Company Watch

ANALYSIS OF BREAKING NEWS

  PHH Corp.:
  No Money, No Sale

January 1, 2008 - PHH Corp. (PHH-NYSE) was all set for new ownership, to be bought by GE and the Blackstone Group. Part of it would go to GE (the fleet management business) and part of it would settle at Blackstone Group (the mortgage part). But things didn't quite work out that way.

PHH makes prime mortgages, the ones that go to high credit worthy individuals, not the subprime mortgages that ruled the headlines for months. In other words, their mortgages are most likely current in their payments or very few if they aren't. There's nothing wrong with the quality of their business. The only catch is: it takes $1.69 billion to do the deal.

The problem started back on September 17 when the firms informed PHH that they had revised their interpretations as to the availability of debt financing to the tune of a $750 million shortfall. In other words, they couldn't raise enough for Blackstone to fund its share of the buyout. Blackstone usually puts a small amount of equity in a deal and borrows the rest. But credit windows are much tighter than they were 6 months ago.

And there's the rub for all deals going forward, especially ones done by equity firms that use a lot of debt to fund a purchase. Lenders, whether they're banks or institutions like pension funds, aren't as free with their money. It's not that they're seeking onerous terms. They're just not lending. There's a fear mentality gripping lenders, one that will definitely slow the deal flow for the foreseeable future.

That's where you, the reader, come in. You most likely don't own PHH or one of the two investment banks. You might have GE in your portfolio. But this isn't about the individual stocks in this transaction. It's more about the concept of lenders shunning deals, especially deals with mortgages involved. If this keeps up, the housing market will stay in the dumps, and banks, mortgage bankers, s&l's and every industry involved with housing will be down there with them.

It takes money flowing to make deals (and housing) happen. When the spigots are turned off, the deals dry up (so do new home sales as well as existing homes). Lenders are running from lending to all but the most credit worthy borrowers because they've felt the full impact of the subprime blasts to their profits. They're not going to get in that mine field again. And they're not going to get anywhere near it either, staying in more comfortable lending niches, the ones with no history of a problem.

Until you see mergers and acquisition deals getting financed, don't expect the stock market to rally to any significant level. Without the buyouts to supply fresh funds for stock owners to redeploy into the market, as well as premiums paid for stocks, investors are going to play it very close to the vest. The first clue may come from lenders tip toeing back into the mortgage market in a meaningful way. It means they're ready to do business again. With that mentality they'll be a lot more open to M&A debt funding. Right now, their minds and wallets are closed.

- Ted Allrich