That premium reflects the added risk that investors take when lending to such firms, said Sudip Datta, finance department chair at Wayne State University's Mike Ilitch School of Business. Higher riskĬredit rating agencies are tasked with evaluating the financial health of companies and governments and the riskiness of specific bonds and securities.Ĭompanies with junk ratings typically must pay higher interest rates to borrow money than those with investment-grade ratings. "What brings us down is the industry we're in," he said. Gilbert also emphasized how Moody's scorecard gave 65% weight to Quicken's "operating environment" in the mortgage business and only 35% to the company's balance sheet. “If you’re familiar with what people people call junk yields, (5.25%) is nowhere near that kind of thing," Gilbert said. "You see companies who are at the worst end of it getting interest rates over 12% and the companies that are at the highest notch of what you're calling junk are getting 4 or 5% interest rates." Quicken had a junk rating when it did a $1 billion, 10-year bond issue in December 2017 with a 5.25% fixed interest rate.
Simply landing in junk territory doesn't mean that a company is in trouble and forced to accept exorbitant borrowing costs, he said. Gilbert noted how the junk category has a wide range of gradations and includes companies such as Netflix and Detroit-based Ally Financial, General Motors' former finance arm GMAC. "Our balance sheet and our liquidity is the most solid and strongest it's been since we started 34 years ago," he said Monday. In a phone interview this week, Gilbert pushed back on any notion that Quicken Loans is a true credit risk.
The third big rating agency, Fitch Ratings, hasn't done any in-depth scores on the company. The other agency, S&P Global Ratings, last affirmed Quicken as "BB" in 2017, or two notches below investment grade on that agency's scale. More: War erupts between mortgage giants Quicken Loans, United Shore More: How Dan Gilbert has made Quicken Loans thrive in mortgage industry More: Startup wants Quicken Loans to pay $740M in Texas trade secrets case 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. Two of the "Big Three" credit rating agencies have assigned junk ratings to Quicken Loans. "So If you begin to let the air out of that balloon, then everything begins to collapse.” ”If you took Dan Gilbert’s enterprises out of the equation, Detroit's downtown would be basically crawling along in rebuilding itself," said John Mogk, a Wayne State University law professor who specializes in urban development. Gilbert's real estate firm, Bedrock, owns or controls about 100 properties in greater downtown Detroit and has undertaken expensive renovations of many of them. Among other projects, the firm is building what would be the tallest skyscraper in Detroit, surpassing the Renaissance Center in height. No one contends that Quicken Loans is facing any immediate danger of a cash crunch, but the rating agencies' cautionary assessment raises questions about the long-term stability of the mortgage lender's business model - as well as downtown Detroit's continued resurgence, which has relied on Gilbert's ability to finance big real estate investments. For the rating agencies, a fundamental issue is not how well Quicken is managed, but rather the nature of its business as a non-bank mortgage lender that is reliant on short-term financing - and without any bank deposits to fall back on.ĭuring last decade's mortgage market meltdown and financial crisis, several similar lenders collapsed when their short-term borrowing arrangements dried up.
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