Moody's Investors Service just affirmed PHH Corporation's [PHH] Ba2 rating, but admitted it holds some concerns.
Lately, PHH has considered separating or even selling its mortgage business after losing business in the space last year.
Another option, of course, would be for PHH to sell it's other primary business: fleet management.
A third action, if any were decided, would be to sell the entire operation.
The second idea is the one Moody's is not too fond of.
The ratings agency sent a warning with the rating affirmation, and lowered its outlook to negative from stable.
Moody's said it is concerned the sale of the fleet business would "weaken the company's franchise strength and result in a business with a more concentrated revenue base."
Compass Point analysts Kevin Barker and Steven Seperson sent an interpretation of the Moody's report to clients this morning.
"Moody's specifically cites that if the company were to sell the fleet management business and keep the mortgage business as a standalone company, there would need to be a significant decrease in leverage in order to keep its current rating," the analysts wrote.
"Also, if core earnings deteriorate, the company's liquidity profile weakens, or the regulatory environment results in further monetary exposure, there is the potential for downgrade," they added. "While we do believe the company recognizes the need to deleverage if the fleet were to be sold (and we fully expect them to do so), the increased scrutiny from Moody's does pose a risk if the fleet management business were to be sold by itself."
In the fourth quarter, PHH reported $45 million in net income or $0.78 per basic share.
For the full year, the net income was $135 million or $2.36 per basic share.
According to the full year report, released after market close, full-year retail mortgage loan closings hit $47.4 billion, up 4% from 2012.
However, full-year total mortgage loan closings were $52.4 billion.
That's down 6% from 2012.
Things got even worse in the last quarter of the year.
Mortgage applications declined 18% sequentially in the fourth quarter to $10.4 billion.
"The Company has retained JPMorgan Securities, Centerview Partners and Kirkland & Ellis to assist in exploring ways to maximize shareholder value through the separation or sale of the company’s fleet business, mortgage business, or both," the report states.
Compass Point believes the best option for PHH shareholders is to remain intact until the entire business can be sold.