Fitch Places PHH's Ratings On Rating Watch Evolving on Announcement of Potential Separation or Sale

CHICAGO--()--Fitch Ratings has placed the 'BB' Long-Term Issuer Default Ratings (IDR) of PHH Corporation (PHH) on Rating Watch Evolving following the company's announcement that it is exploring ways to maximize shareholder value through the separation or sale of its fleet business, mortgage business, or both.

The company has retained advisors to assist in this process. PHH indicated that they expect to reach conclusions on this announcement prior to the end of the second quarter of 2014.

KEY RATING DRIVERS - IDRs AND SENIOR DEBT

The Rating Watch Evolving reflects uncertainty surrounding the potential outcome of a separation or sale of either or both businesses, though Fitch believes positive rating momentum is limited to a scenario where the mortgage business is sold and the fleet business is retained.

Fitch views the fleet leasing business as a source of stable cash flow generation to the company's overall business and a credit positive to PHH's current ratings. Therefore, the sale of the fleet leasing business would be viewed negatively by Fitch.

Fitch views PHH's mortgage business less favorably due to the highly cyclical nature of the mortgage origination business and the capital intensive and volatile nature of the mortgage servicing business. Furthermore, the mortgage business is subject to intense regulatory and legislative scrutiny, which further increases business risk.

In the case of a sale, Fitch will focus its review on the surviving entity, assessing expected capitalization, liquidity, and funding flexibility. Fitch will also consider the impact of today's announcement on PHH's competitive position, including the potential loss of clients and/or departures at the senior management level.

Since September 2013, PHH has been in discussions with some of its shareholders with regard to ways to maximize shareholder value, including a possible sale or IPO of its fleet leasing business and exploring alternative funding mechanisms for its mortgage servicing rights (MSR) portfolio. This is not the first time the company has pursued strategic alternatives, and Fitch believes an extended period of uncertainty is likely to have a greater impact on existing customer relationships.

RATING SENSITIVITIES - IDRs AND SENIOR DEBT

Negative rating momentum could develop if the mortgage business is the surviving entity and management is unable to improve the profitability of the business due to weaker competitive positioning, resulting from the loss of significant customer relationships, or higher regulatory and funding costs. Negative rating actions could also result from the view that the sale of the fleet leasing business weakens the capitalization or funding flexibility of the firm.

Positive rating momentum could result if the fleet leasing business is retained, although an eventual upgrade would be dependent upon the company having the appropriate capitalization, funding and liquidity levels, while maintaining current customer relationships. This would likely take some time to observe.

Ratings could be affirmed should there be no change to the current business model, including no disruption in customer relationships, and the company continues to generate consistent operating performance while maintaining appropriate capitalization, liquidity, and economic access to diversified funding sources, including unsecured debt. Fitch believes the likelihood of this occurring is remote.

Fitch has placed the following ratings on Rating Watch Evolving:

PHH Corporation

--Long-term IDR 'BB';

--Short-term IDR 'B';

--Senior unsecured debt 'B';

--Commercial paper 'B'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820431

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Contacts

Fitch Ratings
Primary Analyst
Johann Juan, +1 312-368-3339
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mohak Rao, CFA, +1 212-908-0559
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Johann Juan, +1 312-368-3339
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mohak Rao, CFA, +1 212-908-0559
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com