OREANDA-NEWS. S&P Global Ratings today said it affirmed its issuer credit rating on Walker & Dunlop Inc. at 'BB-'. The outlook remains stable.

At the same time, we raised the debt rating on the senior secured term loan by one notch to 'BB' and revised upward the recovery expectations to '2', indicating our expectation for "substantial" recovery (70%-90%, higher end of the range) in the case of default, from '3' (higher end of the range).

"The ratings reflect Walker's favorable market position in the commercial real estate market, consistent financial performance, and conservative financial policies," said credit analyst Gaurav Parikh.

As the No. 2 Fannie Mae-delegated underwriting and servicing lender, the No. 4 Freddie Mac seller/servicer, and the No. 6 HUD lender in the country in 2015, Walker has a formidable scale and market presence in the multifamily lending sector. The company's debt-to-EBITDA ratio at year-end 2015 was 2.05x on an adjusted basis, compared with 3.0x at fiscal year-end 2014. We expect the company will maintain leverage between 2.0x-3.0x.

Walker's revenue concentration--in terms of mortgage originations and servicing--does limit the rating to a degree. At the same time, we recognize that the company continues to grow organically and through acquisitions, maintaining consistent cash flows. In June 2016, Walker & Dunlop acquired $3.8 billion commercial mortgage servicing portfolio from Oppenheimer Multifamily Housing & Healthcare Finance Inc., a subsidiary of Oppenheimer Holdings Inc., for $44.8 million. The company expects the acquired portfolio to have an unpaid principal balance of $3.8 billion and generate 17 basis points in servicing fees, which would lead to annual servicing revenue of approximately $6.4 million. For the first half of 2016, the company's origination revenue was $148.8 million, compared with $142.7 million for first half 2015. As of June 30, 2016, the total servicing portfolio has increased to $57.3 billion, with a weighted average servicing fees of 25 basis points and weighted average remaining life of loans at 10.4 years. For quarter ending June 2016, the company's mortgage servicing rights (MSRs) increased to $468 million compared with $412 million as of year-end 2015.

The stable outlook reflects S&P Global Ratings' expectations that, over the next 12 months, Walker will continue to maintain its competitive position as a primary originator and servicer of multifamily loans. The outlook incorporates our expectations of the firm maintaining leverage and EBITDA coverage between 2.0x-3.0x and 6.0x-10.0x, respectively. Furthermore, we expect the company to successfully renew its warehouse facilities on an annual basis to fund its GSE originations.

We could lower our rating over next 12 months if net debt to EBITDA rises above 3.0x or if EBITDA coverage dips below 6.0x on a persistent basis. We could also lower our rating if significant changes to existing federal policies supporting the multifamily lending market limit Walker's origination volume or profitability. If the company's market position unexpectedly erodes such that the company is unable to renew its existing warehouse facilities, or if it loses significant market share to its peers, we could lower the rating. We view the prospects of this scenario as relatively remote.

We see limited upside in the ratings over the next 12 months given the overall cyclicality and volatility in the commercial real estate space coupled with lack of clarity on the role that the federal government plans to have in the multifamily lending market. However, we could raise the rating if, long term, Walker operates at leverage consistently below 2.0x in conjunction with other leverage metrics, such as debt to tangible equity and EBITDA coverage, also supporting the assessment of a lower financial risk profile.