Detroit Free Press: Sudip Datta on Quicken Loans 'junk' bond rating
Detroit-based Quicken Loans is enjoying strong profits and holds the title as the nation's No. 1 direct-to-consumer mortgage lender. It is one of the city's largest employers and the biggest revenue-generator in the business empire of Dan Gilbert, the central figure in downtown Detroit's recent and dramatic turnaround. Yet in the eyes of the Wall Street credit rating agencies, Quicken Loans is still viewed as a relatively risky business and its debt is rated as below investment grade, or what is commonly called "junk" in the financial world. It's considered too dangerous for some investors such as some pension funds. 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. 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. ”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. "So If you begin to let the air out of that balloon, then everything begins to collapse.” Credit rating agencies are tasked with evaluating the financial health of companies and governments and the riskiness of specific bonds and securities. Companies with junk ratings typically must pay higher interest rates to borrow money than those with investment-grade ratings. 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. Some investors like junk bonds because they want the higher yield. "The rating tells investors that this is a junk-bond category, so be careful, but if you want to have higher returns, take the risk," Datta said.
Full story in Detroit Free Press.