April 22, 2009
VIA EDGAR AND FED EX
- --------------------
Mellissa Campbell Duru, Esq.
Special Counsel
Office of Mergers and Acquisitions
Securities and Exchange Commission
100 F Street, N.E.
Washington D.C. 20549-3628
Re: PHH Corporation Preliminary Proxy Statement on Schedule 14A filed
April 1, 2009 by Pennant Capital Management, LLC (File No.
1-07797) and Amendment No. 9 to Schedule 13D filed on March 9,
2009 by Alan Fournier and Pennant Capital Management, LLC (File
No. 5-13543).
Dear Ms. Duru:
On behalf of Pennant Capital Management, LLC, Pennant Spinnaker Fund LP,
Pennant Offshore Partners, Ltd., Pennant Onshore Partners, LP, Pennant Onshore
Qualified, LP, Pennant Windward Fund, LP, Pennant Windward Fund, Ltd., Alan
Fournier, Allan Z. Loren, Gregory J. Parseghian (collectively the "Soliciting
Persons"), we have filed today Amendment No. 1 ("Amendment No. 1") to the
Preliminary Proxy Statement filed under cover of Schedule 14A by the Soliciting
Persons on April 1, 2009 (the "Preliminary Proxy Statement") relating to PHH
Corporation (the "Company"). Enclosed supplementally with this letter are three
clean copies of Amendment No. 1, three redlined copies of Amendment No. 1
showing the changes that were made to the Preliminary Proxy Statement and copies
of certain supplemental information referred to in the responses below.
The following are the Soliciting Persons' responses to your letter of April
10, 2009 containing the Staff's comments regarding the originally filed
Preliminary Proxy Statement and Amendment No. 9 to Schedule 13D filed on March
9, 2009 by Alan Fournier and Pennant Capital Management, LLC. For your
convenience, the full text of each of the Staff's comments is set forth below in
bold type, and the Soliciting Persons' response to each comment directly follows
the applicable text. Defined terms used in this letter without definition have
the meanings ascribed to them in the Preliminary Proxy Statement.
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 2
Preliminary Proxy Statement
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1. Tell us why you have not included Pennant General Partner LLC as a filing
person on the Schedule 14A and as a participant in the solicitation. In
this regard, we refer you to the letter dated March 4, 2009 from the State
of New York, Department of Insurance which states that Pennant Capital
Management, LLC and Pennant General Partner LLC together own 9.97% of
shares of PHH Corporation.
We have not included Pennant General Partner LLC ("Pennant GP") as a filing
person on the Schedule 14A because Pennant GP is not engaged in any
"solicitation" as that term is used in Rule 14a-3(a). Pennant GP serves as
the general partner of the four Funds that are organized as Delaware
limited partnerships; it has no employees, and it does not manage the
Funds' investments in the Company. In contrast, Pennant Capital Management,
LLC ("Pennant Capital") is the investment manager or adviser to each of the
Funds, both domestic and offshore, and has a number of employees, some of
whom act for Pennant Capital in respect of the investment in the Company
held directly by the Funds. As a result, we have concluded that while
Pennant Capital is engaged in a solicitation with respect to the Company,
Pennant GP is not.
We have not included Pennant GP as a participant in the solicitation
because it does not fall into any of the categories of persons who are
defined as participants in clauses (i) through (vi) of Instruction 3 to
Item 4 of Schedule 14A. In that regard we note that the only persons within
the "Pennant family" that are soliciting proxies are Alan Fournier and
Pennant Capital, that the only "Pennant" persons that are financing the
solicitation are the Funds, and that no committee or group is involved in
soliciting or financing the solicitation (although Alan Fournier and
Pennant Capital may be deemed to be acting in concert in connection
therewith). While the Funds and Pennant GP are passive with respect to the
solicitation, we consider the Funds to be participants because Pennant
Capital is causing the Funds to bear the costs of the solicitation.
Please note that our response to Comment #27 addresses the March 4, 2009
letter from the New York Insurance Department that you refer to in Comment
#1.
Cover Letter
2. You urge shareholders to vote for your nominees because of your belief that
such nominees will bring "a proven track record of creating stockholder
value and implementing change." Please provide support for this statement.
As is clear from the biographical information of the Independent Nominees
provided in the Preliminary Proxy Statement, each Independent Nominee would
bring to the Company different credentials. Mr. Parseghian was recruited
due to the depth and breadth of his experience in the mortgage industry.
Mr. Loren was chosen because of his proven track record of creating
stockholder value and implementing change. We believe
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 3
this characterization of Mr. Loren's background is supported by an
interview of Mr. Loren in a 2005 article in The McKinsey Quarterly entitled
"Leading a turnaround: An interview with the chairman of D&B" in which the
due authors stated the following:
"D&B, formerly known as Dun & Bradstreet, could be a business school
case study about restoring value to a good company that had lost its
way. For decades, the $1.4 billion provider of global business
information, tools, and insight has supplied data about companies
around the world. Customers buy D&B products, such as business
information reports (detailed briefings on companies) and
business-to-business marketing lists, to improve cash flows, mitigate
risks, and increase revenues. But during the 1980s and 1990s, a series
of acquisitions and divestitures undermined the performance and brand
of the company, and by the late '90s it could no longer focus on its
true sources of value. In 1999 D&B failed to meet its revenue and
earnings expectations, and shareholders were furious. The company,
which is now based in Short Hills, New Jersey, had become an
underperformer with underleveraged assets.
That was the problem greeting Allan Z. Loren in May 2000, when he
joined D&B as chairman and CEO. Loren had recently retired as the CIO
of American Express, another venerable brand-name company, which he
had helped turn around. In D&B, he saw a business that had a lot to
offer its customers-if it could focus on the right things, repair its
brand, improve its leadership, and crystallize its value proposition.
