KBW: UWM Better Off After Losing Two Harbors Deal

Analysts at Keefe, Bruyette & Woods (KBW) have concluded that United Wholesale Mortgage (UWM) is likely in a stronger position after failing to acquire Two Harbors Investment Corp. In a flash note released on July 5, KBW analysts Bose George and Frankie Labetti stated that the failed acquisition removes significant leverage risk for UWM. They argued that while Two Harbors' mortgage servicing rights portfolio would have strategically expanded UWM's servicing business, the revised bid structure, which included a cash option, could have substantially increased UWM's debt if many shareholders opted for cash.

The analysts highlighted that "Not winning this deal eliminates this risk," and that there is "limited downside to UWMC from not acquiring TWO." This assessment follows Two Harbors shareholders approving a sale to CrossCountry Mortgage (CCM), concluding a protracted bidding process involving UWM. KBW maintained its "Outperform" rating for UWM, setting a price target of $3.75. This recommendation is based on the stock's current low valuation and the potential for UWM to enhance its financial standing.

KBW pointed out that UWM's debt-to-equity ratio is approximately 3.1x, which is considerably higher than many of its industry peers. The firm suggested that a reduction in UWM's dividend could accelerate the company's deleveraging efforts. KBW estimates that a dividend cut of at least 50% could lower UWM's debt-to-equity ratio from its current 3.1x to around 2.4x by the end of 2027. Their base-case scenario anticipates a more substantial cut of approximately 70%, reducing the quarterly dividend from $0.10 per share to $0.03, which could bring leverage down to roughly 2.2x over the same timeframe. The analysts believe that retaining more cash through a dividend reduction would enable UWM to pay down debt more effectively.