Fitch Downgrades UWM Ratings After Q2 Loss, Oaktree Deal

Fitch Ratings downgraded United Wholesale Mortgage (UWM) to a long-term issuer default rating of B+ from BB-, citing a substantial increase in leverage. This downgrade was primarily driven by significant second-quarter losses and increased borrowings, which elevated UWM's corporate leverage ratio. At the close of the second quarter, UWM's corporate leverage, defined as gross nonfunding debt to tangible equity, surged to 6.1x. This represents a sharp increase from 3.2x at the end of the first quarter and a dramatic rise from 1.2x at the end of fiscal year 2023. Fitch anticipates that UWM's leverage will persist above the previous downgrade trigger of 2.0x throughout the outlook period. The rating agency expects leverage to decrease over time as earnings generation surpasses the anticipated $165 million annual preferred dividend, especially since common dividends have been suspended. The increased borrowings were utilized to finance originations and operational activities. A contributing factor to the financial strain was a $603 million hedging loss incurred during the second quarter. UWM stated this hedging activity was an attempt to safeguard its portfolio in anticipation of acquiring the mortgage servicing rights (MSR) portfolio from Two Harbors Investment Corp. However, CrossCountry Mortgage (CCM) ultimately secured the bid for Two Harbors' MSR book. On Wednesday, UWM reported a net loss of $451.9 million for the second quarter. Concurrently, the company announced a strategic capital partnership valued at $2.05 billion. This partnership involves the Ishbia family's new entity, SFS Group Capital, in conjunction with Oaktree Capital Management. The capital infusion includes a $400 million common stock offering. Mat Ishbia, UWM's president and CEO, indicated in a Thursday online Q&A session that following the capital raise, the leverage ratio (nonfunding debt to equity) is projected to decrease from 5.6x to 1.2x. Fitch is classifying the planned issuance of $1.65 billion in series A perpetual preferred stock to Oaktree and the Ishbia family, scheduled for the fourth quarter of 2026, as debt rather than equity. The ratings outlook for UWM remains stable, according to Fitch.