WL Ross to pay $1bn for subprime mortgage servicing unit

Just months after Cerberus dropped its $800 million buyout of H&R Block’s Option One Mortgage Corporation, the distressed investment shop has agreed to purchase the company’s servicing unit for an even higher price.

WL Ross has agreed to buy the mortgage loan servicing unit of Option One Mortgage Corporation from Kansas City-based tax services provider H&R Block for $1.1 billion (€705 million).

The distressed investment firm’s transaction price tops the $800 million deal previously struck for Option One's mortgage servicing and origination units by Cerberus Capital Management. The Cerberus deal, agreed in April 2007, fell through in December after Cerberus and H&R Block were unable to agree on final terms following last summer’s subprime mortgage crisis. Option One ceased its mortgage origination activities following the break-up of the deal.

WL Ross

“In today’s turbulent markets, the challenge is to complete a transaction, not simply announce an agreement,” said H&R Block chairman Richard Breeden in a statement. “There is still much work to be done until the business can be safely transferred at closing.”

H&R Block had been seeking a buyer for Option One since late 2006 as the result of financial losses induced by rising defaults on subprime mortgages. When the Cerberus deal was announced,  UBS analyst Kelly Flynn told Bloomberg she believed Cerberus was overpaying for the unit, which she had expected to go for as little as $400 million.

The WL Ross transaction’s final purchase price will be based on a formula that will be applied to the closing date balance sheet. The bulk of the purchase price will be determined by the assumption of total outstanding servicing advances, for which WL Ross will pay $0.97 per $1.00. Based on 31 January values, WL Ross would pay $1.04 billion for $1.07 billion in servicing advances.

WL Ross will acquire all assets and certain liabilities of Option One, including those of the company’s call center subsidiary in India.

Both parties are freed from all obligations if the transaction does not close by 30 May. A reverse break-up fee of $15 million will apply if WL Ross is unable to satisfy the financing condition to its obligation.

The transaction is expected to reduce Option One’s debt by some $700 million and return approximately $270 million in cash. No significant impact on reported net income is expected.

WL Ross, specialising in distressed investments, currently has $7.5 billion under management and closed its fourth fund on $4 billion in January. The firm was acquired by asset management firm Invesco in July 2006 for $375 million.

This is WL Ross’s second acquisition of a subprime mortgage servicer following the acquisition of bankrupt home lender American Home Mortgage’s loan servicing division in 2007.

H&R Block’s financial advisor on the transaction was Lazard Fréres and the company’s legal advisor was law firm Jones Day. WL Ross was represented by Weil, Gotshal & Manges.