Ambitious IPO Looks to Tap a $1T Asset Market

In January 2008 former Countrywide Financial president Stan Kurland formed PennyMac to bottom-feed on troubled mortgages. Now he hopes to take a REIT affiliate of the company public by selling $750 million worth of stock to the public through an IPO. Not bad for a business (which entails the servicing of troubled loans) that is barely 18 months old and has only one significant deal under its belt, a $558 million pool of troubled loans from the FDIC.

Can Mr. Kurland make the PennyMac IPO fly? We shall see, but one thing's for certain: if the company can pull off its IPO its backers (hedge funds BlackRock and Highfields Financial) will walk away with a nice return on their investment and a piece of the new company. But are PennyMac's IPO dreams full of hot air?

Before we answer that question let's talk about Mr. Kurland. It's not like he needs the money. A few days before he was forced out of Countrywide in the summer of 2006 by then-chairman and CEO Angelo Mozilo he sold $130 million worth of stock in the firm.

Mr. Kurland hasn't exactly been loquacious about what happened at Countrywide or been terribly forthcoming about PennyMac with me. He declined to be interviewed for a book I wrote about the mortgage mess (Countrywide was front and center) and generally I get callbacks from PennyMac's spokesman or even an attorney for one of its backers.

But that's OK. The new IPO filing is chock full of interesting facts and figures about PennyMac and the distressed loan business in general. IPO language can be both overly optimistic and cautiously glum. (The executives and investment bankers dictate the hyperbole while the disclosure attorneys rein them in.)

First, let's talk about the potential of distressed loans. According to the SEC filing, this is a $1 trillion business waiting to explode. Kurland and company chief investment officer David Spector (former head of global residential for Morgan Stanley) will take advantage of both the FDIC's "legacy" loan sales program and the Treasury's Public-Private Investment Program, neither of which have gotten off the ground and may never. (At press time it looked as though PPIP was dead indeed.)

Like I said: the hopes and dreams of a young company might be full of a certain amount of hot air, but I don't want to come across as too negative. But then again, people in the industry are talking about PennyMac and Mr. Kurland, mostly because of where he used to work - at Countrywide.

In its IPO filing the young company expresses some concern that "publicity and media attention" concerning litigation and investigations involving Countrywide may have an adverse impact on PennyMac's operations. Mr. Kurland worked there for 28 years, starting out as an accountant but it should be pointed out that he left CFC well before the mega-lender/servicer ran into deep financial trouble. (Last month the Securities and Exchange Commission slapped CFC's founder, Angelo Mozilo, with civil fraud and insider trading charges - which he denied.)

Even though Mr. Kurland hasn't talked about Countrywide openly some former employees and analysts familiar with his situation say he tried to steer the company away from subprime and feared greatly for the huge amounts of risk the lender/servicer was taken on. As it turns out he was right.

But what of PennyMac? Can it really capitalize on a Mount Everest-sized national loan problem and carve out a successful (and profitable) place in what appears to be a crowded market? When the company bought the $558 million portfolio from the FDIC it declined to say at what price. The IPO documents note that PennyMac has "capital commitments" (from its backers) of $584 million. To date, PennyMac has invested $226 million of the money - presumably in the FDIC portfolio which means it bought the loans for less than 50 cents on the dollar.

Still, there's plenty of chatter in the industry about all the employees PennyMac has hired and the generous amount of office space it has rented in Orange County. (It has just 10 loan modification telemarketers working in a space fit for 100.) As one distressed loan investor told me, "They have a lot of chiefs working there but not too many Indians." Translation: PennyMac might be burning a bit too much cash, making its investors nervous. But one official close to the company - requesting his name not be used - assured me that all is well with PennyMac and that its backers are more than comfortable with how Mr. Kurland has shepherded the young firm.

"This is a multiyear commitment," said the official. "You build a good business over not one year but many." True, but it appears that PennyMac's backers could be cashing out after just 18 months.

One last note: PennyMac Mortgage Investment Trust, the unit that's going public, will operate as a real estate investment trust, paying out 90% of its earnings to shareholders so it can avoid a big federal income tax bill. Countrywide's Mr. Mozilo hated REITs, calling them "pigs with lipstick." His reasoning: any company paying out that much of its profits cannot build retained earnings. PennyMac admits as much in its filing - but Mr. Mozilo isn't mentioned by name and probably for good reason.

Paul Muolo is executive editor of National Mortgage News. He can be e-mailed at Paul.Muolo@SourceMedia.com.

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