PHH Corp., the largest non-bank mortgage lender, may not be in the throes of an actual liquidity crisis. But its sudden leadership reshuffle did nothing to quiet investor fears about one.
The Mount Laurel, N.J., company on Wednesday
That botched debt deal — in which PHH yanked a $250 million offering of senior unsecured notes it had aimed to price at 9.5%, and then raised less than half that much money at 9.25% through an add-on to an older bond issue — and the resulting downgrade raised investor concerns about the company's ability to raise funds in the future. But analysts were taken aback by PHH's executive-level response this week.
"It was sudden. We weren't anticipating that this would happen so quickly," said Bose George, an analyst with Keefe, Bruyette & Woods.
PHH's decision not to issue bonds at a higher rate would have had a slight impact on earnings "but the aftermath would not have happened," George said, referring to the downgrade. "In retrospect, they should have taken that, because now it's unclear what their funding costs are now compared with what they could have got in early December."
PHH had been struggling financially for some time, posting losses for the past two consecutive quarters due to write-downs on mortgage servicing rights. It reported a net loss of $148 million in the third quarter of 2011, due to a $361 million MSR write-down.
The company's stock price, which fell more than 53% in 2011, fell 2 cents to close at $11.37 per share Wednesday.
PHH also ran into trouble last month because it was issuing debt at the same time that derivatives broker MF Global was on the verge of bankruptcy. The combination of PHH's sliding stock price and earnings volatility caused its cost of capital to go up, according to FBR Capital Markets analyst Paul Miller.
"Some of it was self-inflicted and some of it was just bad timing," Miller said in an interview, speculating that Selitto was ousted "due to the failed debt deal and stock price and the strategic mistake of not hedging mortgage servicing rights."
PHH chairman Jim Egan acknowledged some of the problems facing his company
"The prolonged uncertainty and volatility in the global economy and capital markets, along with a U.S. housing market that remains challenging, requires an emphasis on liquidity and cash generation over growth in the near term," Egan said.
A PHH spokeswoman declined to comment further. The company would not make Messina or Selitto available for interviews.
Selitto came to PHH in August 2009 during an earlier period of turmoil at the top of the company. Earlier that year, dissident shareholders elected former Freddie Mac CEO Gregory J. Parseghian and another candidate to the company's board over A.B. Krongard, at the time PHH's chairman, and Terence W. Edwards, its president and CEO.
Egan assumed the chairman's role after that election. In October 2009, PHH hired Selitto, whose background included founding home equity lender DeepGreen Financial and mortgage insurer Amerin.
His replacement is a longtime General Electric Co. executive. Messina, 50, joined PHH as chief operating officer in July, after 17 years at GE, most recently as chief executive of the company's chemical and monitoring solutions unit. He had previously served as CEO of GE's mortgage services business.
As Messina takes over PHH, one of his first tasks will be quieting investor fears about the company's recent downgrade.
S&P credit analyst Rian Pressman downgraded PHH's senior debt to "BB-," on Dec. 19 and put the company on credit watch with negative implications. The ratings agency raised concerns that PHH would be unable to repay $423 million in unsecured notes due March 2013 exclusively from cash flow.
PHH is the sixth-largest mortgage originator in the U.S, and some analysts have proposed that the company slow its mortgage production and leasing activity. Miller has gone further, suggesting in a research note last month that PHH sell its fleet management business outright to generate cash for its mortgage unit.
PHH said last month that it currently has $9.8 billion in mortgage and fleet financing arrangements to support its ongoing business operations. It had $510 million of revolving credit and $322 million in unrestricted cash and cash equivalents as of Dec. 21 to retire its unsecured debt maturing in 2012 and also fund its ongoing operations.
