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Quicken Loans, LLC -- Moody's affirms Quicken Loans' Ba1 ratings and revises outlook to positive from stable

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Rating Action: Moody's affirms Quicken Loans' Ba1 ratings and revises outlook to positive from stableGlobal Credit Research - 04 Mar 2021New York, March 04, 2021 -- Moody's Investors Service, ("Moody's") has affirmed Quicken Loans, LLC's corporate family rating at Ba1, its long-term senior unsecured rating at Ba1, and has revised the outlook to positive from stable.While the ratings were affirmed at their current levels, the change in outlook to positive from stable reflects the continued strengthening of the company's financial profile, which Moody's expects to persist over the next 12-18 months. Affirmations: ..Issuer: Quicken Loans, LLC ....LT Corporate Family Rating, Affirmed Ba1....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1Outlook Actions:..Issuer: Quicken Loans, LLC....Outlook, Revised to Positive from StableRATINGS RATIONALEThe affirmation of the Ba1 ratings reflects Quicken Loans' strengthened franchise in the US mortgage market, supporting its strong profitability and solid funding profile, but also captures some governance risk from its ownership structure. A further unique strength to Quicken Loans' franchise is the potentially complementary businesses additionally held under Rocket Companies, Inc.For the first nine months of 2020, Quicken Loans was the largest overall US mortgage originator with a market share of around 7.6%, up from just under 7% in 2019 and around 5% from 2014 through 2018. In addition, the company was the largest retail originator in the US. With interest rates declining, mortgage originations, particularly refinancing, surged in 2020, constraining industry capacity. Origination volumes more than doubled in 2020 versus 2019 and a material increase in gain-on-sale margins boosted Quicken Loans' profitability, with $6.1 billion in net income corresponding to around 30% of average assets during the first nine months of 2020, compared with $750 million or 5.0% of assets for 2019. Moody's expects profitability to remain strong in 2021 as origination volumes will likely continue to remain elevated despite the recent increase in long-term interest rates. Moody's expects longer-term profitability for Quicken to remain strong, such as net income to assets of 5%, or higher.The company's funding profile is somewhat weaker than those of other highly rated non-bank finance company peers. Like other non-bank mortgage companies, Quicken Loans largely relies on secured repurchase facilities to fund its residential mortgage originations. However, its funding profile is solid given its very modest reliance on secured corporate debt, the long tenor of its unsecured corporate debt, and the availability of a $1.0 billion three-year unsecured revolving credit facility, which was recently arranged. In addition, the company has maintained up to half of its warehouse/repurchase facilities with original tenors of more than a year, reducing its refinancing risk; typically mortgage origination warehouse facilities have maturities of 364 days.In August, Rocket Companies, Inc., the parent of Quicken Loans, completed its initial public equity offering (IPO) that raised almost $2 billion for the selling stockholders. Moody's considers Rocket's IPO as credit positive for Quicken Loans, because of the additional disclosure and market discipline associated with being a public company. The IPO's benefits will be somewhat offset by the pressure on management from the quarterly earnings and market share growth expectations of public investors. However, Moody's continues to assess that some governance risk remains in respect to Dan Gilbert, the company's founder and chairman, who will continue to control the company as the its principal stockholder, holding a super majority of all voting rights and the fact that a majority of the board of directors are not independent.The company has recently communicated a long-term market share target of 25%, a substantial increase from its current 7.6%. While the company has a solid track record of managing rapid growth over the last ten years, Moody's views fast growth as credit negative due to the potential for increased operational risks which may lead to stress on liquidity, controls, management and system resources. In addition, sacrificing profitability to continue rapid growth or to defend market share could further increase credit risks. The company's ambitious market share target could also lead to an increase in its very modest share of non-GSE and non-government loan origination volumes, or could cause Quicken Loans to transition away from its mortgage banking focus of selling all new originations within a couple of weeks after loan closing. Were this to occur without a commensurate increase in alternative liquidity sources and capital to address the risker liquidity and asset quality profile that such an increase would entail, it would be a material credit negative development.Moody's also increased the operating environment score for nonbank mortgage companies to Ba3 from B1. The operating environment, a key component of Moody's rating analysis, measures the extent to which external conditions can have a meaningful influence on finance companies' credit profiles, capturing the relevant economic, judicial, regulatory, institutional and general operating conditions that may affect finance companies' creditworthiness. The revision reflects a modest increase in barriers to entry, modestly increasing stability of nonbank mortgage firms as larger companies mature, particularly with respect to a strengthening of their governance and liquidity profiles. and reduced mortgage industry uncertainty as accelerated reform for Federal National Mortgage Association (Fannie Mae, Aaa) and Federal Home Loan Mortgage Corp. (Freddie Mac, Aaa) is unlikely to be pursued.The revision of Quicken's outlook to positive from stable was driven by the continued strengthening of the company's financial profile, which Moody's expects to continue over the next 12-18 months.The Ba1 senior unsecured bond rating is based on Quicken Loans' Ba1 corporate family rating and the application of Moody's Loss Given Default (LGD) for Speculative-Grade Companies methodology and model, which incorporate their priority of claim and strength of asset coverage.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe company's ratings could be upgraded if the company is able to demonstrate improved profitability from its purchase mortgage originations while achieving and maintaining: 1) expected long-term strong profitability such as net income to assets (excluding MSR fair value marks) in excess of 5.0%, 2) a strong capital position with its ratio of tangible common equity (TCE) to tangible managed assets (TMA) remaining above 20%, 3) solid financial flexibility, such as reducing its secured debt to gross tangible assets ratio to less than 50%, 4) low refinance risk on its warehouse facilities with at least 40% or more of its warehouse lines having average remaining maturities of 18 months or more and 5) disciplined growth coupled with a lack of significant operational or regulatory issues.Given the positive outlook, a ratings downgrade is unlikely over the next 12-18 months. Negative ratings pressure may develop if Quicken Loans' financial profile or franchise position weakenfor example if the company's: 1) origination market share drops materially, 2) profitability weakens whereby Moody's expects net income to average assets to remain below 4.0% for an extended period of time, 3) TCE to TMA ratio declines to less than 17.5%, or 4) percentage of non-GSE and non-government loan origination volumes grow to more than 7.5% of its total originations without a commensurate increase in alternative liquidity sources, and capital to address the riskier liquidity and asset quality profile that such an increase would entail. In addition, an aggressive reach for market share would be viewed negatively.The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Warren Kornfeld Senior Vice President Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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