Under Loren's leadership, D&B quickly crafted a strategy to help it
determine how it could win in the marketplace and to generate the
confidence needed for implementing its plans. Soon the company adopted
a business model designed to increase its investments in the
capabilities that lie at the heart of its brand promise and to
position itself for growth. Savings from restructuring were reinvested
to expand the business and to raise its earnings per share (EPS)-a
strong focus of the turnaround. D&B also created a new culture of
leadership, which Loren regards as critical for sustaining any
business.
Five years later, D&B has repaired its brand, improved its leadership,
and built a portfolio of effective customer solutions. The company has
also delivered double-digit earnings growth during each of the past
four years, and its value has increased by more than 300 percent
during that time. In January 2005, Loren handed over the position of
CEO to Steven Alesio, in a succession plan that had been managed for
nearly two years."
A copy of the article can be found at The McKinsey Quarterly's website at
http://www.dnb.com/pdfs/about/mckinsey-quarterly.pdf.
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Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 4
Background of this solicitation, page 3
3. Please explain why, on November 24, 2008, you believed that management had
little credibility in the market and that the November 10, 2008 earnings
conference call was "reckless and damaging."
"Reckless and Damaging"
In a phone conversation between two representatives of Pennant, Alan
Fournier and Lui Sykes, and Mr. Krongard on November 24, 2008, Messrs.
Fournier and Sykes expressed to Mr. Krongard their belief that the
Company's November 10, 2008 earnings call for Q3 2008 had been reckless and
damaging principally based on the substance and manner of Management's
disclosure that the Company was considering the acquisition of a banking
institution. The disclosure was made almost in passing in Management's
prepared introductory remarks, without any attempt to provide to investors
a sense of the materiality or potential impact of a bank acquisition. Nor
did Management seek to provide any assurance that, in the midst of perhaps
the greatest banking crisis since 1929, the acquisition of a bank would not
seriously add to the Company's challenges.
In responding to a question about the size of a possible bank acquisition,
Mr. Edwards, the CEO, said (grammatical errors in transcript): "This
strategy is to look at something that could support a billion dollars in
escrows. Size assets that we've looked at are in the small as a billion in
assets, to as large as $10 billion in assets." (Q3 Earnings Call Transcript
at 17) When pressed for a better understanding of Management's rationale
for pursuing an acquisition at the higher end of that range, and the
possibility that significant capital would have to be contributed to the
bank by the Company ($500 million of capital was posited in the question),
Mr. Edwards replied that "[w]e're looking at all options in between."
Immediately following this "non-response" to a question seeking help in
understanding a potentially material transaction for the Company, Mr.
Edwards further sowed confusion by stating: "Going back to the question I
got earlier [about why management is not buying the stock if they think it
is so cheap], if I don't disclose everything on this call when I get a
question, then I have insider information and I can't buy the stock." (Q3
Earnings Call Transcript at 17) Previously, Mr. Edwards had said he
personally believed the Common Stock was undervalued and, in response to
prodding, that he would purchase stock if permitted by counsel. (Q3
Earnings Call Transcript at 10-11) With this statement, Mr. Edwards called
into question whether there was material nonpublic information about a bank
acquisition that he was withholding from investors. By leaving listeners to
guess what he meant by his comment and what important information might
prevent the Company's CEO from buying stock, Mr. Edwards created
uncertainty among investors that Pennant believes added to the damaging
impact of his performance.
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 5
As a result of the earnings call, investors were left in the dark as to
Management's plans for a bank acquisition and the impact it might have on
the Common Stock. To make matters worse, during the call Mr. Edwards
stated: "[B]ecoming a depository has been part of our strategic plan for
years. But we have been burdened by other things, contracts, delayed
filings, things like that that kept us from getting where we wanted to be."
(Q3 Earnings Call Transcript at 8) This was a surprise to Pennant, and
undoubtedly to the market as well, because as far as Pennant is aware from
covering the Company closely for several years, the November 10, 2008
earnings call was the first time the Company had ever disclosed to the
market any such long-standing strategic plan.
The November 10, 2008 call was held on a Monday morning. By the end of that
day, the Common Stock was down 14.36% from the Friday close (while the
Russell 2000 Financial Services Index was down 4.04%). By the market close
on Tuesday, November 11, 2008, the Common Stock was down another 26.11% -
for a cumulative two-day decrease from the Friday close of 36.72% - while
the Russell 2000 Financial Services Index was down another 1.12%, or a
cumulative 5.11% for the two days. Pennant believes that the market's
reaction was indicative, in part, of the concerns engendered by Management
through its handling of the earnings call.
Finally, the November 10, 2008 earnings call was discussed by Messrs.
Fournier, Sykes and Krongard on their November 24, 2008 phone call. When
Mr. Fournier characterized the earnings call as an unmitigated disaster,
Mr. Krongard replied: "I think you're being kind." Also in that call, Mr.
Krongard indicated to the Pennant representatives that, following the
earnings call, Mr. Edwards had been very critical of his own performance.
Credibility in the Market
-------------------------
Pennant's reasons for believing that Management had little credibility in
the market place stemmed in part from the fact that the Common Stock was
trading at a huge discount from tangible book value. In that regard, during
the November 10, 2008 earnings call, Mr. Edwards said that the Common Stock
was trading at 23% of tangible book value (Q3 Earnings Call Transcript at
6) and later stated that if the Company was put in "run off mode"
shareholders would get book value (Q3 Earnings Call Transcript at 15).
Referring to Mr. Edward's 23% figure, one analyst on the earnings call said
to Mr. Edwards during the question and answer session that "[t]he market is
giving you - it seems to me - an extraordinarily strong message that it
doesn't believe you guys are headed down the right road here." (Q3 Earnings
Call Transcript at 15)
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 6
4. Please supplement your disclosure to succinctly describe the relationship
between the participants. Please explain how the Pennant affiliated
entities and Mr. Fournier first contacted Messrs. Loren and Parseghian.
