(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'sannouncement on Oct. 3, 2012 that it has entered into an agreement with private equity firm WLRoss & Co. LLC to acquire Homeward Residential Holdings, Inc. (Homeward) and its variousmortgage loanservicing and origination operating subsidiaries. At the same time, Fitch hasaffirmed Ocwen's short-term IDR at 'B'.
Homeward's acquisition is subject to regulatory approval and anticipated toclose by year-end 2012. Currently, Homeward services approximately 422,000mortgage loans with an aggregate unpaid principal balance of over $77 billion,which would bring Ocwen's combined mortgage servicing portfolio to 1.2 millionmortgage loans with an unpaid principal balance of approximately $209 billionbased on Ocwen's June 30, 2012 data. Homeward's loan origination businessincludes correspondent and retail lending and is focused on conforming, Agencymortgages.
The transaction is expected to be funded by approximately $588 million in cashand $162 million in Ocwen convertible stock. The cash portion of theacquisition is expected to be funded through existing balance sheet cash on handand operating cash flows, as well as proceeds from the sale of a portion of itsservicing assets. While Fitch does not anticipate Ocwen to undertakeincremental debt to finance the acquisition, overall leverage is expected toincrease on a pro forma basis, as the company assumes approximately $2.3 billionof Homeward's existing servicing advances.
While Fitch views the acquisition as strategically complementary to Ocwen'scurrent business model, there remain near-term integration and execution risks,which could result in potential service disruptions, which may ultimately impactcash flow generation. Fitch remains concerned regarding the potential leverageimplications and integration risks associated with Ocwen's ongoing growththrough large, opportunistic portfolio acquisitions. In addition, heightenedregulatory scrutiny for the overall sector continues to weigh on the company'soperational risk profile.
RATING DRIVERS AND SENSITIVITIES
Resolution of the Rating Watch Negative will be evaluated in the context of thesuccess of the integration of Homeward, the extent to which Ocwen is able tostabilize leverage, and any other acquisitions that Ocwen pursues over theshort- to intermediate term. The ratings could be downgraded due to a materialdeterioration in revenue and cash flow generation resulting from potentialintegration risks and service disruptions. Should Ocwen pursue futureacquisitions that would require a substantial cash outlay or a need forincremental debt that results in an increase in balance sheet leverage beyondFitch's expectations for the current rating level, this could also yieldnegative rating actions. Fitch expects a potential downgrade would be limitedto two notches from Ocwen's current rating level of 'B+'.
Conversely, the rating could be affirmed in the event that Ocwen is able tomaintain sufficient liquidity and funding flexibility over an extended period oftime, including a reduction of balance sheet leverage to pre-acquisition levels.Positive improvement in operating performance, including incremental EBITDA andcash flow generation through measured growth, also may lead to a ratingsaffirmation.
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'.