Credit rating agency Fitch announced this week that its long-term issuer default rating (IDR) for Finance of America, the reverse mortgage industry’s leading lender, has been downgraded from “CCC+” to “C” following the announcement of a debt exchange plan that staves off maturity risk beyond 2025.
FOA announced late last month that it has entered into an exchange offer agreement with certain noteholders that will result in new, secured debt that will come due beyond the original 2025 maturity date of the existing unsecured notes, according to an announcement and an 8-K filing with the Securities and Exchange Commission (SEC). But Fitch said that it believes other considerations were in play.
Last week, however, credit rating agency Moody’s also assessed FOA following the debt agreement and determined that its existing rating would remain unchanged. FOA specified that the maturity extension is only applicable to the new notes and the existing notes maturity will remain unchanged
Reasons for the change
“Fitch views the exchange transaction as a distressed debt exchange (DDE) given the material reduction in terms for creditors, namely the removal of covenants on existing unsecured notes and the maturity extension,” the agency explained in an announcement. “Fitch believes FOA has taken these actions to avoid an otherwise likely eventual default.”
Once the plan is executed, Fitch “expects to downgrade the IDRs to ‘RD’ (Restricted Default) and reassess the rating based on the final capital structure.”
Fitch added that it believes there is “elevated execution risk related to the completion of the debt exchange,” and that FOA requires additional financing to repay working capital lines, “which currently encumber the collateral intended to be pledged to the new secured notes offered as part of the exchange.”
A failure to execute on this exchange could “significantly impair the firm’s liquidity profile,” the agency said.
Fitch also shared four key observations, including the agreement resulting in a material reduction in terms; the agreement being initiated to avoid a “probable default” under the original maturity timeline; and low levels of liquidity and funding flexibility relative to peers. The agency added, however, that the agreement would likely improve FOA’s “financial and operating flexibility.”
“Fitch believes the debt exchange offer will reduce refinancing risk and medium-term liquidity needs by extending near-term maturities to 2026,” the agency said. “This should provide enhanced operating flexibility as well, as the firm is expected to benefit from eventual rate cuts, with improvements in mortgage origination volume.”
This is the second time in the past year that Fitch has downgraded a rating for FOA. In October 2023, it brought its rating down from “B-” to “CCC+.”
Company response
Following the initial publication of this story, HousingWire’s Reverse Mortgage Daily (RMD) received a statement from Matt Engel, CFO of FOA.
“Finance of America looks forward to the successful completion of the exchange offer and is optimistic that a reassessment following the exchange will result in an improved rating,” Engel said. “We appreciate the ongoing support of our noteholders and look forward to continuing to work together in the future.”
RMD also sat down with a FOA executive who explained that the company still sees the announced debt agreement as an overall benefit. The rating from Fitch will not impact company operations or its current course, especially considering that another major credit rating agency did not similarly choose to downgrade its rating.
FOA continues to see potential benefits of the plan to its capital structure, liquidity and growth and profitability, the executive explained. Moody’s approaches its assessments differently by taking potential future benefits into account, whereas Fitch performs these processes separately when it makes its own determinations, according to the executive.
Additionally, the Fitch rating did not come as a surprise to people working for FOA, the executive said, and consequently has no impact on strategic operations currently being undertaken.
In terms of the content of the Fitch rating itself, the executive said that the agency’s point about a material reduction in covenants as a factor leading to the rating reduction applies only to existing unsecured notes, and when the new, secured notes are in place they will come with “tighter” terms and covenants.
Additionally, FOA cited two examples of Fitch initially lowering a rating before later choosing to raise it back to its prior level: for Voyager Aviation Holdings, LLC and Avation PLC, respectively.
Recent history
The company and certain noteholders entered an agreement to “an exchange of any and all of the outstanding 2025 unsecured notes” into two new, secured tranches. The first is for up to $200 million in aggregate principal of senior secured first-lien notes due in 2026 (with an option to extend it to 2027 if the company elects to do so), while the second is for up to $150 million in aggregate principal of exchangeable senior first-lien notes due in 2029.
The company explained in its announcement that it is optimistic about the ultimate results of the arrangement.
“The announcement marks another significant step to improve the company’s capital structure and achieve sustainable growth and profitability,” the company said.
Earlier in June, FOA announced that it received shareholder approval, upon recommendation of its board, to perform a reverse stock split at a 10-to-1 ratio in a move designed to boost the company’s stock price, another source of recent pressure.
“Our Board has determined that it is advisable and in the best interests of the company and our stockholders to reduce the number of shares of Class A Common Stock outstanding with the primary intent of increasing the per share trading price of our Class A Common Stock in order to meet the NYSE’s price criteria for continued listing on that exchange,” the company said in its corresponding 8-K filing with the SEC.
FOA is hopeful that move will make a material difference, according to its SEC filing. In December 2023, the company received a notice from the New York Stock Exchange (NYSE) that it was out of compliance with the exchange’s continued listing standard, which requires the share price to remain above $1 in a given 30-day trading period. FOA said it came back into compliance after this point, but NYSE issued an additional notice in February 2024.
Last week, NYSE took the steps to begin delisting FOA’s warrants, traded under the ticker symbol “FOA.WS,” although the class A common shares traded under the “FOA” ticker symbol will continue to be traded.
According to Home Equity Conversion Mortgage (HECM) endorsement data compiled by Reverse Market Insight (RMI), FOA is the largest reverse mortgage lender in the country. It posted 7,566 endorsements in the 12-month period ending in June 2024. FOA was one of only four lenders in the top 10 to post gains for the month, despite a 14.4% reduction in total HECM volume across the industry.
Editor’s note: This story has been updated with perspective from both the CFO and a separate corporate executive at FOA, and details about Moody’s decision to maintain FOA’s existing rating from that agency.
