DBRS Morningstar Places NRZ UR - Positive Following Agreement to Acquire Caliber Home Loans

DBRS, Inc. (DBRS Morningstar) has placed the ratings of New Residential Investment Corp. (NRZ or the Company) and its subsidiaries Under Review with Positive Implications. Included in this rating action is the Company’s Long-Term Issuer Rating of B (high). The ratings action follows the April 14th, 2021 announcement that the Company has entered into a definitive agreement to acquire Caliber Home Loans, Inc (Caliber) for approximately $1.675 billion in cash. The acquisition is expected to close in 3Q21, and is subject to customary closing conditions and various regulatory approvals.

KEY RATING CONSIDERATIONS
The Under Review with Positive Implications reflects DBRS Morningstar’s view that the acquisition presents a compelling fit given the complementary strengths of NRZ and Caliber. Specifically, the acquisition will broaden NRZ’s product diversity strengthening its home purchase mortgage business, expand its mortgage servicing rights (MSRs) portfolio, and strengthen its overall recapture rate across its current servicing portfolio. In addition, NRZ’s already solid franchise will become a top-tier non-bank mortgage originator, as well as non-bank mortgage servicer. Importantly, the enhanced scale, broader product set and increased geographic diversification combined with modest cost synergies is expected to benefit earnings generation as it is expected to be accretive to earnings in 2022, and strengthen the Company’s performance through interest rate cycles.

While DBRS Morningstar recognizes the strategic fit of the acquisition, we also note the substantial integration and operational risks associated with a sizeable acquisition, particularly as it relates to culture and IT. Importantly, integration risk is further elevated, given the shifting housing market from a refinance driven market to one more oriented to home purchase. These concerns are partially mitigated by NRZ’s established track record of successfully integrating prior acquisitions that ultimately have strengthened the franchise and the moderate overlap in origination channels of NRZ and Caliber.

On a pro-forma basis, NRZ will become a leading non-bank mortgage originator with NRZ originating $62 billion of residential mortgages in 2020 and Caliber originating $80 billion. Meanwhile, NRZ also is a leading non-bank mortgage servicer with a combined servicing portfolio of approximately $451 billion (excluding MSRs held by NRZ but serviced by third-parties). The Company will continue to also benefit from its ancillary business lines that provide NRZ access to the whole mortgage life cycle, including title, home appraisal, and property management. We anticipate that NRZ will benefit from Caliber’s strong retail branch presence in capturing more home purchase mortgage business as refinance activity moderates with mortgage rates moving higher as 2021 progresses. Importantly, we expect that NRZ’s current servicing portfolio will benefit from the strong retention rates experienced at Caliber. Indeed, Caliber has generated retention rates of approximately 54% compared to the low-20% range at NRZ. Strengthening retention rates will improve NRZ cash flows, net margins on originations and protect the MSR assets on the balance sheet.

Credit fundamentals are expected to remain acceptable. NRZ is funding the acquisition with cash and liquidity at NRZ, as well as cash at Caliber and a $500 million secondary equity offering. NRZ expects to maintain its sound liquidity position post-closing, forecasting pro-forma March 31, 2021, available liquidity to remain sound at $1.9 billion. Importantly for the ratings, over the past year, NRZ has strengthened its funding by reducing its reliance on mark-to-market facilities as well as diversified funding through the issuance of senior unsecured debt.

The Under Review with Positive Implications status is generally resolved with a rating action in three months. However, DBRS Morningstar expects to conclude the review once the acquisition closes in 3Q21. During its review, DBRS Morningstar will assess the ultimate impact of the acquisition on NRZ’s market position and ability to navigate shifts in the U.S. housing market as well as interest rate cycles. Further, the review will also focus on the acquisition’s impact on the expected earnings generation of the Company, its funding and capitalization, and risk management.

Concurrent with today’s rating action, DBRS Morningstar has discontinued the Long-Term Issuer Ratings of HLSS Holdings, LLC and HLSS MSR-EBO Acquisition LLC, which are wholly-owned subsidiaries of NRZ rated by DBRS Morningstar in conjunction with MSR financing transactions that have been subsequently repaid.

RATING DRIVERS
The closing of the Caliber acquisition on terms consistent with those announced would lead to an upgrade of NRZ’s ratings. If the acquisition of Caliber were to close with terms materially different than those announced, NRZ’s ratings would likely be confirmed at their current rating level. The ratings would be downgraded if the acquisition does not close and NRZ were to generate sustained losses or were to experience a reduction in access to funding.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financials (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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