The brand new debt funding pact with Oaktree provides Ocwen's share a lift

A new note agreement that raised more than $ 250 million for Ocwen Financial Corp. will generate, initially increased its shares early Wednesday as investors welcomed plans to use the money to refinance existing funds and make investments.

At around $ 29.50, Ocwen's share price was up about $ 2 on Wednesday lunchtime on the east coast, compared to prior to the announcement of the new pension investment pact with Oaktree Capital Management late Tuesday.

The business opportunities and costs for service providers are increasing significantly as regulations tighten and federal forbearance widen. This prompts large players like Ocwen to manage funding in such a way that a balance is struck between the two.

"We are relentlessly focused on cost and execution," said President and CEO Glen Messina in an investor meeting on the debt deal and the company's preliminary earnings on Wednesday.

While maintenance costs have generally increased during the pandemic, Ocwen has seen its operating costs decrease 2 basis points to 13 basis points of the 2020 average unpaid financial account balance. That cost is on track to drop another 2 basis points.

Ocwen's preliminary estimate for fourth quarter 2020 profit is a loss of $ 7 million. This represents an improvement on a loss of more than $ 9 million in Q3 20, but is less favorable than net income of nearly $ 35 million in Q4 19 before the pandemic.

Specifically, the company plans to use $ 100 million of the proceeds from the new subordinated high-yield debt to repay and support the refinancing of its existing corporate debt, with the remainder invested in the services and origination business.

Investing in originations is aimed at diversifying the business and can include acquisitions.

The OFC HoldCo notes in the debt agreement have a term of six years and a 12% cash coupon that is adjusted for an original issue rebate that will help the company reduce its interest expense.

The banknotes also include a voucher worth 13.25%. With PIK Coupons, payments are made in additional bonds rather than cash, thereby reducing the costs associated with investor payments.

The debt agreement also includes warrants for 12% of the shares at the time of closing, subject to adjustments. The warrants entitle investors, under certain conditions, to buy shares at a fixed price until the bonds expire. There is also a second lien on the assets of the parent company (OFC), but not on the assets of the operating subsidiary.

Ocwen's most recent agreement with Oaktree-affiliated companies follows a December deal between the two companies involving a purchase vehicle for the mortgage servicing rights of Fannie Mae and Freddie Mac.

Ocwen will need funding to both invest in its business and absorb regulatory costs related to maintenance, in part because it competes with a multi-tier enforcement move related to PHH Corp., a company it acquired in 2018 .

Ocwen also recently dropped out of mediation with the Consumer Financial Protection Bureau to clarify previous service allegations, stating that the CFPB's demands are exaggerated.

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