NEW YORK, Feb. 9, 2015 /PRNewswire/ -- The Mangrove
Partners Master Fund, Ltd., a significant shareholder of Home Loan
Servicing Solutions, Ltd. (Nasdaq: HLSS), today announced it has
delivered a letter to the members of HLSS's Board of Directors.
The full text of the letter follows and has been posted to
www.freeHLSS.com:
The Board of Directors
Home Loan Servicing Solutions, Ltd.
c/o Intertrust Corporate Services (Cayman) Limited
190 Elgin Avenue
George Town, Grand Cayman
KY1-9005
Cayman Islands
CC: Michael Lubin,
Corporate Secretary
Dear Members of the Board:
We are writing you in response to your letter dated February 5, 2015 ("Response"). Based on the
latest publicly available shareholdings list, The Mangrove Partners
Master Fund, Ltd. ("Mangrove Partners") is one of the ten largest
shareholders of Home Loan Servicing Solutions, Ltd. ("HLSS" or the
"Company"). As we expressed in our February 2, 2015 letter, we believe it is
imperative for the Company to exercise its contractual rights to
terminate its relationship with Ocwen Loan Servicing, LLC ("Ocwen")
without delay. We believe that continuing to expose HLSS to
Ocwen-related risks by leaving the Ocwen relationship intact
constitutes a dereliction of your duty to the Company and a grave
risk to all shareholders. Your Response was inadequate. As a
result, it is our intention to nominate a slate of replacement
directors for election this year because time is not the Company's
friend and you as the Board are showing no signs of taking concrete
action to protect shareholders in this serious situation.
We believe that there have been multiple Termination Events
under the documents governing HLSS's purchase of Rights to MSRs
("RMSRs") from Ocwen. Pursuant to each sale supplement governing
HLSS's purchase of RMSRs from Ocwen, a Termination Event is defined
as "the occurrence of any one or more of the following events…(e)
Seller [Ocwen] fails to maintain residential primary servicer
ratings for subprime loans of at least 'Average' by Standard &
Poor's Rating Services…'SQ3' by Moody's Investors Service, Inc
("Moody's")…and 'RPS4+' and 'RSS4+' by Fitch Ratings." A
Termination Event therefore occurred on January 29, 2015, when Moody's downgraded Ocwen's
servicer quality (SQ) assessments to SQ3- from SQ3 and as a special
servicer of residential mortgage loans to SQ3- from SQ3. Another
Termination Event occurred on February 4,
2015, when Fitch Ratings downgraded Ocwen's residential
primary servicer rating for Subprime product to "RPS4" from "RPS3."
Section 6.13 of the sales supplements specifies that "(i)n the case
that any Termination Event occurs with respect to any Servicing
Agreement… [Ocwen] shall, upon HLSS's written direction to such
effect, use commercially reasonable efforts to transfer the
Servicing Rights relating to any affected Servicing Agreement to a
third party servicer identified by HLSS." Importantly, Section 6.13
of the sales supplements then proceeds to state that "HLSS shall
be entitled to receive all proceeds of such transfer" (emphasis
added).
We believe that there are compelling reasons why HLSS should
immediately begin the process of exercising its rights to direct
Ocwen to transfer the servicing rights to one or more different
servicers. Most importantly, servicing transfers will isolate HLSS
from the risks of an ongoing relationship with Ocwen. A number of
these risks were outlined in our prior letter to you. You are no
doubt aware that Moody's downgraded HLSS's corporate family rating
from Ba3 to B2 on October 21, 2014,
citing HLSS's "reliance on Ocwen" as the primary reason for the
downgrade. Additionally, we remind you that the California
Department of Business Oversight threatened to suspend Ocwen's
servicing license multiple times during 2014. It is our belief that
HLSS's continued affiliation with Ocwen is an unacceptable risk and
contrary to the best interests of the Company and its shareholders.
We believe that restructuring HLSS's servicing counterparty
relationships would be a significant positive development for the
Company in the current operating environment and would be viewed
positively by all of the Company's lending relationships.
Transferring servicing would give HLSS the opportunity to engage
with servicers that have greater servicing stability, better
management oversight, stronger relationships with regulators, and
higher ratings.