Pennant has revised the disclosures on pages 1 and 5 of Amendment No. 1 to
add a description of the relationship among the participants and explain
how Pennant (including Mr. Fournier) first contacted Messrs. Loren and
Parseghian.
5. We refer you to amendment No. 9 to the Schedule 13D filed by Pennant
Capital Management, LLC and Alan Fournier. Please provide a summary of the
material provisions of the letter received from the State of New York,
Department of Insurance, dated March 4, 2009, (the "DOI Letter") and
explain how this factored into your decision to nominate your candidates to
the Board.
Pennant has revised the disclosure on page 5 of Amendment No. 1 to add the
requested summary and explanation.
Reasons for this Solicitation
- -----------------------------
6. Although you highlight what you believe are shortcomings of the Board and
management of the company, other than the election of two directors, you
have not described any proposed solutions. Please disclose whether the
participants have any other specific plans or strategies designed to
improve the overall performance of the company. For example, you disclose
your intention to vote proxies for company nominees other than the Chief
Executive Officer. If your nominees are elected, would the participants
intend on advocating for a replacement of the Chief Executive Officer? If
the participants do not have any specific plans other than the election of
directors, please state this fact.
Pennant has revised the disclosure on page 8 of Amendment No. 1 to comply
with the Staff's request.
7. Please revise your disclosure to emphasize the nominees' limited ability to
effect any changes if elected given that they would constitute a minority
of the Board.
Pennant has revised the disclosure on page 8 to emphasize that if elected,
the Independent Nominees will be a minority on the Board and will have
limited ability to effect any changes.
8. Support for each statement or assertion of opinion or belief must be
self-evident, disclosed in the proxy materials, or provided to the staff on
a supplemental basis. Provide us with support for the statements you make
with respect to the following statements:
o "[P]ennant expects that the recent deep industry downturn will result
in great opportunity for the Company...11 of the top 30 industry
competitors...have failed...leaving the company as the 5th largest
retail originator of residential mortgages...,";
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 7
The statement that "the recent deep industry downturn will result in great
opportunity for the Company" is supported by Mr. Edwards' November 10, 2008
statement that "[b]efore getting into the details, I want to touch on the
opportunities this unique market presents to PHH. As you know we are an
outsource solution for mortgages and fleet management. In the past during
recessionary times we experienced increased new [fleet] activity for both
businesses and today that remains true. In the mortgage space the
consolidation means having more - having scale is more important than
ever." (Q3 Earnings Call Transcript at 2) (We note that although Mr.
Edwards said "fleet activity," it is clear from the context of the prior
sentences and his use of the word "both" that he was speaking about
increased activity and opportunity for both PHH Mortgage and PHH Fleet.)
Support for the proposition that "11 of the top 30 industry
competitors...have failed...leaving the company as the 5th largest retail
originator of residential mortgages" can be found in the Company's December
2, 2008 presentation filed with the Commission as Exhibit 99.1 to the Form
8-K filed that day by the Company.
(http://www.sec.gov/Archives/edgar/data/77776/000095012308016756/
y73009exv99w1.htm). On Slide 8 of that presentation, the Company lists the
top 50 mortgage originators of 2006 and shows 11 of the top 30 listed on
the slide as having shut down their operations. Slide 5 of the same
presentation shows that the Company has become the 5th largest mortgage
originator.
o "[w]ith the recently improved market for refinancing and intense focus
of the federal government...Pennant believes the company will have
even greater opportunities...,";
Pennant's belief as to the Company's mortgage origination opportunities is
supported by disclosure on page 57 of the Company's 2008 Form 10-K (filed
with the Commission on March 2, 2009) under the heading "Mortgage Industry
Trends" - "Overall Trends." In the first sentence of the second paragraph
under those headings, the Company expresses its expectation as to higher
loan origination volumes in 2009 tied specifically to efforts by the
federal government.
The statement as to the intense focus of the federal government is
supported by the "Regulatory Trends" section of the Company's 2008 Form
10-K (page 55). Among other things, the Company identifies the Housing and
Economic Recovery Act of 2008, conservatorship of Fannie Mae and Freddie
Mac, Emergency Economic Stabilization Act of 2008, the federal purchase of
the direct obligations of GSEs and the Homeowner Affordability and
Stability Plan as measures taken by the federal government to help stem the
U.S. housing market crisis.
o "[T]he Company's largest competitor...has begun to scale down its
business...leaving plenty of opportunities for PHH Fleet to pick up
profitable new clients...,";
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 8
This statement is based on Mr. Krongard's statement to Messrs. Fournier and
Sykes, on their November 24, 2008 telephone conversation, that GE was
scaling down its fleet business to a point of almost getting out of the
business and that he viewed this as an opportunity for the Company.
o "[P]ennant believes that tangible net book value represents a
reasonable proxy for runoff value and that the market has therefore
been expressing the view that the Company is worth more "dead than
alive"...";
Pennant's belief that tangible net book value represents a reasonable proxy
for runoff value is supported by a statement made by Mr. Edwards during the
Company's November 10, 2008 earnings call. Mr. Edwards said that the Common
Stock was trading at 23% of tangible book value (Q3 Earnings Call
Transcript at 6) and later stated that if the Company were put in "run off
mode" shareholders would get book value (Q3 Earnings Call Transcript at 15)
Pennant's belief that the market has been expressing the view that the
Company is worth more "dead than alive" is supported by the observations
that (i) the Company's market capitalization is the market's valuation of
the Company as a going concern and (ii) a 77% discount to tangible book
value (which Mr. Edwards equates with run off value) suggests that
liquidating the Company or putting it into run off mode would produce more
value than the market believes would result from operating the Company as a
going concern.
