credit rating agency Fitch This week it announced its Long-Term Issuer Default Rating (IDR) of American FinancialThe leading lender in the reverse mortgage industry has downgraded its rating to “C” from “CCC+” after announcing a debt swap plan aimed at hedging maturity risks beyond 2025.
According to an announcement and 8-K, FOA announced late last month that it has entered into an exchange offer agreement with certain noteholders that will create new secured debt that will be deducted from existing unsecured notes in 2025. Expires after the year expiration date. Securities and Exchange Commission (U.S. Securities and Exchange Commission). But Fitch said it believes there are other considerations at play.
Last week, however, credit rating agencies Moody’s FOA was also assessed following the debt agreement and determined that its existing rating remains unchanged. The FOA clarified that the extension period only applies to new notes, and the terms of existing notes remain unchanged.
Reason for change
“Fitch views the exchange transaction as a distressed debt exchange (DDE) given the significant reduction in creditor terms, including the cancellation of covenants on existing unsecured notes and the extension of maturities,” the agency explained in an announcement. “Fitch believes FOA took these actions to avoid a possible eventual default.”
Once the plan is implemented, Fitch “expects to downgrade the IDR rating to ‘RD’ (restricted default) and reassess the rating based on the final capital structure.”
Fitch added that it believes “execution risks associated with consummating the debt exchange are elevated” and that FOA will require additional financing to repay working capital lines, “which currently impedes the collateral intended to be pledged to the newly issued secured notes” in the exchange. a part of.
The agency said a failure to execute trades on the exchange could “significantly harm the company’s liquidity position.”
Fitch also shared four key observations, including that the agreement resulted in a material reduction in terms; that the agreement was initiated to avoid a “possible default” during the original maturity; and that liquidity and funding flexibility are lower compared to peers. However, the agency added that the agreement could improve FOA’s “financial and operational flexibility.”
“Fitch believes the debt exchange offer will reduce refinancing risks and medium-term liquidity needs by extending short-term maturities to 2026,” the agency said. “This should also provide enhanced operating flexibility as the company is expected to benefit from eventual rate cuts as mortgage originations increase.”
This is the second time Fitch has downgraded the FOA rating last year. In October 2023, it downgraded its rating to “CCC+” from “B-“.
Company response
After this story was first published, house lineReverse Mortgage Daily (RMD) received a statement from FOA Treasurer Matt Engel.
“American Financial looks forward to the successful completion of the exchange offer and is optimistic that the post-exchange reassessment will result in an improvement in the ratings,” Engel said. “We thank our noteholders for their continued support and look forward to continued collaboration in the future.”
RMD also spoke to an executive at FOA, who explained that the company still views the announced debt deal as an overall benefit. Fitch’s rating does not have an impact on the company’s operations or its current progress, especially given that another major credit rating agency has not similarly chosen to downgrade its rating.
The executive explained that FOA continues to see the potential benefits of the program to its capital structure, liquidity, growth and profitability. The executive said Moody’s does its assessment differently, taking into account potential future earnings, while Fitch conducts those processes separately when making its own decisions.
In addition, the executive said that the Fitch rating was not surprising to FOA staff and therefore had no impact on the ongoing strategic operations.
On the content of the Fitch ratings themselves, the executive said the agency’s view that a reduction in covenant material was a factor in the downgrade applies only to existing unsecured notes and will be added when new secured notes are in place. Comes with “stricter” terms and contracts.
Additionally, the FOA cited two examples where Fitch initially downgraded a rating and later chose to raise it to its previous level: Voyager Aviation Holdings Limited and Aviation PLCrespectively.
recent history
The company reached an agreement with certain noteholders to “exchange all outstanding 2025 unsecured notes” into two new tranches of secured notes. The first is senior secured first lien notes due 2026 in an aggregate principal amount of up to $200 million (with the option to extend to 2027 if the Company chooses to do so), while the second in an aggregate principal amount of up to $150 million is due in 2029 The principal amount of exchangeable senior first lien notes due in 2017.
The company explained in the announcement that it is optimistic about the final outcome of this arrangement.
“This announcement marks another important step in improving the company’s capital structure and achieving sustainable growth and profitability,” the company said.
In early June, FOA announced that it had received shareholder approval for a 10-for-1 reverse stock split based on the recommendation of its board of directors, a move aimed at boosting the company’s share price, another source of recent pressure.
“Our board of directors has determined that it is prudent and in the best interest of the company and our stockholders to reduce the number of outstanding shares of our Class A common stock, with the primary purpose of increasing the trading price per share of our Class A common stock. In order to satisfy the requirements of the New York Stock Exchange price standards for continued listing on the exchange,” the company said in a corresponding 8-K filing with the SEC.
According to the SEC filing, FOA hopes the move will have a significant impact. In December 2023, the company received a notification from the IRS New York Stock Exchange (NYSE) said it did not meet the exchange’s continued listing standards, which require shares to remain above $1 in a given 30-day trading period. The FOA said it would return to compliance thereafter, but the NYSE issued an additional notice in February 2024.
Last week, the New York Stock Exchange took steps to begin delisting FOA’s warrants under the ticker symbol “FOA.WS,” but Class A common stock under the ticker symbol “FOA” will continue to trade.
Home Equity Conversion Mortgage (HECM) Endorsement Data Reverse Market Insights (RMI), FOA is the largest reverse mortgage lender in the nation. In the 12 months to June 2024, the agency received 7,566 endorsements. Although total HECM volume fell by 14.4% across the industry, FOA was one of only four lenders in the top 10 to post growth for the month.
Editor’s note: This article has been updated with the views of FOA’s chief financial officer and another company executive, and details Moody’s decision to maintain the agency’s existing rating on FOA.
