Fitch downgrades FOA rating after debt swap plan

Fitch downgrades FOA rating after debt swap plan

Credit rating agency Fitch It was announced This week, the long-term issuer default rating (IDR) America FinanceThe leading lender in the reverse mortgage sector was downgraded to “C” from “CCC+” after announcing a debt modification plan that eliminates maturity risk after 2025.

FOA announced late last month that it had entered into an exchange offer agreement with certain noteholders that will result in new, secured debt maturing after the original 2025 maturity date of the existing unsecured notes, according to that announcement and an 8-K filing Securities and Exchange Commission (SEC) However, Fitch said it believes there are other issues at play.

But last week the credit rating agency Moody’s He also assessed FOA after the debt agreement and its current rating would remain unchangedThe FOA said the maturity extension only applies to new notes and the maturity of existing notes will remain unchanged.

Reasons for the change

“Fitch views the exchange transaction as a distressed debt exchange (DDE) given the significant reduction in creditors’ exposure, namely the release of covenants on the existing unsecured notes and the maturity extension,” the agency explained in a statement. “Fitch believes FOA took these actions to avert an impending default that would otherwise have been imminent.”

Once the plan is implemented, Fitch “expects to downgrade the IDRs to ‘RD’ (Restricted Default) and reassess the rating based on the eventual capital structure.”

Fitch added that it believes there is “a high level of execution risk associated with the completion of the debt exchange” and that the FOA requires additional financing to repay working capital lines “that currently encumber the collateral intended to be pledged to the new secured notes offered as part of the exchange.”

The agency said that not trading on that exchange “could significantly impair the company’s liquidity profile.”

Fitch also shared four key observations, including that the deal results in a significant reduction in terms; that the deal was initiated to avoid a “potential default” under the original maturity schedule; and that it has lower levels of liquidity and funding flexibility compared to peers. However, the agency added that the deal would likely improve FOA’s “financial and operational flexibility.”

“Fitch believes the debt swap proposal will reduce refinancing risk and medium-term liquidity needs by extending near-term maturities to 2026,” the agency said. “This should also provide enhanced operational flexibility as the company is expected to benefit from eventual rate cuts through improvements in mortgage origination volume.”

This is the second time in a year that Fitch has downgraded FOA. It downgraded its rating from ‘B-‘ to ‘CCC+’ in October 2023.

Company response

After this story was first published, HousingTel‘s Reverse Mortgage Journal (RMD) has obtained a statement from FOA’s CFO, Matt Engel.

“Finance of America looks forward to the successful completion of the exchange proposal and is optimistic that the reassessment following the exchange will result in a better rating,” Engel said. “We appreciate the ongoing support of our noteholders and look forward to continuing to work together in the future.”

RMD also spoke with a FOA executive who explained that the company still views the announced debt deal as an overall benefit. Fitch’s rating will not impact the company’s operations or current trajectory, especially considering no other major credit rating agency has chosen to downgrade.

The manager explained that FOA continues to see potential benefits to the plan’s capital structure, liquidity and growth and profitability. According to the manager, Moody’s approaches its assessments differently by taking into account potential future benefits, while Fitch performs these processes separately when making its own decisions.

The manager also said that the Fitch rating was not a surprise to those working at FOA, and therefore, it did not have an impact on the strategic operations currently carried out by the company.

In terms of the content of the Fitch rating, the manager said the agency’s point about a significant reduction in covenants as a factor leading to a downgrade only applies to existing unsecured bonds, and that new, secured bonds will come with “tighter” terms and covenants when they come into effect.

FOA also provided two examples of Fitch initially downgrading a rating and then deciding to upgrade it to its previous level: Voyager Aviation Holdings, LLC And Aviation PLCrespectively.

Recent history

The company and certain noteholders have entered into an agreement to “exchange any and all of the outstanding unsecured notes due 2025 into two new, secured tranches: the first for up to $200 million in aggregate principal amount of senior secured senior notes due 2026 (with an option to extend through 2027 if the company elects) and the second for up to $150 million in aggregate principal amount of convertible senior senior secured notes due 2029.”

The company said in its announcement that it was optimistic about the final results of the deal.

“This announcement constitutes another important step towards improving the company’s capital structure and achieving sustainable growth and profitability,” the company said in a statement.

FOA announced in early June that it had received approval from shareholders to conduct a 1-for-10 reverse stock split, at the recommendation of its board of directors, aimed at boosting the company’s stock price and another source of recent pressure.

“Our Board of Directors has determined that it is in the best interests of the company and our stockholders and advisable to reduce the number of shares of our Class A Common Stock in order to increase the trading price per share of our Class A Common Stock in order to meet the price criteria established by the NYSE for continued listing on such exchange,” the company said in its related 8-K filing with the SEC.

FOA expects the move to make a significant difference, according to an SEC filing. The company said it will New York Stock Exchange (NYSE) reported that the exchange was out of compliance with its continuous listing standard, which requires a share price to remain above $1 for a specified 30-day trading period. The FOA said it has since returned to compliance, but the NYSE issued an additional notice in February 2024.

Last week, the NYSE took steps to delist options from FOA, which trades under the ticker symbol “FOA.WS,” but Class A common shares, which trade under the ticker symbol “FOA,” will continue to trade.

According to approval data compiled by Home Equity Conversion Mortgage (HECM) Reverse Market Insight (RMI), FOA is the nation’s largest reverse mortgage lender. It reported 7,566 approvals in the 12-month period ending June 2024. FOA was one of only four lenders in the top 10 to report gains for the month, despite a 14.4% decrease in total HECM volume across the industry.

Editor’s Note: This story has been updated with the perspective of both the CFO at FOA and a separate corporate executive, as well as details regarding Moody’s decision to maintain FOA’s existing rating on that entity.