Wall Street Bond Rating Agencies Give Junk Bond Status To Detroit’s Quicken Loans
Wall Street Bond Rating Agencies have given Detroit-based Quicken Loans Junk Bond status. Yet, Quicken is enjoying strong profits.
Quicken Loans is one of the city’s largest employers and the biggest revenue-generator in the business empire of Dan Gilbert.
The reality in the finance world is much different. Quicken Loans is viewed as a risky business model. Its debt is commonly referred to as “junk”.
Quicken’s debt is also considered too dangerous for some investors such as some pension funds. Many pension funds and money market funds are not allowed to buy junk bonds.
The fundamental issue for Wall Street is the nature of its business as a non-bank mortgage lender. As a result, the rating agencies see a lender without any bank deposits high risk.
The rating agencies are not making any assertions that Quicken Loans is facing any immediate danger of a cash crunch. However, the rating agencies’ assessment raises questions about the long-term stability of the mortgage lender’s business model.
Two of the credit rating agencies have assigned junk ratings to Quicken Loans. The most recent action, in January by agency Moody’s Investors Service, scored Quicken as a stable “Ba1,” which is a notch below investment grade on Moody’s scale.
S&P Global Ratings assigned Quicken a “BB” or two notches below investment grade. Yet, Fitch Ratings hasn’t done any in-depth scores on the company.
Junk Bond Status Means Higher Risk
Credit ratings for businesses work just like consumer credit ratings. Companies with a junk bond rating pay higher interest rates to borrow money than those with investment-grade ratings. Just like people with a 550 FICO pay a higher interest rate on a mortgage compared to someone with a 750 score.
Credit rating agencies appear to be more conservative when rating non-bank mortgage lenders. This is due to the collapse of several non-bank lenders leading up to the financial crisis.
For example, Moody’s gave Countrywide Financial an investment-grade rating in November 2007. Countrywide collapsed 30 days later. The government had to facilitate a fire sale to Bank of America. BofA is still trying to straighten out the chaos it acquired more than ten years later.
Today, Quicken Loans has a Moody’s rating that is one notch below where Countrywide was in those calamitous final months.
A Moody’s representative last week declined to comment on whether the agency has adjusted its rating standards for mortgage lenders since the financial crisis.
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