NEW YORK ( TheStreet) -- Nationstar Mortgage Holdings (NSM - Get Report) shares, which rose Wednesday following a transaction with a related company, New Residential Investment Corp (NRZ - Get Report), erased its gains Thursday after an analyst downgrade. New Residential, meanwhile -- a lesser-known name with no employees that analysts mostly ignored -- clung to its gains.
While Nationstar shares traded higher on Wednesday, rising 4.7% to $42.73 in the first few hours following the deal's announcement, they fell 3.83% Thursday to close at $39.70. Shares of New Residential, meanwhile, have risen 5.2% in the two trading days since the deal was announced. New Residential shares closed at $6.45 Thursday.
In the deal announced Wednesday, New Residential and related parties acquired from Nationstar a part of servicing fee income on up to $130 billion worth of unpaid mortgage debt. Servicing essentially refers to collecting the debt. In return for acquiring the rights to the fees, known as mortgage servicing rights (MSRs), New Residential would have to finance up to $6.3 billion of advances against potential non-payment of the mortgage debt. Fortress Investment Group (FIG) owns 75% of Nationstar and an affiliate of Fortress is an external manager of New Residential. New Residential has no employees, serving largely as a corporate shell that pays out a large dividend from the fee income it essentially buys from Nationstar. By holding capital against potential non-payment of mortgages, it frees up Nationstar for other activities such as acquisitions or paying down debt.
Wednesday's deal "enables Nationstar to pay down debt and potentially purchase more mortgage servicing rights," according to a report from Compass Point Research analyst Kevin Barker.However, Barker argued the deal "highlights how capital intensive this business has become," adding "we would expect the bidding for future MSR deals to be more competitive. Therefore, we view the potential return on capital from new deals as limited." While at least three analysts published reports on Thursday saying the deal was positive for Nationstar, a downgrade from appeared to drive the stock. The downgrade was published ahead of Thursday's open and the stock remained in negative territory all day. By contrast, no analysts published reports on New Residential. While 10 analysts cover Nationstar, just five follow New Residential. Sterne Agee analyst Henry Coffey, who predicted Wednesday's deal in a note on Tuesday, stated in a follow-up note on Thursday that the deal "creates positive investment/reinvestment opportunities for NRZ and capital relief (w/minimal EPS impact) for NSM." He has a "buy" rating on New Residential and a "neutral" rating on Nationstar. -- Written by Dan Freed in New York. Follow @dan_freed