of time and reduce balance sheet
leverage to pre-acquisition levels in the context of OCN and HLSS as combined
Conversely, the ratings could be downgraded further due to a material reduction
in revenues and cash flow generation caused by a material change in OCN's cost
structure resulting from integration, legal and regulatory risks. The Recovery
Ratings of the term loan are also sensitive to changes in collateral values and
advance rates under secured borrowing facilities, which ultimately impact the
level of available asset coverage. Should future acquisitions resulting in a
significant increase in balance sheet leverage over and above Fitch's
expectations for the current rating level, this could also result in negative
Fitch has assigned the following ratings:
Ocwen Loan Servicing, LLC
--Long-term IDR 'B'; Rating Watch Negative;
--Senior secured term loan 'B/RR4'; Rating Watch Negative.
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Paul Ryndak, CFA
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