CHICAGO--()--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 Negative.
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.
SUBSIDIARY 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 entities.
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 rating actions.
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.
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 Rating Criteria' (Aug. 15, 2012);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Recovery Ratings for Financial Institutions' (Aug. 15, 2012).
Applicable Criteria and Related Research:
Finance and Leasing Companies Criteria
Rating FI Subsidiaries and Holding Companies
Recovery Ratings for Financial Institutions
Global Financial Institutions Rating Criteria