OREANDA-NEWS. S&P Global Ratings today said it lowered its long-term issuer credit rating on Walter Investment Management Corp. to 'B' from 'B+'. The outlook is negative. At the same time, we also lowered the rating on the company's term loan to 'B+' from 'BB-' and the rating on its senior unsecured notes to 'CCC+' from 'B-'. The recovery rating on the term loan remains at '2', which assumes substantial recovery (70%-90%; lower half of the range). The recovery rating on the senior unsecured notes remains at '6', which assumes negligible recovery (0%-10%).

"Our rating actions on Walter reflect our expectation that the company will incur meaningful impairments to its MSR portfolio when the company reports for the second quarter," said S&P Global Ratings credit analyst Stephen Lynch. The value of MSRs is correlated to the 30-year mortgage rate because prepayment on mortgages are expected to increase when the 30-year mortgage rate declines. During the first quarter of 2016, Walter recognized an impairment charge of $258.5 million on its MSRs when the 30-year mortgage rate declined to 3.7% from 4.0% at the end of 2015. We expect further write-downs because the 30-year mortgage rate slid to 3.5% at the end of the second quarter.

The impairments to MSRs have hurt the company's tangible equity. Walter ended the first quarter with just $179 million of tangible equity, down from $374 million a year earlier. We expect debt to tangible equity leverage will continue to rise when the company reports second-quarter results.

The declining asset values also complicate the company's goal of lowering leverage to 3.4x-3.6x. Walter's plan is to sell MSR assets to Walter Capital Opportunity Corp. (WCO) and use the proceeds to repurchase debt and lower leverage. However, the company has not reported any meaningful sales to the WCO to date, and continued markdowns on MSRs will reduce proceeds received in any sale transaction.

"The negative outlook on Walter reflects our view that the company may have trouble lowering its debt to EBITDA to below 5.0x and that debt to tangible equity will remain substantially elevated," said Mr. Lynch.

We could lower the rating over the next six to 12 months if we believe debt to EBITDA will remain above 5.0x.

We could revise the outlook to stable if the company is able to lower debt to EBITDA sustainably below 4.0x, or if the company were able to maintain debt to EBITDA below 4.5x with debt to tangible equity below 6.0x. Over time, we could upgrade the company if both debt to EBITDA and debt to tangible equity were below 4.5x.