Analysts say mortgage companies raising debt in the current high mortgage rate environment is a sign that market conditions are improving, but the recovery from the economic downturn may be slower than expected. Ta. housing wire.
Management decided to target mortgage servicing rights (MSR) transactions to improve liquidity in order to fund operations and investments. And recent deals show there is appetite among investors for debt in the mortgage space.
Since the stock market is not attractive at the moment, issuing bonds is an ideal option to raise capital for public and private companies. Companies primarily issue unsecured bonds to increase their share of the balance sheet.
freedom mortgage and pennymac mortgage investment trust Companies have recently moved to raise capital through bond issues, and analysts said other mortgage companies could follow suit.
“The bond market has shut down as interest rates have risen over the last year, spreads have increased so dramatically, and non-bank mortgage companies are facing difficulties,” said Warren Kornfeld, senior vice president of Financial Institutions Group. he said. Moody’s Investor ServiceSaid.
But things are different this year, Kornfeld said.
“It looks like we have at least bottomed out in terms of profitability as profitability has started to improve, but the market has opened up. My concerns have allayed.”
Eric Hagen, Managing Director and Mortgage Analyst BTIGsaid some companies are raising debt as they see opportunities for future growth. However, in other cases it can be a defensive tactic to improve liquidity.
“Liquidity and cash generation are core elements of business. Therefore, we believe that even if interest rates are very high, there may be some demand for mortgage companies to raise funds in the bond market. It makes sense for us,” Hagen said.
Investors have an appetite
In September, Freedom Mortgage raised $1.3 billion in about 24 hours. The amount was higher than the $1 billion the company had expected in June. announced This product reflects an oversubscribed transaction.
The company issued two tranches. The first tranche of $800 million has a coupon of 12% and is due in October 2028, while the second tranche of $500 million has a coupon of 12.25% and is due in October 2030. The proceeds will be used to retire approximately $1 billion in unsecured notes maturing between 2024 and 2025. The remainder will be used for market growth opportunities.
“Due to overwhelming investor demand, the company has accepted more capital than it originally planned to raise. With these proceeds, the company has invested in opportunities to extend debt maturities and repay more loans. will be able to continue,” a Freedom spokesperson wrote to Housing Wire.
On the other hand, PennyMac Mortgage Investment Trust announced On September 18, the company announced the underwriting public offering price of $50 million of 8.50% senior notes due 2028. The Notes are fully and unconditionally guaranteed on a senior, unsecured basis. penny mac companyis an indirect wholly owned subsidiary of the company.
The company plans to use the proceeds to fund operations and investments. This includes supporting correspondent lending businesses such as obtaining mortgage servicing rights (MSRs) and purchasing agent-eligible mortgages. The REIT also plans to repay other debt, including 5.50% exchange notes due in 2024.
PennyMac declined to comment for this story.
Piper Sandler & Company,, Janie Montgomery Scott LLC and Ladenburg Thalmann & Co. Inc. Served as co-bookrunning manager for the offering.
Prospects for new services
Debt issued by mortgage companies during the coronavirus pandemic with maturities of five to six years and low interest rates could soon mature. But so far, that’s not a red flag.
Ten lenders have $4 billion in unsecured debt maturing in 2024 and 2025, with only about 10% of the total due next year, according to data compiled by BTIG. This is not a cause for alarm.
Data includes: mr cooper group, american financeFreedom Mortgage, Home Point Capital, loan depot, rhythm capital, OcwenPennyMac Financial Services; rocket company and UWM Holdings Co., Ltd..
“On the other hand, the Freedom incident shows there is a demand.” [for mortgage companies debt], but it may be limited. One of the things we’re looking at is his $4 billion debt maturity schedule. This is spread out over several years. “If a large amount of debt were to be carried over into next year, that would be even more of a concern,” Hagen said.
Mortgage loan companies face rising bond issuance costs due to soaring interest rates, which could put pressure on their finances. However, the decision to issue unsecured bonds could improve liquidity and provide financial flexibility.
“The reason why we believe some of the lower coupon debt has been or could be retired is simply to manage liquidity on the balance sheet,” Hagen said.
He continued: “The question we’re getting is, what will the business’ earnings be like if we’re at that interest rate level? Obviously it’s lower than it was before. When we were sourcing, it was very low.”
Commenting on the market outlook for these companies, Kornfeld said, “Rising mortgage rates (we’ve seen a 1% increase over the past three to four months) will likely result in third quarter profitability on par with second quarter. , or may even decline slightly.” In fact, the third quarter may be a little worse than the second. ”
“Then we thought 2024 was going to be much better than 2023. But we still haven’t gotten back to the average long-term profitability of these companies, which is a return on assets of about 2.5% to 3%. yeah.” [basically net income to the balance sheet]. We’ll probably go back to a little bit less than that, around 1.5% to 2%. 2024 will still be better than 2023, but probably only slightly,” Kornfeld said.
