PHH Corp. is one of the top five retail originators of residential mortgages in the U.S., and its subsidiary, PHH Arval, is a leading fleet management services provider in the U.S. and Canada. Bass, a macro investor, is famous for saying “I think you can see that the pig has moved through the python in terms of U.S. housing losses,” which might have influenced his investment in a housing mortgage company.
PHH recently made some sweeping changes, including changes in top-tier management. In 2011 it named a new COO and CFO. In January 4, it named a new CEO, Glen Messina, the company’s former COO. The board said that Messina was ideal to execute its new priorities. “The prolonged uncertainty and volatility in the global economy and capital markets, along with a U.S. housing market that remains challenging, requires an emphasis on liquidity and cash generation over growth in the near term, said Jim Egan, chairman of the PHH Corporation board of directors.
Additionally, in January 2012 the company announced a $300 million aggregate upsizing in its funding capacity to $1.5 billion, and the total committed financing agreements at the company’s fleet segment to $3.6 billion. The extra funding will allow the company to acquire vehicles to lease to fleet management clients.
However, the company is having some debt issues. It held a $250 million in aggregate principal amount of 6% convertible senior notes due 2017. It will use the net proceeds of the offering to contribute to the repayment of the $250 million aggregate principal amount of its 4% convertible senior notes due April 15, 2012, as well as for general corporate purposes.
On Thursday, December 22, the company’s stock dropped 15% after Standard & Poor’s downgraded PHH’s credit and unsecured debt from “BB+” to “BB-“ on concerns that the company won’t be able to pay its unsecured corporate debt. The ratings agency believes that it will not be able to pay its $423 million of senior unsecured notes due March 2013 exclusively from free corporate cash flows, and believes it does have adequate liquidity to repay its $249 million in convertible notes due in April 2012.
Currently the company has $7.4 billion in long-term liabilities and debt on its balance sheet, with about $1.3 billion in cash. It also lost $1.7 billion in cash flow in 2010, and has generated $1.1 billion in the trailing 12 months. Revenue has wavered, dipping in 2008, and after increasing to $2.6 billion in 2009, it decreased to $2.4 billion in 2010. Earnings were negative from 2006 to 2008, and decreased from $253 million in 2009 to $48 million in 2010.
Bass may believe he has found a company whose stock price is lowered due to debt issues it is likely to be able to resolve, particularly with new management, an uptick in the housing industry, and an enhanced fleet management business.
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