FINANCE OF AMERICA COMPANIES INC.
Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of
Fitch has also downgraded
Today's rating actions have been taken as part of a periodic peer review of non-bank mortgage companies, which is comprised of six publicly rated firms.
Key Rating Drivers
The rating downgrade reflects Fitch's expectation that FOA's leverage will remain elevated over the medium term, driven by a continuation of relatively weak earnings and the impact of higher rates. Leverage (gross debt to tangible equity) was 10.2x at
The Negative Outlook reflects Fitch's belief that there is execution risk and cash burn associated with FOA's plan to reduce expenses sufficiently to begin rebuilding capital to take leverage below 7.5x within the Outlook horizon. Recent covenant breaches, resulting from reduced profitability and higher leverage, are also viewed negatively and create some concern for the company's ability to extend debt maturities and secure future funding.
FOA's rating remains supported by its track record as a
Ratings are constrained by higher leverage relative to peers, continued reliance on secured, short-term wholesale funding facilities, elevated key person risk related to its founder and Chairman,
FOA reported a pretax loss of
FOA's leverage was 10.2x as of
Similar to other mortgage peers, FOA is reliant on the wholesale debt markets to fund operations, with unsecured debt representing 12% of total debt at
As of
FOA also had
FOA received waivers from its lenders related to profitability, debt service coverage and tangible net worth covenants in order to avoid technical default. Covenant breaches are viewed negatively by Fitch as it believes continued breaches could materially weaken FOA's financial flexibility and ability to fund originations.
FOA is not subject to material asset quality risks because nearly all originated loans are sold to investors shortly after origination. However, FOA has exposure to potential losses due to repurchase or indemnification claims from investors under certain warranty provisions. Fitch expects FOA will continue to build reserves for loan production to account for this risk. FOA's historic repurchase claims have been minimal, and the company has had sufficient reserves to cover these charges, which Fitch expects to continue.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Inability to reduce leverage below 10x over the Outlook horizon;
Sustained operating losses and/or a further erosion of the tangible equity base;
Inability to refinance secured funding facilities or avoid covenant breaches;
Inability to maintain sufficient liquidity to effectively manage servicer advances or to meet margin call requirements;
Regulatory scrutiny resulting in FOA incurring substantial fines that negatively impact its franchise or operating performance; and/or
The departure of
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch believes the Negative Outlook could be revised to Stable if FOA successfully executes on its plan to improve profitability and earnings consistency and reduce leverage below 10x.
Longer-term, upward rating momentum could be driven by:
Sustained reduction in leverage to below 7.5x;
An enhanced liquidity profile and improved funding flexibility, including an extension of funding duration and increased aggregate liquidity resources;
An increase in unsecured debt approaching 25% and a commensurate increase in unencumbered assets;
A continuation of strong asset quality performance;
Continued growth of the business that enhances FOA's franchise; and
Demonstrated effectiveness of corporate governance policies, including enhanced management team depth and/or clearly articulated succession planning for key management positions.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The senior unsecured debt rating is one notch below the Long-Term IDR, reflecting the subordination of the debt to secured debt in the capital structure and a limited pool of unencumbered assets, which translates into weaker relative recovery prospects in a stressed scenario.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The unsecured debt rating is primarily sensitive to changes in the Long-Term IDR and secondarily to the funding mix and available collateral. A material increase in unencumbered assets and recovery prospects could narrow the notching between the Long-Term IDR and the unsecured notes, while a material increase in secured debt could result in wider notching.
SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS
The ratings of
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
The ratings of
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
FOA has an ESG Relevance Score of '4' for Governance Structure due to elevated key person risk related to its founder and Chairman,
FOA has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy and Data Security, due to its exposure to compliance risks that include fair lending practices, debt collection practices and consumer data protection. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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