Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of
The actions follow the company's announcement that it has entered into a definitive agreement to sell certain assets of its wholesale originations channel to
Key Rating Drivers
IDRs and SENIOR DEBT
The downgrade reflects Fitch's view that this transaction represents a significant shift in
The RWN reflects continued uncertainty regarding the financial impact of the transaction including the impacts on leverage and profitability, if any, as well as on future strategic actions. Fitch expects to resolve the RWN once more information is available regarding the financial impacts, if any, from the transaction, and the company's strategic direction and execution plan.
The 'B-' IDR remains supported by Home Point's continued market position as a large servicer with an outsourced servicing operation, the absence of any near-term debt maturities, adequate liquidity to cover any operational needs over the Outlook horizon, an appropriate risk control framework, and strong asset quality performance.
As of YE 2022, Home Point had
Home Point's leverage (gross debt to tangible equity) decreased to 2.4x as of YE 2022; down from 3.8x at 2Q22, which is below the current covenant maximum under the company's MSR facility. Corporate non-funding leverage, which excludes funding-related debt, increased to 1.6x at YE 2022 up from to 1.2x at 2Q22 driven by continued equity erosion from operating losses and incremental borrowings. The proposed transaction is unlikely to lead to deleveraging in the near term and potentially could increase leverage if assets are written down, but Fitch will evaluate the impact when exact terms are known.
The unsecured debt rating is one notch below the Long-Term IDR reflecting below average recovery prospects, given the subordination to substantial secured debt in the capital structure, and a limited pool of unencumbered assets mostly consisting of MSRs, which could have significant valuation volatility.
SUBSIDIARY AND AFFILIATED COMPANY
The ratings of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action could result if the transaction does not substantially improve the financial profile of the company including profitability, leverage and liquidity metrics, taking into consideration the potential offsetting declines in franchise value and business model. A decline in the company's liquidity position as a result of non-renewal or acceleration of any secured financing facilities due to the transaction could also lead to negative action. Lastly, should regulatory scrutiny of the company or industry increase meaningfully, or if Home Point incurred substantial fines that negatively impacted its franchise or operating performance, this could also drive negative rating momentum.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch believes the RWN could be resolved if Home Point demonstrates sufficient financial benefits from the transaction including an immediate improvement in its profitability outlook through expense structure resizing, reduction in leverage below 1.5x and maintenance of an appropriate liquidity position. Depending on the materiality of these improvements, this could be accompanied by a Stable Outlook (if sufficiently material) or a Negative Outlook (if more modest).
While there is limited potential for further positive rating actions in the near term, growth of the business that enhances Home Point's franchise, improved profitability and earnings consistency, a continuation of strong asset quality, a sustained reduction in total leverage below 1.0x, an increase in longer-duration funding and a stronger liquidity profile, including an increase in committed funding and maintenance of the proportion of unsecured funding could drive positive rating momentum over time.
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 a wider notching.
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
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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