Fitch Ratings warned of a possible downgrade of Ocwen Financial (OCN) after the Atlanta company agreed to buy Homeward Residential Holdings from WL Ross & Co.
Although Fitch views the deal as "strategically complementary to Ocwen's current business model, there remain near-term integration and execution risks" that may lead to "potential service disruptions, which may ultimately impact cash flow generation," Fitch said Monday in a news release.
Fitch remains concerned about possible "leverage implications and integration risks associated with Ocwen's ongoing growth through large, opportunistic portfolio acquisitions." It also pointed to heightened regulatory scrutiny of the overall sector as possibly weighing on Ocwen's risk profile.
Ocwen's current rating of B+ long-term issuer default rating was placed on a negative watchlist, Fitch said. Fitch affirmed Ocwen's short-term issuer default rating at B.
The mortgage servicer, which specializes in distressed and subprime loans, has been on a shopping spree. It has picked up businesses in areas where its big bank competitors are struggling and has previously bought servicing businesses from Goldman Sachs (GS), Barclays Bank PLC and Morgan Stanley (MS). In June it said it had purchased the commercial servicing rights portfolio of Aurora Bank.
Ocwen said last week it would buy Homeward for $750 million in cash and stock. WL Ross, the private-equity firm headed by billionaire Wilbur Ross, formed Homeward in 2007 by combining several other entities.
Ocwen would pay $588 million in cash and $162 million in convertible stock. Fitch said it did not anticipate Ocwen taking on debt to finance the deal but that overall leverage would increase on a pro forma basis as the company would assume roughly $2.3 billion in Homeward's existing servicing advances.
Homeward services roughly 422,000 mortgage loans with an aggregate unpaid principal balance of more than $77 billion. The deal would bring Ocwen's combined mortgage servicing portfolio to 1.2 million mortgage loans with an unpaid principal balance of about $209 billion.