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Investors in loan servicing giant Mr. Cooper got a boost Monday from the company’s plan to be acquired at a premium by Rocket Companies, but a decline in the value of Rocket’s shares suggests investors have doubts about the all-stock deal’s $9.4 billion valuation of Mr. Cooper.
Rocket Companies’ appetite for growth — it’s also planning to acquire real estate brokerage Redfin in a $1.75 billion all-stock deal — is likely to more than double the company’s corporate debt ratio, analysts at Fitch Ratings said Monday in warning of a potential downgrade of debt issued by subsidiary Rocket Mortgage to junk bond status.
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If the Mr. Cooper deal closes as expected by the end of this year, Mr. Cooper shareholders would receive 11 shares in Rocket Companies for each share they own.
Based on Rocket’s March 28 closing price of $13.03 before the deal was announced, that works out to $143 for each Mr. Cooper share — a 35 percent premium over the average price of the company’s shares over the last month.
In other words, last week stock market investors valued Mr. Cooper at $6.1 billion, and Rocket Companies was willing to hand over shares in Rocket that were worth $3.3 billion more.
After initially spiking to an all-time high of $125.34 on the merger news, shares in Mr. Cooper closed Monday at $119.60, up 14 percent.
Rocket investors saw the value of their shares fall by 7 percent Monday, to $12.07. Shares in Rocket, which in the last 12 months have changed hands for as much as $21.38, hit a 52-week low of $10.06 on Jan. 13.
Rocket default rating on ‘rating watch negative’
After doing record refinancing business during the pandemic when mortgage rates hit historic lows, mortgage lenders have struggled as rising mortgage rates and home prices curtailed borrowing. Industry forecasters think 2023 was the bottom, with Fannie Mae economists expecting purchase mortgage origination volumes to grow by 10 percent this year, to $1.43 trillion.
Citing the “highly cyclical” nature of the mortgage business — and expectations that Rocket’s plans to acquire loan servicer Mr. Cooper and real estate brokerage Redfin will leave it more highly leveraged — Fitch analysts said they’ve placed Rocket Mortgage’s issuer default rating on “rating watch negative.”
While Fitch analysts said Rocket has a “strong liquidity profile,” they expect Rocket will borrow more in order to fund loans and acquire mortgage servicing rights after it closes deals to acquire Mr. Cooper and Redfin.
As a nonbank lender, Rocket borrows money to fund mortgages that are packaged into mortgage-backed securities for sale to investors. In an investor presentation, Rocket said the combined companies would have $52 billion in funding capacity and $11 billion in liquidity.
After the deal to acquire Mr. Cooper closes, Fitch says it will weigh a downgrade on Rocket Mortgage’s long-term issuer default rating (IDR) to “‘BB+’ from ‘BBB-,’” which would make it more costly for Rocket to borrow money.
A BB rating from Fitch indicates to investors that debt issued by a company is considered “speculative,” carrying “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.”
A BBB rating is a step up, indicating “good credit quality” and that “expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.”
A downgrade “would be primarily driven by higher corporate leverage of the parent [after] the Mr. Cooper and Redfin acquisitions, which may remain above the prior downgrade trigger of 1.0x beyond the 12-24 months outlook horizon,” Fitch analysts said.
Fitch estimates that the merger will more than double Rocket’s corporate leverage ratio from 0.6x today to 1.4x after the deal closes.
Mr. Cooper’s corporate leverage ratio was 2.1x at the end of last year, and Fitch analysts said they expect to upgrade the company’s BB issuer rating “by one or two notches, reflecting the stronger combined business profile and lower leverage.”
Although a BB+ rating would be a step down for Rocket from BBB-, Fitch analysts said the company’s consolidated credit profile after the merger “would reflect its strong market position and leading mortgage franchise in the U.S.”
