Ocwen provides disappointing company update

Today, Ocwen provided a company update for its shareholders.  While the stock is up ~14% on the news, I am disappointed with how the current CEO is running the company.

  1. The update doesn’t seem to mention anything about buying back debt, which currently has fairly high yields (12-13%).  To me, this seems like an obvious move to make.  Where else might Ocwen get such high returns on capital with little risk?
  2. The company has halted its share repurchase program.
  3. The company intends “hire two financial advisors with significant experience in asset backed financing, capital markets, corporate and mortgage finance”.  I’m not a fan of companies that piss away money on overpriced labour.  Ocwen previously gave its CFO a raise in Dec 2014 but apparently he’s not good enough at his job that Ocwen now needs to hire outside talent.

So far, it seems that the new CEO is bad at capital allocation and bad at maintaining Ocwen’s status as a low-cost operator.

EDIT (2/6/2015): The update also indicated that the company may not be in full compliance with the CFPB metrics:

On the National Mortgage Settlement front, although we do not have the final results of the retesting of certain 2014 metrics by the National Monitor overseeing compliance, we do expect that, similar to many other Servicers in 2014, we will have metrics that will require remediation through corrective action plans as defined by the settlement.

8 thoughts on “Ocwen provides disappointing company update

  1. they are paying down the term loan, that takes priority over buying back unsecured debt. Term loan holders have much more leverage with the company than bond holders, I imagine that is what drove the decision.

  2. Disagree with part of what you’ve written here. The company does explicitly state that it will probably look to redeem some of the debt outstanding – just not the bonds.

    “Proceeds from the sales of MSRs should be substantial and could be used to fund existing assets, invest in new assets or repay portions of our Senior Secured Term loan.”

    At ~7% yield that’s not a terrible idea either, but not as good as repurchasing the more subordinated debt.

    I imagine that their decision not to buy back bonds is due to restrictions in the term loan credit agreement that dictate reinvestment and leverage. Any payments redeeming bonds would need to pass restricted junior payments criteria – proceeds from MSR’s are probably going to be counted as asset sales and not directly eligible for bond redemption. Simultaneously, smaller UPB -> lower EBITDA and higher LTV levels which necessitates a paydown of term debt to remain within covenant levels.

    By the way, I think that the same argument holds true for ASPS. The term loan for ASPS is quoted around ~70.If your goal is to increase the value of the total enterprise and operate with a prudent capital structure, there would be no better way to do that than to provide some price support for those loans.

      • I think that they probably would be able to buy back either, they probably have some allowance through the RP basket. However, as you’ve noted they have opted to do neither.

        The term loan repayment is likely to be mandatory. Share or bond repurchases would have to come from free cash flow because MSR proceeds must either be reinvested in the business over 18 months, or used to repay the secured debt.

        They seem focused on both their liquidity and reinvestment. Could it be that they need additional liquidity, or have a larger than expected reinvestment plan? I don’t know the answer.

      • I’m not sure where they can reinvest unless they want to make acquisitions. They can’t board subprime MSRs due to the NY DFS and California DBO. They’re selling agency MSRs. They could ramp up their originations, but I doubt that’s sensible.

        As far as liquidity goes, they say that they have strong liquidity. MSRs throw off cash as they run off so their assets naturally de-lever / sell themselves down. I don’t get it.

        The clean up calls will take up a lot of capital. However, they don’t have to do them. They should look at the returns on clean-up calls versus buying back debt.

    • That would hurt them. Hubzu and default-related services will do poorly since those lines are heavily dependent on Ocwen. Without the PSA-gaming I don’t think 40% margins are realistic and I think Hubzu would have very few customers.

      ASPS has some misc. stuff like Lenders One which is growing. There is a debt collection business that is so-so.

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