o "[t]he Company's current depressed market valuation reflects a dim
view of the Company's stewardship by the Board...,"
This statement is based in part on Pennant's view, discussed in the
response immediately above, that the market believes the Company is worth
more "dead than alive." In addition, during the question and answer session
of the November 10, 2008 earnings call, one analyst on the call said
(referring to Mr. Edward's 23% figure) that "[t]he market is giving you -
it seems to me - an extraordinary strong message that it doesn't believe
you guys are headed down the right road here." (Q3 Earnings Call Transcript
at 15)
o "[P]ennant believes that the[] incentive plans fail to provide proper
incentives for employees, particularly in the current market
environment...,";
The Preliminary Proxy Statement describes at length Pennant's view that the
incentive plans fail to provide proper incentives for employees because the
employees' ability to earn incentive compensation under the plans is
significantly affected by conditions beyond the control of the employee,
such as interest rates and market-driven gain-on-sale margins. Pennant
believes that the Company's incentive plans are particularly susceptible to
not providing proper incentives in the current market environment because
in the current market environment it is even more difficult to set pre-tax
income targets in March that will be relevant for the entire year. Pennant
believes that this is the case
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 9
because of the great uncertainty in the current market environment as to,
among other things, the future of the US economy in general, the future of
the housing sector in particular, and the effectiveness and timing of the
unprecedented stimulus efforts being undertaken by the federal government.
o "[it] has been readily apparent to Pennant that until recently, the
Board and Management have not focused on the profitability of
individual clients...,"; and,
As stated in the Preliminary Proxy Statement, this statement is based on
Pennant's discussions with representatives of the Board and Management. In
a November 19, 2008 meeting held at Pennant's offices between Messrs.
Fournier and Sykes of Pennant and Ms. Sandra Bell, the Company's new CFO
("Ms. Bell"), Ms. Bell indicated that PHH Mortgage had not tracked the
earnings power of its clients in the past and that it did not then track
the earnings power of new clients before signing them as clients. Ms. Bell
indicated to the Pennant representatives that PHH Mortgage suspected that
some of its clients were insufficiently profitable across the business
cycle but did not, in the past, evaluate or focus on whether an existing
client is sufficiently profitable to keep as a client or whether a
potential client is profitable enough to sign as a new client. In that
discussion, Ms. Bell told the Pennant representatives that PHH Mortgage was
currently taking a number of actions to improve its profitability including
cutting costs and unprofitable revenues.
In addition, during a November 17, 2008 call among Mr. Sykes, George
Kilroy, President and CEO of PHH Fleet ("Mr. Kilroy"), and Mark Johnson,
Treasurer of PHH Fleet ("Mr. Johnson"), Mr. Sykes specifically asked Mr.
Kilroy why PHH Fleet is not being more aggressive in passing costs to its
clients. Mr. Kilroy responded with the concern that passing costs to
clients may lead to clients leaving PHH Fleet to go to competitors that do
not pass similar costs to their clients. In the discussion with Mr. Kilroy,
it was clear to Pennant that Management was more focused on growing PHH
Fleet's market share instead of focusing on restoring profitability even at
the cost of potentially losing some business.
o "[M]anagement was slow to address profitability concerns, especially
in 2008 after termination [of] the merger agreement with General
Electric Capital Corporation."
Pennant believes that Management was too slow to "right-size" its cost
structure and thereby address profitability concerns. Instead of reducing
expenses aggressively to achieve profitability, Management was content with
operating at a break-even level.
For example, for approximately the first half of 2008, Management said that
the mortgage production business would break-even at a level of $39 billion
in annual originations. In fact, breaking even was Management's goal
starting at least in the first quarter of 2008, according to Mr. Edwards:
"On our last call [for Q1 2008 earnings], we said we were seeing refi
activities slow down as rates rose, but we
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 10
thought we could achieve our goal of $39 billion in origination loan volume
to breakeven in this segment...." (Q2 Earnings Call Transcript at 2,
emphasis supplied)
Later in the year, as Management apparently started to finally appreciate
the reality of the downturn, the Company began to pay additional attention
to cost cutting efforts but still retained its goal of (at best) break-even
mortgage origination operations. Rather than a break-even point of $39
billion in annual originations, Management had been able to lower that
level to as little as $30 billion. In November 2008, in response to
questioning about whether the Company's then-anticipated run rate of $27
billion in mortgage originations could allow the segment to break even, Mr.
Edwards stated: "Getting to break-even at $27 billion, is almost
impossible. ... at the $30 billion to the $34 billion, more achievable to
be able to get the break-even at the $30 billion." (Q3 Earnings Call
Transcript at 12)
Pennant believes that the Company should have been more aggressive in
trying to achieve profitability early in the year by targeting a break-even
level below its mortgage origination run rate. Since, as shown above, the
Company believed it was able to achieve break-even operations at a level in
the low $30 billions, Pennant believes it should have targeted such a cost
structure much earlier in the year when it was predicting $39 billion in
annual origination volume.
Another way of looking at the slowness of Management's response to a
deteriorating situation is the fact that Management knew in May 2008 (the
time of the Q1 2008 earnings call) that refinancing activity was slowing
down, yet it was only in August 2008 that it seemed as though Management
was going to take the problem seriously. During the Q2 2008 earnings call
on August 9, 2008, Mr. Edwards stated:
"So getting it to break even is just not going to happen. So what
we're going to do over the next few weeks is the management team of
the mortgage company is going to brainstorm on what new accounts do we
have coming in, what's the sales momentum? What do we think the run
rate is for all of our existing clients? What does that look like [in]
terms of volume and in order to be a break even, what do we have to
take out of the cost structure in order to get there? Is that's the
exercise we'll go to, to get the thing back on track to break even.
..."
(Q2 2008 Earnings Call Transcript at 14, emphasis supplied) Pennant
believes these are fundamental questions that Management should have been
brainstorming about well before the August 9, 2008 Q2 earnings call.
