Wand Merger Corp’s merger-recap with residential mortgage servicer Nationstar will lever the company up by more than a turn but has the benefit of boosting free cash flow by giving Nationstar access to substantial deferred tax assets, giving the company leeway to pursue growth and eventually reduce leverage, said four sources familiar with the matter.

The dual-tranche USD 1.7bn senior unsecured notes offering was launched via Credit Suisse on Monday (25 June), with the roadshow ending today, with pricing expected thereafter. The notes are rated B2/B+.

The syndication includes a five-year non-call two tranche being whispered in the mid to high-7% area and an eight-year non-call three piece whispered in the low 8% area, according to two sources following the deal.

Along with an equity issuance by Wand Merger’s parent WMIH Corp (fka Washington Mutual) and cash on hand at both WMIH and Nationstar, proceeds from the notes will finance the merger as well as refinance Nationstar’s existing 2018, 2019 and 2020 notes. The remaining capital structure will consist of Nationstar’s existing 2021 and 2022 notes and the new Wand Merger notes.

Nationstar’s USD 400m 6.5% senior unsecured notes due 2021 last traded today at 99.875 to yield 6.547%. The USD 300m 6.5% senior unsecured notes due 2022 last traded today at 99.5 to yield 6.645%, according to MarketAxess. Nationstar’s stock last traded today at USD 17.52, for a market cap of USD 1.721bn. WMIH’s stock last traded today at USD 1.31, for a market cap of USD 262m.

The transaction increases total leverage by just over a turn, to 5.1x for the combined company compared to 3.9x at the standalone Nationstar before the merger. That is based on total pro forma debt of USD 2.5bn and USD 491m of pro forma LTM adjusted EBITDA, according to deal documents.

The merger gives little boost to the combined company’s EBTIDA — Nationstar’s standalone historical LTM adjusted EBTIDA is USD 483m, according to deal documents.

However, as well as the merger taking out near-term maturities, the USD 1.015bn of deferred tax assets that WMIH brings to the table will counteract the company’s increased interest expense from the offering, giving the company until 2032 or the end of the USD 1bn, whichever comes first, to generate more cash flow and EBITDA. With the tax cushion, the company will generate more cash flow and be able to pay down debt, complete acquisitions or keep the cash flow to protect against the market, two sources said.

Assuming the mortgage market continues on its current trajectory, it is likely that the combined company will be able bring leverage down to its pre-deal level within three years, perhaps less, said three sources. The management team said on the call that their goal is to lower leverage to 3.5x, one buysider added.

Pro forma the merger, free cash flow should come to around USD 240m, based on USD 491m of combined EBITDA less USD 187m of interest expense and USD 64m of capex. That is an increase from about USD 225m of FCF at Nationstar before the deal, based on USD 483m of EBITDA, USD 136m of interest expense, USD 64m of capex and USD 58m of LTM tax expenses, according to three sources.

Liquidity will stand at USD 582m with USD 100m in combined cash and cash equivalents and USD 482m in undrawn capacity under various credit facilities.

Three buysiders said they preferred the bond to those of fellow residential mortgage servicers Ocwen and Ditech. Comparatively, pricing is expected to come inside of Ditech for both tranches, in line with Ocwen for the five-year and wide of it for the eight-year, said the sources.

Ocwen’s B-/Caa2 rated USD 350m 8.375% senior secured second lien notes due 2022 last traded on 22 June at 103.5 to yield 7.188%, according to MarketAxess. Ditech’s unrated USD 250m senior unsecured notes due 2024 last traded on 18 June at 82 to yield 13.195%.

Searching for company

Washington Mutual filed for bankruptcy in 2008, and WMIH Corp is the entity that emerged from bankruptcy in March 2012. Since then, WMIH has had limited operations and has focused on completing an acquisition or merger transaction, working with an affiliate of KKR to that end since 2014, according to SEC filings.

In February 2018, WMIH entered into the merger agreement with Nationstar. After the merger, Nationstar will continue to operate as a wholly owned subsidiary of WMIH — but Nationstar’s somewhat conservative management will stay on board, much to the satisfaction of potential bondholders, three sources said.

“This isn’t really a merger in my mind,” said one analyst following the transaction. “WMIH isn’t a company, it was a special purpose acquisition company and it had no business, it just had a deferred tax asset.”

The combined company’s stock will trade under WMIH, but the combined company may change the ticker back to NSM, added the sources.

Nationstar operates currently in three segments: servicing, origination and its Xome business, which offers technology and data solutions to the mortgage market, according to deal documents. As interest rates increase, investors expect the servicing sector to contribute a larger slice of revenue than the 53% it represented as of 31 March. Origination’s contribution is expected to decrease from the 32% reported as of 31 March, a buysider noted.

Two buysiders said the company was right to aim to counteract the cyclicality of mortgage performance with its strategy and experience in servicing delinquent mortgages.

“When mortgage delinquencies rise, the company could be affected and it could roll through their results, but because they have a background in mortgage delinquencies, they know how to modify them and modify their exposure, more than some of the other more aggressive mortgage servicers,” one buysider said.

Sources said Nationstar was careful enough to bypass regulatory problems from the CFPB, unlike Ocwen, which is still mired in regulatory battles, most recently regarding cease and desist orders received from the CFPB in April 2017.

Credit Suisse and Nationstar declined to comment. WMIH did not respond to requests for comment.

2018 Debtwire