NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) assigns a BBB- Issuer rating and a BBB- Senior Unsecured Debt rating to United Shore Financial Services, LLC (“United Shore” or “the company”), based in Pontiac, MI. The Outlook for the ratings is Stable.
United Shore’s ratings reflect the company’s very strong, multiyear operating performance history and low adjusted leverage, which, importantly, considers the largely self-liquidating and short-term nature of its principal asset (conforming and government residential mortgages), and its related funding (warehouse lines). Accordingly, exclusive of these dominant balance sheet footings, United Shore’s remaining assets and liabilities are relatively modest compared to its equity base. This includes a comparatively low amount of MSRs, which have not historically represented much more than United Shore’s equity (in fact, typically they have been less than equity), nor are they expected to over the near-term, despite reduced industry MSR bulk purchase demand.
In this regard, as an origination-focused operation in recent years, United Shore has systematically sold its MSRs after some seasoning and accumulation. But, following the onset of COVID, successive Fed rate cuts, slowly lower mortgage rates and increasing refinance activity, with an overlay of unprecedented economic uncertainty and its impact on potential MSR buyers, the secondary market for the asset has been uneven and weak. Accordingly, United Shore has been retaining MSRs, and given the company’s substantial origination capacity, the asset has grown materially. With uncertain prospects for the MSR market over the near-term, at a minimum, United Shore’s creditors and counterparties should expect to see this asset grow reasonably rapidly, but again, not likely to be in excess of the company’s equity over the foreseeable future, as long as production margins remain reasonable.
While, theoretically, an origination-heavy strategy such as United’s would expose a company to interest rate related cyclicality associated with the business more so than for firms with more balanced origination and servicing operations, United Shore’s operational intensity around its focused business model has resulted in strong returns through recent periods of interest rate volatility. Additionally, while currently the dominant market participant among wholesale originators, the company’s ultimate future success is reliant both on its continued operational excellence and differentiation, as well as continued market share development for the wholesale channel in aggregate. Should this latter industry trend not develop as United Shore anticipates, competitive returns could become more challenging, as well as variable, for the company.
Finally, while retaining MSRs is not necessarily United’s preferred strategy, despite capable and cost effective subservicers Cenlar and Mr. Cooper, some likelihood that the company will be accumulating the asset over the near-term changes the company’s prospective balance sheet profile to some degree, but not in an overly risky way in our view, this despite no current plans to begin hedging the volatile asset with financial instruments. With respect to the latter, United’s very large, highly efficient (and profitable) origination business, serves as a distinct ‘operating’ hedge to its growing, but not outsized, projected MSR asset.
The ratings are based on KBRA’s Global Finance Company Rating Methodology, published on November 28, 2017.
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.