9. You disclose your belief that the "fair value for the Company is in excess
of $40 per share based on a 10x multiple applied to potential normalized
earnings of approximately $4 per share or more (resulting from an assumed
40 basis point pre-tax margin for PHH Mortgage Production on annual volume
of over $40 billion, a
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 11
10 basis point pre-tax margin for the mortgage servicing segment of the
Company and PHH Fleet adjusted pre-tax earnings returning to 2007's level
of $106 million)." Please supplementally provide us with support for each
of the foregoing estimates. Where the basis of support are other documents,
provide either complete copies of the documents or sufficient pages of
information so that we can assess the context of the information upon which
you rely and mark any supporting documents provided to identify the
specific information relied upon. In addition, advise us what
consideration, if any, has been given to adhering to the disclosure
standards enunciated in Exchange Act Release No. 16833 (May 23, 1980).
We have revised the disclosure on page 6 of Amendment No. 1 to add the
additional assumptions of (i) a loan servicing portfolio of $150 billion
and (ii) a tax rate of 40%. Supplemental support for Pennant's belief as to
fair value is as follows:
(a) Multiple of 10x.
----------------
The Company's August 24, 2007 merger proxy statement for its aborted
acquisition by GE and Blackstone (http://www.sec.gov/Archives/edgar/
data/77776/000095012307011934/y35740ddefm14a.htm) contained fairness
opinions from Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Gleacher Partners LLC and presented a joint financial analysis by
these two Company financial advisors. As disclosed on page 40 of that
proxy statement, the financial advisors used forward one-year and
two-year multiples of 11.5x and 9.8x on average earnings for the
selected companies and 11.1x and 10.0x for median earnings for the
selected companies.
(b) $40 billion in mortgage originations.
-------------------------------------
According to The Mortgage Bankers Association's Mortgage Origination
Estimates, over the last 10 years, from 1999 through 2008 inclusive,
average annual residential mortgage originations in the U.S. have been
$2.388 trillion. This statistic can be seen at the MBA's web site,
http://www.mbaa.org/researchandforecasts/economicoutlookandforecasts,
by selecting "Residential" at the top left across from "Market Focus."
The resulting Excel spreadsheet can be manipulated to add together the
40 quarterly figures presented for this 10-year period (arriving at
the $2.388 trillion number). For this calculation, Pennant has
"rounded down" and assumed a normalized origination figure of $2.0
trillion per year.
For the Company's market share of this $2 trillion market, Pennant has
assumed 2% based on Slide 5 of the Company's December 2, 2008
presentation filed with the Commission as Exhibit 99.1 to the Form 8-K
filed that day by the Company. That slide shows a Company market share
of 2.3% and can be found here:
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 12
http://www.sec.gov/Archives/edgar/data/77776/000095012308016756
/y73009exv99w1.htm
The $40 billion in mortgage originations was based on $2 trillion
($2,000 billion) multiplied by 2%. Using the actual 10-year average
market size of $2.388 trillion and Management's 2.3% market share
figure cited above would produce originations of $54.9 billion, or
37.3% greater than the figure used in Pennant's estimate.
(c) 40 basis point pre-tax margin.
------------------------------
Based on Slide 15 of PHH's March 2, 2009 presentation filed with the
Commission as Exhibit 99.2 to the Form 8-K filed that day by the
Company, we believe that 40 basis points is reasonably conservative.
The presentation is found here:
http://www.sec.gov/Archives/edgar/data/77776/000095012309003823
/y74944exv99w2.htm.
On the chart depicted in Slide 15, the margins across the top are
"gain-on-sale" margins (in connection with the sale of the mortgages
that the business originates). To determine the pre-tax margins, we
can look at the $40 billion volume line presented by the Company
(coinciding with the estimate above), which shows segment earnings of
$182 million to $469 million in earnings. We discard the high end of
$469 million in earnings (because Pennant believes it may be overly
ambitious) and arrive at a range of $182 million to $397 million in
annual segment earnings. Dividing these earnings numbers by the $40
billion of volume to which they relate, we can arrive at pre-tax
margins ranging from 45.5 basis points to 99.25 basis points. Pennant
believes that a margin of 40 basis points - below the bottom of the
range the Company is looking at for 2009 - is a reasonable normalized
number.
(d) 10 basis point pre-tax margin for the mortgage servicing segment.
-----------------------------------------------------------------
Based on Slide 17 of the Company's March 2, 2009 presentation filed
with the Commission as Exhibit 99.2 to the Form 8-K filed that day by
the Company (link immediately above), we believe that 10 basis points
is reasonable. This is the midpoint of the range of 9 basis points to
11 basis points presented by management.
The Company also gave a 9 to 11 basis point range for segment profit
in its Q4 2008 earnings call on March 2, 2009. (Q4 2008 Earnings Call
Transcript at 4)
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 13
(e) $150 billion servicing portfolio.
---------------------------------
As disclosed on page 11 of the Company's 2008 Form 10-K, average loan
servicing portfolio was $152.7 billion in 2008, $163.1 billion in 2007
and $159.3 billion in 2006. Pennant believes that $150 billion is a
reasonable estimate of the size of the Company's loan servicing
portfolio on a normalized basis.
(f) PHH Fleet adjusted pre-tax earnings returning to 2007's $106 million.
