S&P: Stearns Holdings LLC Downgraded To 'B' On Declining EBITDA, Equity, And Mortgage Servicing Rights; Outlook Stable
At the same time, we lowered our issue rating on Stearns' senior secured notes to 'B' from 'B+'. We are lowering the recovery rating on the notes to '4L' from '3H', indicating our expectation for average recovery (30%-50%, lower half of the range) in the event of a default.
"Stearns' earnings and equity have substantially weakened over the past year because of declining gain-on-sale margins and negative valuation adjustments on mortgage servicing rights assets," said credit analyst Stephen Lynch. The declining margins are partly the result of growth in the lower earning correspondent channel, while the decline in MSRs is largely the result of higher prepayment assumptions because of low interest rates. Our calculation of EBITDA--which excludes fair-value adjustments from modeling assumptions--declined to $41.9 million for the 12 months ending June 2016 from $102.7 million for the 12 months ending June 2015. Over the last 12 months, tangible equity has also declined to $183.5 million from $250 million.
The stable outlook reflects our expectation that Stearns will continue to generate cash earnings that are not affected by mark-to-market valuation adjustments. We also expect Stearns will maintain adequate funding and liquidity.
Over the next year, we could revise the outlook to negative or lower the ratings further if earnings continue to deteriorate. We could also lower the rating if the company were to sell a substantial portion of its MSR assets.
We believe an upgrade is unlikely over the next year. Over time, we could raise the rating if the company were able to sustain leverage below 5.0x debt to EBITDA while also growing its MSR portfolio.