Fitch Cuts UWM Credit Rating to B+ Amid Q2 Loss and Capital Partnership

Fitch Cuts UWM Credit Rating to B+ Amid Q2 Loss and Capital Partnership

UWM Holdings Corporation saw its long-term issuer default ratings downgraded to B+ from BB- by Fitch Ratings on Friday. The reduction reflects a sharp rise in leverage attributed to recent quarterly losses and increased borrowings, though the agency assigned a stable outlook to the revised rating.

According to Fitch, corporate leverage—defined as gross nonfunding debt to tangible equity—surged significantly. The metric ended the second quarter at 6.1x, a steep climb from 3.2x at the close of the first quarter and 1.2x at the end of 2023. The agency anticipates that leverage will remain elevated above the previous downgrade trigger of 2.0x for the foreseeable future.

The deterioration in financial metrics follows a difficult second quarter for the lender. UWM reported a net loss of $451.9 million, partly driven by a $603 million hedging loss. These hedges were implemented as a protective measure regarding a potential acquisition of mortgage servicing rights from Two Harbors Investment Corp., a bid that was ultimately won by CrossCountry Mortgage.

To address the balance sheet, UWM announced a $2.05 billion strategic capital partnership involving Oaktree Capital Management and the Ishbia family’s SFS Group Capital. The deal includes a $400 million common stock offering. During a recent Q&A session, CEO Mat Ishbia projected that the leverage ratio would decline from 5.6x to 1.2x following the capital raise.

Fitch noted that it will classify the planned $1.65 billion series A perpetual preferred stock issuance as debt rather than equity. The terms include mandatory cash coupon payments after five years if specific liquidity or net worth thresholds are breached. Consequently, Fitch determined the issuance does not meet its criteria for equity credit. The agreement also warrants for 200 million common shares, set to expire in November 2026.

Despite the downgrade, Fitch expects leverage to decrease over time as earnings generation surpasses the expected $165 million annual preferred dividend, noting that common dividends have been suspended.

Shares of UWM were last trading at $1.24.

What to watch

• Closing of the $400 million common stock offering and the $1.65 billion preferred stock issuance expected in the fourth quarter of 2026.
• Future quarterly leverage ratios to verify if the metric declines to management’s projected 1.2x.
• Upcoming earnings reports to assess if operating income exceeds the $165 million annual preferred dividend obligation.

Source: original release