---------------------------------------------------------------------
On Slide 24 of the Company's March 2, 2009 presentation (filed as
Exhibit 99.2 to the Company's March 2, 2009 Form 8-K, link above),
Management presents adjusted fleet management segment results of $95
million for 2008. This results from the $62 million of reported
segment earnings, adjusted principally by the $40 million add-back of
increased debt fees and spread between actual costs to the Company and
the indices the Company was required to use to bill customers. Since
the Company has begun to address the discrepancies between its actual
fleet financing costs and the costs passed through to customers
(albeit more slowly than Pennant believes should have been the case),
this adjustment makes an important step toward normalizing the
earnings of this segment. Pennant believes that this $95 million is
below PHH Fleet's normalized earnings potential due to an unusually
soft fleet business. As stated in the Company's Form 10-K for 2008 at
pages 76 to 77, "[f]or 2008 compared to 2007, the decline in average
unit counts, as detailed in the chart below, was primarily
attributable to deteriorating economic conditions and the timing
associated with the roll-off of leased units due to the uncertainty
generated by the announcement of the Merger Agreement during 2007,
which was ultimately terminated in 2008." Pennant therefore believes
that 2007 represents a more normalized picture of PHH Fleet's
potential earnings.
For purposes of its estimate of value, Pennant is using an adjusted
pre-tax earnings figure of $106 million. This adjusted figure reflects
the $116 million presented by the Company as PHH Fleet's 2007 pre-tax
earnings (2008 Form 10-K at 180), reduced by $10 million in order to
reverse the one-time "$10 million reduction in accruals due to the
resolution of foreign non-income based tax contingencies" (2008 Form
10-K at 78 under Other Operating Expenses).
(g) Earnings of $4 per share.
-------------------------
(i) Mortgage Origination Earnings are $40 billion in originations x
0.40% = $160 million. (From (b) and (c) above.)
(ii) Mortgage Servicing Earnings are $150 billion x 0.10% = $150
million. (From (d) and (e) above.)
(iii) Fleet Earnings are $106 million. (From (f) above.)
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 14
(iv) After-tax earnings are $416 million (segment total) reduced by an
assumed 40% tax rate, or $249.6 million. Based on 54,256,294
shares outstanding at February 13, 2009 (from 2008 Form 10-K),
after-tax earnings are $4.60 per share.
(v) Fair value of $40 per share is earnings of $4 per share
multiplied by the 10x multiple. While the text of the proxy
statement refers to fair value in excess of $40 per share, we
believe that the $4.60 after tax earnings estimate is reasonably
conservative and that even that estimate would result in $46 per
share at a 10x multiple.
We believe the disclosure of this $40 estimate is appropriate and
consonant with the Commission's proxy rules. In this regard, we note
that Exchange Act Release No. 16833 was issued specifically in the
context of proxy contests where a principal issue in contention is the
liquidation of all or part of an issuer. In the case of the instant
solicitation, the participants have no such plan or proposal and are
not presenting the estimate either for or against any such proposal.
Rather, the participants are expressing the view, which is undisputed
by Management, that PHH's market valuation does not reflect its
intrinsic value.
Nonetheless, we do believe that valuation estimates are required to be
made in good faith, to be reasonable and to be disclosed in a manner
that permits shareholders to understand what they are based on. For
that reason, we have included the assumptions on which the estimate
was based, and, as indicated above, we have expanded that disclosure
to include all of the assumptions from which the estimate was
calculated. In light of the issues raised in the proxy contest - most
particularly the absence of any plan or proposal for a full or partial
liquidation or for any merger or acquisition transaction - and in
light of the very subsidiary role the estimate plays in the arguments
put forward in the Preliminary Proxy Statement, we believe the
disclosure, as revised, is sufficient.
10. Please provide support for your assertion that Mr. Krongard stated, on
August 19, 2008, that "the Board was `tired' and that some directors were
open to being replaced..." Provide similar support for statements
attributed to Mr. Krongard in the first full paragraph of page 7.
Mr. Krongard made these statements to Messrs. Fournier and Sykes during
their visit to Mr. Krongard's home in East Hampton, New York, on August 19,
2008.
Failure to Understand Normalized Earnings Potential, page 5
- -----------------------------------------------------------
11. Your disclosure implies that the Board should be capable of developing a
view of "normalized earnings power" and you cite to the consequences of a
failure of developing such a view. Your disclosure, however, does not
reference whether Pennant and/or its nominees, in light of the current
financial market instability,
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 15
could develop, or have already developed, a view of the company's
normalized earnings power. Revise to provide more balanced disclosure and
clarify whether it is Pennant's belief that "normalized earnings power"
metrics are in fact discernible. Please provide support for the basis of
any assertions.
We have revised the disclosure on page 6 of Amendment No. 1 to explain
what we mean by normalized earnings power. As that explanation makes
clear, we believe that normalized earnings power is something that can
be developed in light of the current financial market instability and,
in fact, is something that is of particular importance as a result of
the current financial market instability. The Preliminary Proxy
Statement presents Pennant's view of normalized earnings power in the
context of the $40 estimated valuation that appears just prior to the
bullet point on "Failure to Understand Normalized Earnings Power." This
view results in the $4 estimate of "potential normalized earnings" used
in that valuation estimate and is further broken down by business
segment.
Less than Effective Management Incentives, page 6
- -------------------------------------------------
12. Your disclosure implies that Pennant and its nominees believe a change in
the compensation incentive structure is needed. Discuss the positive, and
negative aspects of any proposed changes and affirmatively state whether it
is Pennant's intent to advocate for a change in executive compensation if
its nominees are elected to the Board.
As subsumed in our response to Comment #6 and the new disclosure included
in Amendment No. 1 in response to that comment, we do not have any specific
proposals as to changes to the Company's compensation structure. While we
believe that changes to the Company's compensation structure should be made
in order to address the criticisms contained in the bullet point entitled
"Less than Effective Management Incentives," as the added Proxy Statement
disclosure makes clear, we believe that this is a matter to be addressed by
the Board.
Public Communications Failures, page 6
- --------------------------------------
13. In discussing the "communication failures" of Management, revise throughout
to reflect that it is your opinion that such (1) failures exist and (2)
failures could potentially result in the adverse consequences you
reference. Also, please provide support for your assertions that
management's failure to communicate, may account "in part" for the
company's depressed market valuation. Please revise to identify any other
factors that the participants acknowledge could be causing depressed market
valuations of companies such as PHH Corp.
