Fitch reviews Rocket Mortgage and Mr. Cooper ratings after acquisition news

Investing.com -- Fitch Ratings has put Rocket Mortgage, LLC’s ’BBB-’ Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating under negative watch. Mr. Cooper Group, Inc. and its subsidiaries, Nationstar Mortgage Holdings Inc. and Nationstar Mortgage LLC, with their ’BB’ Long-Term IDRs and senior unsecured debt rating of Nationstar Mortgage Holdings Inc., have been placed under positive watch.

These actions follow the announcement by Rocket Companies, Inc., parent of Rocket Mortgage, of its plans to acquire Mr. Cooper and its subsidiaries through an all-stock transaction. When the acquisition is finalized, Fitch anticipates aligning Rocket Mortgage’s and Mr. Cooper’s ratings with Rocket’s consolidated credit profile. This may lead to a one-notch downgrade for Rocket Mortgage and a one- to two-notch upgrade for Mr. Cooper.

Fitch plans to resolve the Rating Watches once the acquisition is completed, which is expected around the end of 2025, more than six months from the date of this rating action commentary.

Rocket Mortgage’s possible downgrade is mainly due to the expected increase in the parent company’s corporate leverage following the acquisitions of Mr. Cooper and Redfin (NASDAQ:RDFN). Corporate leverage is projected to rise to 1.4x, up from 0.6x at the end of 2024.

On the other hand, Fitch expects to upgrade Mr. Cooper by one or two notches after the acquisition, reflecting its stronger business profile and lower leverage prior to the acquisition.

Rocket’s consolidated credit profile will reflect its strong market position and leading mortgage franchise in the U.S. The company will combine its significant scale in mortgage origination with Mr. Cooper’s leading scale in mortgage servicing.

However, the ratings are limited by the highly cyclical nature of the mortgage origination business, anticipated increase in corporate leverage due to the transaction, and potential servicing advance needs and regulatory scrutiny related to Ginnie Mae (GNMA) loans.

Rocket’s pre-tax return on average assets (ROAA) was 3.4% in fiscal 2024, and Mr. Cooper’s profitability has been even more stable, with ROAA of 5.8% in fiscal 2024 and averaging 8.5% from 2021-2024.

After the acquisition, Rocket’s corporate leverage is expected to exceed Fitch’s prior downgrade trigger for Rocket Mortgage of 1.0x. Total (EPA:TTEF) leverage, including funding facilities, will also be higher on a pro forma basis, estimated to be 2.3x at the end of 2024, compared to 1.4x for Rocket Mortgage before the acquisitions.

Fitch considers both companies’ liquidity profiles strong. Pro forma, Rocket’s available liquidity would include $1.8 billion in cash, $1.6 billion in unencumbered self-funded mortgage loans, $1.15 billion in borrowing capacity on Rocket Mortgage’s committed revolving credit facility, and $4.6 billion in capacity on combined MSR secured lines of credit.

The senior unsecured debt ratings of Rocket Mortgage and Mr. Cooper and its subsidiaries are equalized with their Long-Term IDRs given significant unencumbered assets are available to senior noteholders, partially offset by Rocket’s ability to incur secured debt in a priority position, which suggests average recovery prospects in a stressed scenario.

Following the acquisition, the ratings of Rocket Mortgage LLC, Mr. Cooper Group, Inc., and its subsidiaries Nationstar Mortgage Holdings Inc. and Nationstar Mortgage LLC are expected to be equalized with those of the parent, Rocket, given they will be wholly owned subsidiaries and obligations will benefit from cross-guarantees.

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