Provident Funding Associates L.P. Downgraded To 'CCC+' As Covenant Cushions Deteriorate; Outlook Negative

  • Provident's mortgage servicing rights portfolio was marked down by $47.5 million in fourth-quarter 2019, resulting in a complete deterioration of its tangible net worth covenant cushion on the company's origination warehouse facilities as of year-end 2019.
  • We believe the recent and rapid fallout in market conditions from COVID-19 has offset recent capital actions taken by the company, and that Provident will be dependent upon favorable business and economic conditions to meet its financial obligations.
  • We are lowering our long-term issuer credit and issue ratings on Provident Funding Associates L.P. to 'CCC+' from 'B-'.
  • The negative outlook reflects the potential that the company's operating performance could continue to decline amid this difficult economic and operating environment.
NEW YORK (S&P Global Ratings) March 24, 2020--S&P Global Ratings said today it downgraded Provident Funding Associates L.P. to 'CCC+' from 'B-'. The outlook is negative. We also lowered our ratings on the company's senior unsecured notes due 2025 to 'CCC+' from 'B-'. We are revising the recovery rating on the notes to '4', indicating our expectation for average recovery (35%), from '3'(50%).
The rating action follows our view that Provident's recent capital actions to improve net worth may prove to be ineffective following a marketwide decline in economic conditions, and that the company's proximity to covenants leaves Provident dependent on favorable economic conditions to meet its financial obligations.
The negative outlook reflects the potential that the company's operating performance could continue to decline amid this difficult economic and operating environment. Our base-case expectation is that over the next 12 months, Provident's increased production revenues are largely offset by increased delinquencies and MSR impairments while the company continues to operate with minimal covenant cushions.
We could downgrade the company if we do not expect it will remain in compliance with its covenants over the next 12 months, or if the company's operating performance continues to decline.
We could upgrade the company if it improves its covenant cushions or the operating environment stabilizes, with fewer-than-expected long-term delinquencies and MSR impairments.
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