In addition to shielding HLSS shareholders from Ocwen-related
risks, we believe that a transfer of the servicing rights will
create significant value for HLSS and its shareholders. While
our valuation work shows a range of potential values, we believe
that a reasonable estimate of the value created by transferring the
servicing rights would be between $8 and
$13 per share of incremental value to HLSS. Based
on the Company's book value on September 30,
2014, this represents an increase in book value of between
44% and 72%. In addition, we believe the Company's stock is
currently trading at a discounted multiple due to the Company's
close ties to Ocwen. Once the Company ends its association with
Ocwen, we see no reason why the Company would not return to trading
at its historic multiple of between 120% and 130% of book value. In
a reasonable scenario, this would give shareholders a value of
between $31 and $40 per share. We
have included our analysis of the value available to HLSS with a
servicing transfer in the appendix to this letter.
Although you may be concerned that HLSS's exercise of its rights
to force servicing transfers could create further instability at
Ocwen, Mangrove Partners believes that Ocwen's cash flows would
only be affected after the servicing transfers are completed.
Likewise, while the servicing transfers away from Ocwen would
likely cause Ocwen to turn loss-making and give rise to multiple
covenant breaches in Ocwen's credit facility pursuant to section
6.07(a) and 6.07(b) of the Ocwen Senior Secured Term Loan Facility
Agreement dated February 15, 2013,
these breaches would occur only after substantially all servicing
transfers requested by HLSS had been completed. As such, any
ensuing Ocwen default would be irrelevant to HLSS and the Company's
remaining exposure to Ocwen would be de minimis.
We urge you to fulfill your fiduciary duty to act in the best
interest of the Company by causing the Company to exercise its
contractual rights to force a transfer of the servicing rights. In
doing so, the Board can and should insulate HLSS from further Ocwen
risk and create substantial value for the Company and its
shareholders. Your Response's vague reassurances and legal
boilerplate did nothing to ease Mangrove Partners' increasing and
justified concerns about the direction of the Company. To be clear,
we are not looking for you to make selective disclosure to us—we
are looking for you to take prudent action to protect the Company
and shareholder interests. Accordingly, until such time as the
Company announces it has entered into definitive agreements to
transfer the servicing rights away from Ocwen pursuant to
competitive processes conducted by top-tier advisors, it is our
intention to bring new leadership to the Board by nominating a
highly qualified slate of directors this week.
Sincerely,
Nathaniel August
President and Portfolio Manager
Mangrove Partners
VALUATION APPENDIX
1. Ocwen profits as servicer on MSRs for which HLSS funds
advances.
Ocwen acts as servicer for all of the RMSRs that HLSS owns. We
believe that Ocwen earns significant profits from this
relationship. Our analysis of the value accruing to Ocwen as
servicer for HLSS RMSRs is below and assumes that Ocwen's
profitability on agency and non-agency MSR are equal as a
percentage of UPB serviced. We note that Ocwen management has
indicated that agency servicing is significantly less profitable
than non-agency servicing and that Ocwen intends to exit its agency
servicing business.
