Fitch downgrades the FOA issuer default rating and then raises it
Credit rating agency Fitch announced this week for which its long-term issuer rating applies Finance of America was downgraded to “limited default” status following the recently published debt exchange plan. The rating was subsequently upgraded to “CCC” upon completion of the exchange agreement.
Fitch explained its rationale for the ratings swing by characterizing FOA’s move as a “distressed debt exchange.” Fitch said the exchange “imposes a material reduction in terms compared to existing contract terms and is made to avoid an otherwise likely eventual default.”
The reduction in terms is “reflected in the extension of the original term of the unsecured debt through conversion into new notes, and the elimination of substantially all restrictive covenants and events of default on the remaining unsecured notes,” the agency said.
Without the swap deal, the company would be hampered by “weak operating performance, limited liquidity and [a] heavily burdened balance sheet,” which would leave it unable to meet the 2025 expiration date of its original agreement. But the exchange agreement, recently amended and claiming a high level of participation, changes the equation, Fitch said.
“The subsequent rating upgrade reflects FOA’s improved financial and operational flexibility following the debt exchange, as refinancing risk has been reduced and near-term liquidity needs are limited given the extension of debt maturities to 2026,” Fitch said. “FOA’s ratings remain supported by its established market position within the reverse mortgage industry and experienced senior management team.”
But FOA, the reverse mortgage industry’s largest lender, still maintains a “weak liquidity profile” that limits its ratings, Fitch added. The agency predicts that FOA’s earnings will be improved by a stronger interest rate environment.
“Fitch believes that FOA’s profitability should benefit from a reduction in interest rates as this is likely to lead to higher mortgage origination volumes and improve the valuation of the company’s remaining investments in its securitizations,” the announcement said.
Additionally, the transition to a “monoline reverse mortgage lender” after closing the forward mortgage arm will also prove beneficial. Fitch said the transition has had a positive impact on FOA’s operating costs.
This is what a spokesperson for the FOA says HousingWire‘s Reverse Mortgage Daily (RMD) said it anticipated these actions from Fitch. FOA will announce its third quarter results on Wednesday.
“The change in Fitch’s rating was expected and, consistent with comparable debt exchanges in the market rated by Fitch, FOA’s debt rating has been upgraded to the level prior to the announcement of the debt exchange support agreement in June 2024,” the said spokesman. .
In June, FOA announced the debt swap agreement that includes new secured debt maturing after the original 2025 maturity date. It amended that agreement in September by exchanging the current unsecured notes (maturing in 2025 with an interest rate of 7.875%) for one of two new bond options. The first offers the same interest rate and matures in 2026 (with a corporate option to extend until 2027), while the second has a 10% interest rate and matures in 2029.
The news from Fitch follows an announcement from Morningstar DBRSwhich confirmed FOA’s previously obtained “good” reverse mortgage lender ranking.