Pennant has revised the disclosure on pages 7 and 8 of Amendment No. 1 to
comply with the Staff's request.
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 16
14. As done on page 9, please revise the biographical information provided for
Mr. Parseghian to disclose the circumstances surrounding his resignation
from Freddie Mac.
Pennant has deleted the selected biographical information of the
Independent Nominees that appeared under the Heading "REASONS FOR THIS
SOLICITATION" on page 7 of the Preliminary Proxy Statement. The full
biographies of the Independent Nominees that appear on page 10 of Amendment
No. 1 under the heading "MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING"
contain all of the information deleted from page 7.
Proposal 1, page 8
- ------------------
15. Clarify that each independent nominee also has agreed to serve if elected.
See Rule 14a-4(d).
Pennant has revised the disclosure on page 9 to clarify that each of the
Independent Nominees has consented to being named as a nominee in the proxy
statement and, if elected, each has agreed to serve as a member of the
Board.
16. We note the statement that "if...a vacancy in the slate of independent
nominees occurs and Pennant cannot supplement this proxy...the persons
named as proxies on the GOLD proxy cards will use the discretionary
authority granted thereby either to vote for the independent nominee or
they will not vote to fill this particular Board seat." We direct you to
the DOI Letter. Please reconcile your disclosure regarding the reservation
of the right to exercise discretionary authority with point 3 of the DOI
Letter.
Pennant has revised the disclosure on page 9 of Amendment No. 1 to remove
the above referenced disclosure. Pennant does not intend to fill any
vacancy in the slate of independent nominees.
17. On a related note, it appears that you are attempting to reserve the right
to exercise discretionary authority to vote for a replacement candidate.
Please advise us, with a view toward revised disclosure, whether the
participants are required to identify such replacement candidates in order
to comply with any applicable company advance notice bylaw. In addition,
revise to provide the biographical information with respect to the
replacement candidate nominee(s) who may be invited to serve should the
nominees for director who have consented to be named and to serve if
elected are not able to do so. Rule 14a-4(d)(1), as the participants are
aware, does not confer the authority to vote for any person who is not a
bona fide nominee.
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 17
Pennant has revised the disclosure on page 9 of Amendment No. 1 to reflect
that it will not seek to nominate a replacement nominee to fill any vacancy
in the slate of independent nominees.
18. Supplement your disclosure in this section to provide a summary of all the
limitations specified in the DOI Letter. Please affirmatively state that
the participants will act, and whether the participants have acted, in
compliance with the limitations set forth in the letter. Disclose the
consequences to the participants and the company, if any, should the New
York Department of Insurance find that the participants have not complied
with the limitations set forth in their letter.
Pennant has revised the disclosure on page 9 of Amendment No. 1 to comply
with the Staff's request.
Information About the Soliciting Persons, page 10
- -------------------------------------------------
19. Please tell us why you have qualified your disclosure in the first full
paragraph of page 11 "to the best knowledge of the Soliciting Persons."
What prevents you from knowing and disclosing this information? Please
explain or delete the qualifier.
In response to the Staff's comment, Pennant has revised the disclosure on
page 13 of Amendment No. 1 to delete the qualifier "to the best knowledge
of the Soliciting Persons."
Solicitation: Expenses, page 11
- -------------------------------
20. Please confirm that you will post your proxy materials on a specified,
publicly-accessible Internet Web site (other than the Commission's EDGAR
Web site) and provide record holders with a notice informing them that the
materials are available and explaining how to access those materials. Refer
to Release 34-56135 available at
http://www.sec.gov/.rules/final/2007/34-56135.pdf.
Pennant confirms that it will post its proxy materials on a specified,
publicly-accessible Internet Web site (other than the Commission's Edgar
Web site) and provide record holders with a notice informing them that the
materials are available on such Web site and explaining how to access those
materials. To this end, Pennant has revised the disclosure on page 15 of
Amendment No. 1 to address the availability of the definitive proxy
statement and other proxy materials in a publicly-accessible Internet
Website and how to access such Web site under the heading "VOTING AND PROXY
PROCEDURES."
21. If appears that you intend to solicit proxies by mail, advertisement,
telephone, facsimile, the Internet, telegraph and/or in person. Please be
advised that all written soliciting materials, including any e-mails or
scripts to be used in soliciting proxies
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 18
must be filed under the cover of Schedule 14A on the date of first use.
Refer to Rule 14a-6(b) and (c). Please confirm your understanding.
Pennant may solicit proxies by mail, advertisement, telephone, facsimile,
telegraph, Internet and/or personal solicitation. In that regard, Pennant
confirms its understanding that all written soliciting materials, including
any e-mails or scripts to be used in soliciting proxies must be filed under
the cover of Schedule 14A on the date of first use.
22. If you do solicit proxies via the Internet, please tell us whether you plan
to solicit via internet chat rooms, and if so, tell us which websites you
plan to utilize.
At this time, Pennant does not intend to solicit proxies via the Internet.
As such, Pennant does not plan to solicit proxies via internet chart rooms.
Information About the Company, page 13
- --------------------------------------
23. You are required to provide information that will be contained in the
company's proxy statement for the annual meeting unless it is your intent
to rely on Rule 14a-5(c). If you intend to rely on Rule 14a-5(c), please
disclose this fact. Also, please be advised that we believe that reliance
upon Rule 14a-5(c) before the company distributes the information to
security holders would be inappropriate. Alternatively, if you determine to
disseminate your proxy statement prior to the distribution of the company's
proxy statement, you must undertake to provide the omitted information to
security holders. Please advise as to your intent in this regard.
