(The following statement was released by the rating agency)
Oct 08 - Fitch Ratings today placed Ocwen Financial Corporation's (Ocwen) 'B+' long-term Issuer Default Rating (IDR) on Rating Watch Negative, following the company's announcement on Oct. 3, 2012 that it has entered into an agreement with private equity firm WL Ross & Co. LLC to acquire Homeward Residential Holdings, Inc. (Homeward) and its various mortgage loan servicing and origination operating subsidiaries. At the same time, Fitch has affirmed Ocwen's short-term IDR at 'B'.
Homeward's acquisition is subject to regulatory approval and anticipated to close by year-end 2012. Currently, Homeward services approximately 422,000 mortgage loans with an aggregate unpaid principal balance of over $77 billion, which would bring Ocwen's combined mortgage servicing portfolio to 1.2 million mortgage loans with an unpaid principal balance of approximately $209 billion based on Ocwen's June 30, 2012 data. Homeward's loan origination business includes correspondent and retail lending and is focused on conforming, Agency mortgages.
The transaction is expected to be funded by approximately $588 million in cash and $162 million in Ocwen convertible stock. The cash portion of the acquisition is expected to be funded through existing balance sheet cash on hand and operating cash flows, as well as proceeds from the sale of a portion of its servicing assets. While Fitch does not anticipate Ocwen to undertake incremental debt to finance the acquisition, overall leverage is expected to increase on a pro forma basis, as the company assumes approximately $2.3 billion of Homeward's existing servicing advances.
While Fitch views the acquisition as strategically complementary to Ocwen's current business model, there remain near-term integration and execution risks, which could result in potential service disruptions, which may ultimately impact cash flow generation. Fitch remains concerned regarding the potential leverage implications and integration risks associated with Ocwen's ongoing growth through large, opportunistic portfolio acquisitions. In addition, heightened regulatory scrutiny for the overall sector continues to weigh on the company's operational risk profile.
RATING DRIVERS AND SENSITIVITIES
Resolution of the Rating Watch Negative will be evaluated in the context of the success of the integration of Homeward, the extent to which Ocwen is able to stabilize leverage, and any other acquisitions that Ocwen pursues over the short- to intermediate term. The ratings could be downgraded due to a material deterioration in revenue and cash flow generation resulting from potential integration risks and service disruptions. Should Ocwen pursue future acquisitions that would require a substantial cash outlay or a need for incremental debt that results in an increase in balance sheet leverage beyond Fitch's expectations for the current rating level, this could also yield negative rating actions. Fitch expects a potential downgrade would be limited to two notches from Ocwen's current rating level of 'B+'.
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 of 'B+', placed on Rating Watch Negative; --Short-term IDR affirmed at 'B'.