Based in George Town, Grand Cayman, Home Loan Servicing Solutions, Ltd. (HLSS) scheduled a $200 million IPO with a market capitalization of $210 million at a price range mid-point of $15, for Wednesday, February 29, 2012. The offering priced at $14 on Tuesday evening.
HLSS is one of six IPOs scheduled for this week (see our IPO calendar) including Yelp!.
HLSS wants to sell 95% of the company in an IPO to acquire rights to service mortgages, primarily subprime and Alt-A mortgage servicing rights and associated servicing advances. HLSS also plans a $10 million from a concurrent private place with William C. Erbey, founder and Chairman of Board of Directors
HLSS will have no mortgage loss risk because they will only service the mortgages, using someone else's mortgage servicing platform.
In the beginning HLSS plans on paying a dividend at an annual rate of 10 cents per month, an annualized rate of $1.20 per year or 8% annualized rate. In the initial stages, however, the dividend would be paid from IPO proceeds. It is likely, therefore, that institutional investors won't be interested, which has longer-term negative implications for the stock.
HLSS is a spin-off of Ocwen Financial Corporation (OCN), which through its subsidiaries, is a provider of residential and commercial mortgage loan servicing, special servicing and asset management services.
OCN operates in three segments: Servicing, Loans and Residuals, and Asset Management Vehicles. These three segments consists of its Ocwen Asset Management line of business that, in addition to its core residential servicing business, includes OCN's equity investments in AMVs and its remaining investments in subprime loans and residual securities.
On September 1, 2010, OCN, through OLS, acquired the United States non-prime mortgage servicing business of Barclays Bank PLC, HomEq Servicing, including the mortgage servicing rights and associated servicer advances of the business, as well as the servicing platforms based in Sacramento, California and Raleigh, North Carolina (the HomEq Acquisition). In September 2011, Goldman Sachs Group, Inc. sold Litton Loan Servicing to OCN.
In the last year OCN stock rose 53% to close February 27, 2012 at $16.21.
On the surface, HLSS has several risks that may be important:
- "We may not be able to obtain the Required Third Party Consents necessary to transfer legal ownership of the Initial Mortgage Servicing Rights to us."
- "Given competition in our industry for the acquisition of mortgage servicing rights and the continued decrease in new securitizations, primarily as a result of the lack of new originations of subprime and Alt-A mortgage loans, a sufficient number of subprime and Alt-A mortgage servicing rights may not be available at attractive prices or at all."
The only positive we can see is that the parent OCM sells for 1.5 times book and HLSS expects to IPO at 1.1 times book. Apparently OCM believes an HLSS IPO is the least expensive way for it to raise cash and shed some debt, in the current economic environment.
Source: HLSS S-1
Also, HLSS is a "newly incorporated Cayman Islands exempted company" which begs the question 'what are they trying to hide?"
We'd rather see a solid dividend paying company based in the U.S. instead of the Cayman Islands, which operates under a different set of laws. We don't see any reason to be particularly excited about HLSS at this time.
MORE ON RISKS
"At this time, some but not all of the rating agencies have indicated that they would issue a statement that the transfer of legal ownership of the Initial Mortgage Servicing Rights to us would not result in a downgrade to the rating of the related mortgage-backed securities, and we have not received all of the other Required Third Party Consents."
HLSS believes it could be at least six months to one year before the rating agency will consider issuing a rating confirmation.
Until HLSS obtains the Required Third Party Consents necessary to transfer legal ownership of an Initial Mortgage Servicing Right, Ocwen Loan Servicing will retain legal ownership of such Initial Mortgage Servicing Right.
Although HLSS will pursue the Required Third Party Consents together with Ocwen Loan Servicing, HLSS may not be able to obtain all the Required Third Party Consents in a timely manner or at all.
S-1, pages 16 & 17
NEGATIVE INDUSTRY TRENDS
Given competition in the industry for the acquisition of mortgage servicing rights and the continued decrease in new securitizations, primarily as a result of the lack of new originations of subprime and Alt-A mortgage loans, a sufficient number of subprime and Alt-A mortgage servicing rights may not be available at attractive prices or at all, according to HLSS.
USE OF PROCEEDS
HLSS expects to net $182 million from its IPO.
HLSS will purchase the Rights to MSRs, associated servicing advances and related assets from Ocwen Loan Servicing.
HLSS will also assume Ocwen Loan Servicing's obligations under the existing advance financing facility.
The estimated purchase price for these assets as of December 31, 2011 is $181 million (net of assumed match funded liabilities of $371 million and subject to certain closing adjustments). The outstanding amount owed on the advance financing facility was $383 million as of December 31, 2011.
Additional disclosure: Home Loan Servicing (HLSS) is an IPO that expects to price Tuesday evening. HLSS is the focus ticker.