KBRA Affirms Issuer Ratings for Rithm Capital Corp. and Subsidiaries: NewRez LLC and Caliber Home Loans, Inc.

KBRA affirms the Issuer rating of BB+ for Rithm Capital Corp. (NYSE: RITM; “Rithm” or “the company”). KBRA also affirms the Issuer ratings of BB+ for NewRez LLC (“NewRez”) and Caliber Home Loans, Inc. (“Caliber”), two indirect, wholly-owned subsidiaries of Rithm. The Outlook for all ratings is Stable.

Key Credit Considerations

Rithm, as well as operating subsidiaries NewRez and Caliber, respective Issuer ratings are supported by the parent company’s scale as a ‘Top 5’ mortgage servicer, appropriate consolidated capitalization – $5.7 billion of common equity (representing ~18% of assets at 1Q23) – a favorable liquidity and funding profile, and a largely solid operating performance history outside of 2020; more specifically, 1Q20, when all leading mREITs deleveraged their respective balance sheets as a result of industrywide repurchase agreement margin calls.

Importantly, Rithm, as well as its large, singularly managed mortgage business, reflects seasoned, well-regarded executive and operating teams. Culminating with the Caliber acquisition in August 2021, Rithm has created one of the industry’s leading mortgage operating companies; a business that is expected to remain the principal driver of earnings over the near-term, even as the company pursues diversified business and investment strategies.

Rithm’s mortgage operating business has been managed well in recent periods, despite the sharp contraction in the origination market, as the value of the company’s scale servicing investment and related income stream has been magnified, while efficient operating expense reductions have also been important towards the overall stabilization of returns. Looking back, while the company’s large 1Q20 loss (and related common equity depletion) were not enviable from a financial perspective, we consider Rithm to have managed through the extremely challenging period as well as could be expected. Additionally, partly stemming from the experience of this challenging period, Rithm now reflects a more durable funding profile; one which has focused on term borrowings and minimizing financing with daily MTM margin requirements for all but very liquid assets. Higher cash balances, recently >$1.3 billion, are also a favorable aspect of a more conservatively managed balance sheet.

Investment / interest rate hedging strategy has historically been conducted with a holistic perspective on the company’s assets and tangible book value accretion. While a refined MSR hedging program – given a ~$9 billion investment in the volatile asset – would be viewed favorably, Rithm’s recent year, large interest rate swap focused, asset hedge positions, have broadly been very effective.

Rating Sensitivities

Further development of a MSR hedging program would benefit Rithm’s credit profile. Consistent operating performance and financial management could lead to positive rating momentum. Operating challenges and / or more aggressive capital management could negatively impact ratings.

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Methodologies