|
|
|
|
3
months
|
9
months
|
($ in
millions)
|
|
|
09/30/14
|
09/30/14
|
Total servicing
segment revenue
|
|
$485
|
$1,527
|
Total segment
operating expenses (ex. interest)
|
(314)
|
(920)
|
Servicing segment
income from operations
|
$171
|
$607
|
Add: MSR fair
value adjustment
|
|
9
|
51
|
Add:
Transaction and transition expenses
|
|
8
|
40
|
Add: Segment
legal & regulatory charges
|
|
20
|
22
|
Less: Mangrove
Partners est. overhead allocation
|
(10)
|
(30)
|
Normalized servicing
income from operations
|
$198
|
$689
|
|
|
|
|
|
|
Less: Servicing
fees remitted to HLSS
|
|
($94)
|
($287)
|
Less: Other
match funded liability interest
|
(15)
|
(47)
|
OCN servicing
earnings after advance financing costs
|
$90
|
$355
|
OCN annualized
servicing earnings ("EBIT")
|
359
|
473
|
|
|
|
|
|
|
OCN total MSR UPB at
quarter end
|
|
$411,280
|
$411,280
|
HLSS RMSR UPB at
quarter end
|
|
165,524
|
165,524
|
HLSS UPB as % OCN
UPB
|
|
|
40.2%
|
40.2%
|
|
|
|
|
|
|
OCN annualized EBIT
attributable to HLSS UPB
|
$145
|
$190
|
Valuation
multiple
|
|
|
4.00x
|
4.00x
|
Value of
OCN EBIT from HLSS UPB
|
|
$578
|
$762
|
% of HLSS UPB
serviced by OCN
|
|
0.349%
|
0.460%
|
|
|
|
|
|
|
HLSS shares
outstanding (in millions)
|
|
71
|
71
|
Value of OCN
servicing per HLSS share
|
|
$8.14
|
$10.73
|
In a servicing transfer, we believe that the earnings Ocwen
currently generates from the MSRs that HLSS has the right to
transfer would be worth over $8 in
incremental value per HLSS share. We have benchmarked our
valuation against what HLSS has indicated it believes Ocwen earns
on this relationship. On June 11,
2013, HLSS indicated in a lender presentation that Ocwen
earns a contribution profit of 36 bps of UPB as servicer on HLSS
RMSRs. As shown below, this suggests that our valuation of Ocwen's
servicing relationship with HLSS is less than 1x its contribution
profit to Ocwen in our low case. We believe this reflects the
conservatism embedded in our valuation.
($ in
millions)
|
|
|
|
|
Ocwen subservicing
fee % of UPB
|
|
|
0.230%
|
Add: Ancillary
fees % UPB
|
|
|
|
0.180%
|
Less:
Incremental expenses % UPB
|
|
|
(0.050%)
|
Contribution of Ocwen
subservicing % UPB
|
|
0.360%
|
|
|
|
|
|
|
September 30, 2014
HLSS RMSR UPB
|
|
|
$165,524
|
Implied contribution
margin to Ocwen
|
|
|
596
|
|
|
|
|
|
|
2. Clean up call rights.
On a December 22, 2014 conference
call, Ocwen stated that it owns call rights: "(A)s the servicer of
almost $200 billion of UPB of private
label mortgages…we estimate that we will execute approximately
$5 billion of calls over the next two
years and they could be worth two to three points of profit to
[Ocwen]." Since these clean up call rights belong to the servicer
of the private label mortgages, their value should accrue to HLSS
as part of the price it receives in a transfer of the MSRs.
($
millions)
|
|
|
|
Amount
|
Ocwen non-agency
servicing UPB at 9/30
|
|
$171,998
|
HLSS RMSR UPB at
9/30
|
|
|
165,524
|
HLSS UPB % OCN
UPB
|
|
|
96.2%
|
|
|
|
|
|
Ocwen serviced
in-the-money clean up call UPB
|
$5,000
|
% that HLSS is
entitled to
|
|
|
96.2%
|
UPB that HLSS is
entitled to
|
|
|
$4,812
|
|
|
|
|
|
HLSS clean up call
profit - Low %
|
|
2.0%
|
HLSS clean up call
profit - Low $
|
|
$96
|
Value of clean-up
call rights per HLSS share – Low
|
$1.36
|
|
|
|
|
|
HLSS clean up call
profit - High %
|
|
3.0%
|
HLSS clean up call
profit - High $
|
|
$144
|
Value of clean-up
call rights per HLSS share – High
|
$2.03
|
Based on the guidance given by Ocwen's management, it is
Mangrove Partners' opinion that the clean up call rights to which
HLSS is entitled could be worth at least $1-2 per share, taking into consideration only
those clean up call rights that were in-the-money as of
December 2014.
3. Altisource Portfolio Solutions, S.A. ("ASPS") profits from
Ocwen's non-agency portfolio.
