Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Shares of Ocwen Financial (NYSE:OCN) rose as much as 13% on Tuesday after New Residential Investment (NYSE:NRZ) announced on Monday afternoon that it had agreed to a multi-year extension of servicing contracts with Ocwen.
The extension of servicing contracts is part of a broader announcement by New Residential Investment that it is acquiring essentially all the assets of Ocwen affiliate Home Loan Servicing Solutions (OTC:HLSS) (and assuming the bulk of its liabilities.) The sale marks a new turn for New Residential Investment and HLSS, which had announced a merger in February. The new asset purchase agreement was struck at an equity purchase price of $17.08 per HLSS share, paid in cash and shares, whereas the merger agreement was worth $18.25 per HLSS per share -- all in cash.
The new, less favorable terms for HLSS are certainly having an impact on today's stock price action, with New Residential Investment gaining 5.5% at 12:15 p.m. EDT, while HLSS is down 2.4%. (Note, however, that New Residential's $120 million gain in market value is four times HLSS's market market value decline; one would have thought an efficient market would show greater symmetry between, if not parity of gains and losses -- the new terms represent a transfer of value from New Residential to HLSS relative to the merger agreement.)
Although Ocwen Financial created HLSS in 2012, it isn't a current shareholder (as far as I can tell), so the new terms do not impact it negatively. Instead, the extension by New Residential of servicing contracts with Ocwen removes uncertainty regarding the longevity of the contracts and the ongoing business relationship between the two parties (even under the original merger agreement, New Residential referred to the relationship in positive terms.) In February, hedge fund manager Mangrove Partners, a top ten HLSS shareholder, demanded the firm sever its business relationship with Ocwen.
Furthermore, the "transfer" of the relationship to New Residential Investment helps to address governance concerns relating to the ties between Ocwen and HLSS. For Ocwen shareholders, this is a positive development; still, my inclination is to put this one in the "too complicated" pile and move on.