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Fitch downgrades — then upgrades — FOA issuer default rating by Chris Clow for HousingWire

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Credit rating agency Fitch announced this week that its long-term issuer default rating for Finance of America was downgraded to “restricted default” status following its recently publicized debt exchange plan. The rating was then upgraded to “CCC” following the completion of the exchange agreement.

Fitch explained its rationale for the whipsaw of ratings by characterizing FOA’s move as a “distressed debt exchange.” Fitch said the exchange “imposes a material reduction in terms compared with the existing contractual terms and is being done to avoid an otherwise likely eventual default.”

The reduction in terms are “reflected in the extension of the original maturity of the unsecured debt via the exchange into new notes, and the elimination of substantially all restrictive covenants and events of default on the remaining unsecured notes,” the agency said.

Without the exchange agreement, the company would be hampered by “weak operating performance, limited liquidity and [a] highly encumbered balance sheet” that would make it unable to meet the 2025 maturity date of its original agreement. But the exchange agreement, recently amended and claiming a high level of participation, changes the equation, according to Fitch.

“The subsequent upgrade of the ratings reflects FOA’s improved financial and operating flexibility following the debt exchange as refinancing risk has been reduced and near-term liquidity needs are limited given the extension of debt maturities to 2026,” Fitch said. “FOA’s ratings remain supported by its established market position within the reverse mortgage sector and experienced senior management team.”

But FOA, the reverse mortgage industry’s leading lender, still maintains a “weak liquidity profile” that constrains its ratings, Fitch added. The agency projects that FOA’s earnings will be improved by a stronger interest rate environment.

“Fitch believes FOA’s profitability should benefit from a reduction in interest rates, as this will likely drive higher mortgage origination volumes and improve the valuation of the company’s residual investments in its securitizations,” according to its announcement.

Additionally, its transition to a “monoline reverse mortgage lender” after closing down its forward mortgage arm will also prove beneficial. Fitch said the transition has had a positive impact on FOA’s operating costs.

An FOA spokesperson told HousingWire’s Reverse Mortgage Daily (RMD) that it anticipated these actions from Fitch. FOA is set to announce its third-quarter earnings on Wednesday.

“‘The Fitch rating change was expected and, consistent with similar debt exchanges in the market rated by Fitch, FOA’s debt rating has been upgraded to where it was prior to the announcement of the debt exchange support agreement in June 2024,” the spokesperson said.

In June, FOA announced the debt exchange agreement that involves new, secured debt that will come due beyond the original 2025 maturity date. It amended that agreement in September by exchanging the current, unsecured notes (due in 2025 with an interest rate of 7.875%) for one of two new bond options. The first offers the same interest rate and is due in 2026 (with a company option to extend into 2027), while the second has a 10% interest rate and comes due in 2029.

The news from Fitch follows an announcement from Morningstar DBRS, which affirmed FOA’s previously obtained “good” reverse mortgage originator ranking.

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