In January 2015, ASPS provided
estimates of potential Technology and Mortgage Services pre-tax
income it expects to generate from Ocwen's existing non-GSE
portfolio. We believe that substantially all of this pre-tax income
is generated from Ocwen's non-agency portfolio. HLSS owns the RMSRs
to over 96% of Ocwen's non-agency servicing portfolio. A third
party servicer to which HLSS transfers servicing could derive
significant value from performing the services that ASPS is
currently performing, and we believe that HLSS could be compensated
for this in the sale price of the servicing rights. Our estimate of
the value another servicer could realize from the cash flows that
ASPS forecast in its recent presentation is presented below.
($ in
millions)
|
|
2015
|
2016
|
2017
|
2018
|
2019
|
Segment pre-tax
income ("PTI")
|
$205
|
$174
|
$152
|
$131
|
$113
|
Less: Mangrove
Partners est. G&A
|
(35)
|
(35)
|
(35)
|
(35)
|
(35)
|
Adjusted
PTI
|
|
$170
|
$139
|
$117
|
$96
|
$78
|
|
|
|
|
|
|
|
|
HLSS UPB % OCN
non-GSE UPB
|
96.2%
|
96.2%
|
96.2%
|
96.2%
|
96.2%
|
ASPS PTI attributable
to HLSS
|
$164
|
$134
|
$113
|
$92
|
$75
|
Less:
Taxes
|
35.0%
|
(57)
|
(47)
|
(39)
|
(32)
|
(26)
|
Net income -
Approximates FCF
|
$106
|
$87
|
$73
|
$60
|
$49
|
Terminal value (4x
2019 Net income)
|
|
|
|
195
|
Cash flows for
discounting
|
$106
|
$87
|
$73
|
$60
|
$244
|
|
|
|
|
|
|
|
|
Discount
rate
|
15.0%
|
|
|
|
|
|
Discounted cash
flows
|
|
$99
|
$71
|
$52
|
$37
|
$130
|
Cumulative discounted
cash flows
|
|
|
|
|
$388
|
HLSS shares
outstanding at 9/30/14 (in millions)
|
|
|
71
|
Value per HLSS
share
|
|
|
|
|
|
$5.47
|
Based on ASPS's projections, the cash flows that a buyer of the
MSRs could realize may be worth over $5 per HLSS share. Although this value would
likely be divided between HLSS and the MSR purchaser, it may also
be conservative because it excludes earnings related to mortgage
charge-off collection services that would likely be valuable to
another servicer.
4. Transaction comparable.
In January 2014, Ocwen agreed to
acquire a primarily private label mortgage servicing portfolio from
Wells Fargo with total principal balance of $39 billion (the "Wells Fargo Portfolio"). The
agreed-upon purchase price was $2.7
billion, including $280
million for the MSR, $115
million for deferred servicing fees, and $2.3 billion for outstanding servicing advances.
Although this transaction was not consummated, it serves as a point
of reference for the value HLSS could receive in a sale to a third
party.
Wells Fargo
transaction valuation
|
($
millions)
|
|
|
Amount
|
Total UPB to be
acquired
|
|
$39,000
|
|
|
|
|
MSR purchase
price
|
|
$280
|
% of UPB to be
acquired (deal multiple)
|
0.718%
|
|
|
|
|
Advance for deferred
servicing fees
|
$115
|
% of UPB to be
acquired
|
|
0.295%
|
|
|
|
|
Outstanding servicing
advances
|
$2,300
|
% of UPB to be
acquired
|
|
5.897%
|
|
|
|
|
|
|
|
|
HLSS potential MSR
valuation
|
|
($
millions)
|
|
|
Amount
|
HLSS RMSR UPB at
9/30/2014
|
$165,524
|
x Wells Fargo deal
multiple
|
|
0.718%
|
Implied fair value of
MSR assets
|
$1,188
|
|
|
|
|
Less: HLSS RMSR
carrying value
|
(619)
|
Potential gain to
HLSS
|
|
$569
|
|
|
|
|
÷ HLSS shares
outstanding at 9/30/14
|
71
|
Value per HLSS
share
|
|
$8.02
|
We note that this analysis does not take into account the cost
of capital associated with deferred servicing fees that Ocwen
agreed to pay up front, nor the difference in servicing advance
requirements between the Wells Fargo Portfolio and the RMSRs that
HLSS currently owns. Servicing advances as a percentage of HLSS's
RMSR UPB stood at 3.685% at September 30,
2014, compared to servicing advances as a percentage of UPB
in the Wells Fargo Portfolio of 5.897%. Also, the HLSS portfolio is
entirely private label, whereas over 8% of the UPB associated with
the Wells Fargo Portfolio was Fannie Mae or Freddie Mac servicing.
