S&P Places Ocwen Financial (OCN) on CreditWatch Negative; Sees Auditor Including 'Going Concern' Language (ASPS)

Standard & Poor’s Ratings Services said that it placed its ‘B’ issuer credit rating on OCWEN Financial Corp. (NYSE: OCN) on CreditWatch with negative implications. We also placed our 'B+' rating on Ocwen's senior secured term loan and 'CCC+' rating on its senior unsecured notes on CreditWatch with negative implications. At the same time, we affirmed our 'B+' rating on Altisource Portfolio Solutions S.A. (Nasdaq: ASPS). The outlookon Altisource remains negative.

"We believe it is likely that Ocwen’s independent auditors will include an explanatory paragraph in the firm’s Dec. 31, 2014, audit that discusses Ocwen’s ability to operate as a “going concern,” indicating the auditor has questions about the the firm’s ability to remain financially viable over the next 12 months," said Standard & Poor's credit analyst Richard Zell. According to Ocwen, of primary focus are the auditor’s questions regarding Ocwen’s residential servicer ranking with two of the three primary nationally recognized statistical rating organizations (NRSROs), including Standard & Poor’s. Two of the primary NRSROs, including Standard & Poor's, have negative outlooks on their residential servicer ranking for Ocwen. A third NRSRO has already lowered its servicer ranking on Ocwen.

A servicer ranking assesses a servicer's overall ability to effectively manage loans on behalf of mortgage investors. Separately from assigning an issuer credit rating to Ocwen and ratings on its debt, Standard & Poor's also assigns servicer rankings to Ocwen Loan Servicing LLC. Standard & Poor’s financial institutions ratings practice assess the creditworthiness of Ocwen, while a
separate group acts independently in assigning servicer rankings. Standard & Poor’s servicer rankings on Ocwen Loan Servicing are AVERAGE with a negative outlook.

In some cases, if specific provisions in servicing agreements are breached, mortgage investors could demand that the backup servicer take over primary servicing responsibilities. In approximately 700 of the firm's more than 4,000 servicing contracts the lowering of servicer rankings by one or two of the three primary NRSROs triggers a provision that could allow investors to transfer servicing. Ocwen has established a successful track record of retaining servicing contracts despite the firm’s well-publicized difficulties. To date, approximately 1% of the agreements eligible for servicing transfer, as a result of the most recent NRSRO downgrade, have done so. However, mounting negative pressure, including the potential for a “going concern” opinion and servicer ranking outlooks currently on negative with the potential for downgrades, could have a significant impact on the company’s ability to retain a portion of mortgage servicing contracts, negatively impacting revenue.

Ocwen is currently in the process of replacing a lender that provides a portion of the company’s non-agency servicer advance funding. Although we believe that Ocwen is close to finalizing advance line terms with new lenders, further negative news may result in a loss of credit confidence and lenders invalidating commitments. Additionally, a portion of the firm's non-agency servicer advance lines mature in November of this year, introducing further refinancing risk if bank lenders lose confidence in Ocwen’s ability to remain viable.

We recognize that Ocwen has been liquidating mortgage servicing rights related to government-sponsored enterprises (GSEs), providing substantial amounts of cash flow when the deals close. We expect Ocwen will continue to strategically liquidate both GSE and other portfolios, resulting in reduced debt outstanding.

Altisource is closely aligned with the financial prospects of Ocwen--approximately 60% of the firm’s revenue is tied to real estate technology services purchased by Ocwen. However, we believe that the current challenges facing Ocwen do not represent a near-term risk to Altisource. Additionally, we do not believe that Altisource’s existence as an organization is inextricably tied to the financial health of Ocwen. However, a loss of the company’s largest customer would likely result in a change to the firm’s business position, possibly resulting in a downgrade.

We could lower the rating on Ocwen if a “going concern” pronouncement or the inability to obtain funding commitments on the firm’s non-agency mortgage servicing advance lines result in weakening Ocwen’s credit profile due to a material loss of funding or revenue, or a reduction in the firm’s liquidity position. We will not necessarily lower the rating immediately after a "going concern" pronouncement--if one is made--but plan to assess whether such a pronouncement would make it difficult for Ocwen to renew its advanced funding lines. We expect to resolve the CreditWatch listing most likely before the end of this summer.

We could resolve the CreditWatch listing and assign a negative outlook if Ocwen is able to retain meaningful levels of funding and prevent a significant loss of revenue associated with the “going concern” provision.

We could raise the rating on Ocwen if proceeds from the sale of GSE servicing assets are used to significantly reduce the firm’s leverage profile.

We could lower the rating on Altisource if additional scrutiny on Ocwen were to alter the relationship between the two companies in a way that we expected would weaken Altisource’s earnings capacity. For instance, we could lower the rating if we expected reduced property management opportunities or fewer fees from Ocwen to cause leverage to approach 3x from its current 1.5x. Our rating on Altisource is already limited by the company’s governance and the potential for conflicts of interest between Ocwen and Altisource. Still, we could lower the rating if the regulatory scrutiny uncovered issues that caused us to take an even more negative view of the company’s governance.

We believe an upgrade on Altisource is unlikely in the foreseeable future.

Highlights from the report:

• Ocwen Financial Corp.’s recent disclosures that its auditor is questioning the company’s ability to operate as a going concern and that commitments on a portion of its non-agency mortgage servicing advance lines may be in jeopardy increases the risks associated with the firm’s credit profile.
• We are placing our ‘B’ issuer credit rating, and 'B+' senior secured and 'CCC+' senior unsecured issue ratings on Ocwen on CreditWatch with negative implications.
• We are also affirming our 'B+' issuer credit rating on Altisource Portfolio Solutions S.A., a firm closely related to Ocwen. The outlook remains negative.
• We will likely lower our rating on Ocwen if the firm’s audit contains a “going concern” explanation that results in a loss of funding commitments, the reassignment of servicing assets, or an inability to generate sufficient cash through operations or asset sales, which could significantly weaken the firm’s credit profile.

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