“The company would combine its significant scale in mortgage origination with Mr. Cooper’s leading scale in mortgage servicing,” Fitch analysts said of the pending deal. “Additionally, it would reflect the company’s strong pro forma liquidity, solid asset quality of the servicing portfolio, robust and integrated technology platform, and experienced management team.”
Fitch analysts said they would consider upgrading Rocket Mortgage’s debt rating following a “sustained reduction in corporate leverage below 1.0x.”
Other “upgrade triggers” would include the “realization of revenue and cost synergies from the Mr. Cooper acquisition that significantly enhance Rocket’s profitability” and “successful integration of Mr. Cooper’s servicing portfolio and correspondent lending platform.”
On a call with investment analysts Monday, Rocket CFO Brian Brown said the company has “a really strong plan” to manage Mr. Cooper’s roughly $5 billion in unsecured debt — including refinancing $3.2 billion and exchanging the rest through a tender or other means.
In announcing the deal to acquire Mr. Cooper, Rocket executives said they expect the deal to generate $500 million a year in revenue and cost synergies by 2027 — including $100 million a year in additional revenue from a higher recapture rate on loans serviced by Mr. Cooper and the ability to provide title and closing services on those loans.
The merger of Redfin, Rocket and Mr. Cooper would combine Redfin’s strength in real estate search, Rocket’s position as a leading mortgage originator, and Mr. Cooper’s position as the largest U.S. loan servicer.
The result would be an even bigger version of what Rocket already is today: An end-to-end platform combining home search, home financing, title and closing, and loan servicing.
Post-merger, Rocket would be acting as the loan servicer for about one in six U.S. mortgages — $2.1 trillion in total — giving it a leg up when existing borrowers are ready to refinance or purchase their next home.
Rocket’s ‘recapture flywheel’ drives repeat business
Source: Rocket Companies March 31, 2025 investor presentation.
Together, Rocket and Redfin attract 62 million visitors to their websites every month, while Rocket and Mr. Cooper’s combined client base of 9.5 million servicing customers represent opportunities for repeat business. Rocket claims that it “recaptures” 83 percent of its servicing clients when they’re ready to take out another loan.
“Integrating Rocket’s originations-servicing recapture flywheel with Mr. Cooper’s servicing platform will drive down costs and improve the experience for the companies’ nearly 10 million combined clients,” the company said in announcing the deal.
In announcing the Redfin deal, Rocket executives said unifying home search, buying, selling, mortgage, title and servicing could net $20,000 in consumer savings on the average home sale — which might help smooth the process of obtaining a green light from antitrust regulators.
In a note to clients Monday, BTIG analyst Eric Hagen said acquiring Mr. Cooper would make Rocket the “uncontested heavyweight in servicing,” while also resetting the bar for valuing mergers that achieve scale.
“We don’t expect meaningful regulatory pushback, even though the combination leaves Rocket with $2.1 trillion of MSRs [mortgage servicing rights] or close to a 20 percent market share in servicing, placing it comfortably ahead of the four other lead non-banks: PennyMac, Rithm, Freedom and Lakeview,” Hagen said.
Historically, Hagen said mortgage loan servicers have been valued at roughly twice their “book value” (the value of a company’s assets minus its liabilities.
“However, we see a new paradigm which ascribes more value to the ‘utility-like’ returns from non-bank originator/servicers, which includes a less rate-sensitive earnings profile,” the BTIG analyst said.
While falling interest rates are good for lenders, they can be punishing for loan servicers, since the mortgage borrowers they collect payments from are more likely to refinance and end up with another servicer. Companies that both originate and service mortgages are in a better position to ride out interest rate volatility.
Rocket’s origination business allows it to avoid having to spend money hedging its mortgage servicing rates, Fitch analysts noted, while Mr. Cooper targets a 75 percent hedge ratio.
If the merger goes through, Fitch analysts predict the combined company will spend less on hedging, “given Rocket’s historical reliance on the natural hedge provided by its origination business.”
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