This suggests that based on a comparable transaction analysis,
HLSS's exercise of its right to transfer servicing away from Ocwen
could result in a gain to HLSS shareholders well in excess of
$8 per share. This gain would
represent an increase of approximately 45% to HLSS's September 30, 2014 book value per share.
5. HLSS's RMSRs are valued on its balance sheet using
assumptions that are more conservative than realized
performance.
A servicing transfer that results in the sale of MSRs that HLSS
finances is likely to result in a significant gain to HLSS.
|
|
|
|
|
Actual
|
Actual
|
|
|
|
|
Wtd.
|
3
months
|
9
months
|
Valuation
input
|
Low
|
High
|
Average
|
09/30/14
|
09/30/14
|
Prepayment
speeds
|
12%
|
28%
|
18%
|
10%
|
10%
|
Delinquency
rates
|
15%
|
35%
|
25%
|
19%*
|
19%*
|
* represents
non-performing loans and real estate as a % of total residential
assets serviced at 9/30/14
|
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
The Mangrove Partners Master Fund, Ltd. ("Mangrove"), together
with the other participants named herein, intends to make a
preliminary filing with the Securities and Exchange Commission
("SEC") of a proxy statement and accompanying proxy card to be used
to solicit votes for the election of a slate of director nominees
at the 2015 annual meeting of shareholders of Home Loan Servicing
Solutions, Ltd. (the "Company").
MANGROVE STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO
READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S
WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS
IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY
STATEMENT WITHOUT CHARGE UPON REQUEST.
The participants in the proxy solicitation are anticipated to be
Mangrove, The Mangrove Partners Fund, L.P. ("Mangrove LP"),
Mangrove Partners Fund (Cayman), Ltd. ("Mangrove Fund Cayman"),
Mangrove Partners, Mangrove Capital and Nathaniel August (collectively, the
"Participants").
As of the date hereof, Mangrove owned 1,655,719 shares of the
Company's Common Stock. As the two controlling shareholders of
Mangrove, each of Mangrove LP and Mangrove Fund Cayman may be
deemed the beneficial owner of the shares of Common Stock of the
Company owned by Mangrove. Mangrove Partners is the investment
manager of each of Mangrove, Mangrove LP and Mangrove Fund Cayman.
Mangrove Capital is the general partner of Mangrove LP. Mr. August
is the Director of each of Mangrove Partners and Mangrove Capital.
By virtue of these relationships, each of Mangrove Partners,
Mangrove Capital and Mr. August may be deemed to beneficially own
the shares of Common Stock of the Company owned by Mangrove.
About Mangrove Partners
Mangrove Partners is a value-oriented investment manager. Its
investment objective is to organically compound net worth while
minimizing the chances of a permanent loss of capital. Its goal is
to generate positive returns from both long and short investments
as opposed to employing a relative value or market hedging
strategy.
Cautionary Statement Regarding Forward-Looking
Statements
The information herein contains "forward-looking statements."
Specific forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts and
include, without limitation, words such as "may," "will,"
"expects," "believes," "anticipates," "plans," "estimates,"
"projects," "targets," "forecasts," "seeks," "could," "should" or
the negative of such terms or other variations on such terms or
comparable terminology. Similarly, statements that describe our
objectives, plans or goals are forward-looking. Our forward-looking
statements are based on our current intent, belief, expectations,
estimates and projections regarding the Company and projections
regarding the industry in which it operates. These statements are
not guarantees of future performance and involve risks,
uncertainties, assumptions and other factors that are difficult to
predict and that could cause actual results to differ materially.
Accordingly, you should not rely upon forward-looking statements as
a prediction of actual results and actual results may vary
materially from what is expressed in or indicated by the
forward-looking statements.
www.mangrovepartners.com
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SOURCE Mangrove Partners