Fitch credit rating agency announced on Thursday that Finance of America Companies (FoA) B-/Negative ratings are unlikely to be impacted by the acquisition of reverse mortgage lender American Advisors Group (AAG) in a deal expected to close next year.
Fitch noted in a press release that the deal is likely to improve FoA’s market position, shareholder capital injection, and modest de-leveraging. However, these improvements are expected to be offset by other factors, including “the continuation of headwinds in the mortgage sector, still-elevated leverage, and the potential integration risks associated with the acquisition.”
“The company’s tangible equity has been eroded through 2022 by negative fair value marks on loans held on balance sheet given rising rates and widening credit spreads, intangible asset write-downs, depressed gain on sale margins and low origination volumes,” Fitch noted in its press release. “The acquisition will be largely equity financed, and FoA expects the transaction to be accretive to its tangible book value.”
But while the reverse mortgage market is much smaller than the forward market, the acquisition is likely to improve the standing of FoA and its reverse mortgage arm, Finance of America Reverse (FAR). The company’s leading reverse mortgage position was labeled as a strength by Fitch in October.
“[T]he combined entity will gain critical scale and a strong position in a challenging market environment. Mortgage volumes plummeted in 2022, exacerbating industry overcapacity, and forecasts from Fannie Mae expect further declines, upwards of 10%, in 2023 compared to 2022 estimates,” the agency said. “Fitch believes FoA will look to remove redundant costs as quickly as possible to benefit from the scale advantages of a larger platform.”
The deal will also provide an injection of capital into the company from existing shareholders. However, the effect is expected to offer “incremental” relief to FOA’s leverage ratio, which had spiked to 19.7x as of September 30 — up from 7.7x at the end of 2021.
Fitch downgraded FoA’s credit rating from B+ to B- in October, maintaining a negative outlook based on expectations that the company’s leverage would remain elevated over the medium term amid weak earnings. The lender’s gross debt to tangible assets was 10.2x at the end of June 2022, up from 8x the prior quarter.
The decision to downgrade FoA’s rating came during a period of transition for the company as it conducted job cuts and made an attempt to sell its retail business — which ultimately fell through.
Following the deal’s collapse, the company announced its decision to exit the forward mortgage space to focus on its specialty finance and services (SF&S) businesses. This included FAR, which it had emphasized due to its profitability compared to the forward mortgage business.