New York, May 26, 2020 -- Moody's Investors Service, ("Moody's") has
confirmed Provident Funding Associates, L.P.'s
(Provident) corporate family rating at B1 and its long-term senior
unsecured rating at B2, concluding the review for downgrade initiated
on 16 March 2020. The outlook was changed to negative from ratings
under review.
The ratings confirmation reflects Moody's assessment that Provident
has been able to mitigate the negative impact on liquidity and capital
from lower interest rates to date, which has reduced the value of
Provident's mortgage servicing rights (MSRs), resulting in a reduction
in liquidity due to margin calls from providers of the company's lines
of credit.
The rapid and widening spread of the coronavirus outbreak and falling
oil prices have led to a severe and extensive credit shock across many
sectors, regions and markets. Given Moody's expectation for
deteriorating profitability, capital and liquidity, the mortgage
servicing sector is among those most affected by this credit shock.
Moody's regards the coronavirus outbreak as a social risk under its environmental,
social and governance (ESG) framework, given the substantial implications
for public health and safety.
RATINGS RATIONALE
The confirmation of Provident's ratings reflects Moody's assessment
of the company's ability to manage its near-term liquidity
needs to-date, and largely maintain its capital level in
the face of the coronavirus pandemic unprecedented disruption.
While the company's capital and medium-term liquidity continue
to be pressured in this challenging environment, they are partly
offset by Provident's improving profitability. As Moody's
expected, lower interest rates led to an increase in refinancing
volumes in the first quarter, which combined with elevated gain
on sale margins, resulted in a positive impact on the company's
profitability. The company reported net income of approximately
$8.4 million in the first quarter, despite a $45
million MSR impairment, resulting in a net income/average managed
assets ratio of 1.6%, a significant improvement over
-3.6% for 2019.
The company's capital level, as measured by tangible common
equity/tangible managed assets (TCE/TMA), which excludes preferred
limited partnership interests, declined modestly to 8.3%
as of 31 March 2020 from 8.7% as of year-end 2019.
When including these interests, TCE/TMA at the end of the quarter
increased modestly to 10.9% from 10.6% as
of year-end 2019, driven in large part by the $20
million investment, a capital injection, in March from the
holding company of Colorado Federal Savings Bank (CFSB).
While Moody's expects non-bank mortgage companies such as
Provident to continue to experience liquidity pressure in this challenging
environment, the rating agency recognizes that Provident has taken
steps to boost its liquidity, including the investment, a
capital injection, from CFSB, extending the maturity of four
of its warehouse and MSR facilities, and increasing its cash balance
to approximately $26.0 million as of 31 March 2020 from
$22.8 million as of year-end 2019.
The assignment of the negative outlook to Provident reflects Moody's
view that challenging operating conditions will continue to pressure the
company's liquidity and capitalization from potential further declines
in the fair value of mortgage servicing rights and the uncertain level
of servicing advance obligations resulting from increasing delinquencies.
Servicers are obligated to make advance principal and interest payments
as well as payments for property taxes, homeowners insurance and
default proceedings, when the borrower fails to do.
The B1 corporate family rating currently assigned to Provident's standalone
credit profile reflects its weak but improving profitability and,
modest liquidity and capital levels, but also incorporates its conservative
credit risk appetite, which lessens asset quality performance risks.
Since before the 2008 credit crisis, Provident has maintained its
focus on very-high quality prime loans, solid capital,
and adequate liquidity, which contributed to a long and stable operating
history. With interest rates continuing to remain low, Moody's
expects the company's profitability to continue to remain solid due to
high origination volumes and elevated gain on sale margins.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, and asset price declines are creating a
severe and extensive credit shock across many sectors, regions and
markets. The non-bank mortgage sector has been one of the
sectors affected by the shock. Moody's regards the coronavirus
outbreak as a social risk under its environmental, social and governance
(ESG) framework, given the substantial implications for public health
and safety. Today's actions reflect the impact on Provident of
the breadth and severity of the shock, and the deterioration in
credit quality it has triggered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook indicates that a ratings upgrade is unlikely over
the next 12-18 months. Provident's outlook could return
to stable if Moody's were to assess that the company was able to
preserve, if not improve, its liquidity and capital position
through challenging operating conditions while meeting the projected increase
in future servicing advance obligations.
The ratings could be downgraded if Provident's liquidity, funding
or asset quality deteriorate. The ratings could also be downgraded
if company's capital level (as measured TCE/TMA) remains below 10%,
if Moody's determines that Provident was unable to maintain modest profitability
measured as pre-tax income to assets of at least 0.5%,
or if the company materially increases its reliance on recourse,
secured funding.
The principal methodology used in these ratings was Finance Companies
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gene Berman
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
