S&P Places PHH Corp. (PHH) on CreditWatch Neg.; Cites Recent Fleet Management Deal

Standard & Poor's Ratings Services said today it placed its ratings on PHH Corp. (NYSE: PHH), including the 'BB-' long-term issuer credit and senior unsecured credit ratings, on CreditWatch with negative implications.

The CreditWatch listing follows management's June 2 announcement that PHH had entered into a definitive agreement to sell its fleet management services business, PHH Arval, to Element Financial Corp. (Element) for $1.4 billion in a cash-for-stock transaction that will be treated as an asset sale for tax purposes.

Management expects that PHH will receive between $750 million and $800 million in after-tax proceeds from the sale. "Although we believe the proceeds will bolster PHH's financial position in the near term, we also believe that without the steady income from its fleet leasing business, the mortgage business will be more vulnerable to mortgage market volatility and will encounter greater difficulty in funding its volatile mortgage servicing rights assets," said Standard & Poor's credit analyst Jeffrey Zaun. Furthermore, we believe the company could distribute a significant portion of the sale
proceeds to shareholders. We will continue to follow management's use of the sale proceeds.

We believe earnings from a stand-alone mortgage company could support the financing of PHH's mortgage origination and servicing businesses, even following the sale of the firm's fleet leasing business. We could, however, downgrade PHH to 'B+' because the business would lack the stable earnings provided by its fleet leasing business.

Over the next few weeks, we will evaluate the implications of the transaction, including management's plans for using the sale proceeds and its ability to establish a stable, laddered long-term funding platform for its mortgage servicing rights. We could resolve the CreditWatch listing and lower the rating to 'B+' when management completes the announced transaction. Alternatively, we could affirm the ratings if we believe management is able to stabilize earnings and maintain a laddered debt maturity profile.

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