Pennant currently does not intend to rely on Rule 14a-5(c). Instead,
Pennant has included all of the required information in its own proxy
statement. In that regard, Pennant has reprinted relevant selections of the
Company Proxy Statement as Appendix D to its proxy statement, and Pennant's
discussion of the Board's proposals refers to the information in Appendix
D. In the event Pennant distributes its definitive proxy statement to
stockholders prior to the time the Company distributes the Company Proxy
Statement in definitive form, Pennant will compare the disclosure in
Appendix D against the definitive Company Proxy Statement and, if there are
any material differences, Pennant will disclose those material differences
in supplementary materials. In the event the Company distributes the
Company Proxy Statement in definitive form prior to the time Pennant
distributes its definitive proxy statement to stockholders, Pennant may
choose to delete Appendix D and rely instead on Rule 14a-5(c).
Form of Proxy Card
- ------------------
24. Please revise the proxy statement and proxy card to refer shareholders to
the company's soliciting materials for the name, background and
qualification of the company's nominees for whom the proxy holder intends
to vote.
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 19
Pennant has revised the disclosure on pages 3 and 9 of Amendment No. 1 as
well as the proxy card to comply with the Staff's request.
25. Consistent with the requirements set forth in Rule 14a-4(d), revise the
form of proxy and proxy card to indicate that there is no assurance that
the company's nominees will serve if elected with any of the Pennant
entities' nominees.
Pennant has revised the disclosure on pages 3 and 9 of Amendment No. 1 as
well as the proxy card to comply with the Staff's request.
26. We refer you to Rule 14a-4(d) and Release No. 34-31326 which sets forth the
means by which you can provide shareholders with a means of "rounding up"`
a minority slate of directors. Please revise your form of proxy card to
permit shareholders to also write in the names of any additional company
nominees for which authority to vote is withheld.
Pennant has revised the proxy card to comply with the Commission's request.
Schedule 13D/A filed March 9, 2009
- ----------------------------------
27. We refer you to our comment 1 above. Please explain why none of the other
solicitation participants, including Pennant General Capital Partner LLC,
have been identified as a filing person and reporting person on the
Schedules 13D filed with respect to PHH Corporation. We may have further
comment.
The Schedule 13D does not include any of the solicitation participants,
other than Alan Fournier and Pennant Capital, as filing/reporting persons
because we do not believe that any of such other participants beneficially
owns more than 5% of the Common Stock within the meaning of Rule 13d-3 or
by virtue of Rule 13d-5(b)(1).
Pennant GP is the general partner of the four Funds organized as Delaware
limited partnerships: Pennant Onshore Partners, LP (which directly owns
253,723 shares of Common Stock); Pennant Onshore Qualified, LP (which
directly owns 522,992 shares); Pennant Spinnaker Fund, LP (which directly
owns 228,146 shares); and Pennant Windward Fund, LP (which directly owns
1,191,058 shares). Collectively, the 2,195,919 shares owned by these four
Funds represent 4.05% of the 54,256,294 shares of Common Stock reported by
the Company in its 2008 Form 10-K as outstanding on February 13, 2009.
Since Pennant GP is not related to either of the two offshore Funds,
Pennant GP does not beneficially own more than 5% of the Common Stock
outstanding within the meaning of Rule 13d-3.
Each of the Funds has voting and dispositive power with respect to its own
shares, but none of the Funds has voting or dispositive power with respect
to the shares held by any other Fund. Therefore, while the Funds
collectively beneficially own more than 5% of
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 20
the Common Stock, none of the Funds individually owns in excess of 5%
within the meaning of Rule 13d-3.
None of the Funds is a member of a "group" with respect to the Common Stock
because none of the Funds has agreed to act together with any other person
for the purpose of acquiring, holding, voting or disposing of any equity
securities of the Company. In its capacity as investment manager or adviser
to each of the Funds, and without any action on the part of any of the
Funds, Pennant Capital acquired shares of Common Stock for the accounts of
each of the Funds and has made all other decisions in respect of such stock
on behalf of the Funds. The Funds themselves have not made any investment
decisions with respect to the shares held by them, and they have not agreed
with any person as to any action or inaction with respect to those shares.
As a result, none of the Funds beneficially owns any shares of Common Stock
by virtue of Rule 13d-5(b)(1).
Similarly, Pennant GP has not agreed to act together with any other person
for the purpose of acquiring, holding, voting or disposing of any equity
securities of the Company. Pennant GP has not made any investment decisions
with respect to the shares held by any of the Funds (including the domestic
Funds for which it serves as general partner), and has not agreed with any
person as to any action or inaction with respect to those shares. As a
result, Pennant GP does not beneficially owns any shares of Common Stock by
virtue of Rule 13d-5(b)(1).
Neither of the Independent Nominees beneficially owns any shares of Common
Stock, and neither has voting or dispositive power with respect to shares
of such stock owned by any other person. Accordingly, neither of the
Independent Nominees beneficially owns shares of Common Stock within the
meaning of Rule 13d-3. In addition, other than their agreement with Pennant
Capital to serve as director nominees and to be indemnified in that regard
to the extent stated in Pennant Capital's proxy statement, neither has any
agreement with Alan Fournier, Pennant Capital, Pennant GP or any of the
Funds with respect to the Company. Moreover, Alan Fournier and Pennant
Capital, which are conducting the solicitation, do not intend to enter into
any such agreements with the Independent Nominees due to the commitments
they have made to the New York Insurance Department as to maintaining the
independence of the Independent Nominees. As a result, neither of the
Independent Nominees beneficially owns any shares of Common Stock by virtue
of Rule 13d-5(b)(1). (We also note, as to the Independent Nominees, that
since neither of them owns any Common Stock, there is substantial case law
to the effect that neither would be considered a member of a "group" under
Rule 13d-5(b)(1) even if they actually did have an agreement to act with
others in concert with respect to the acquiring, holding, voting or
disposing of Common Stock.)
* * * * *
We have discussed your closing comment with Mr. Fournier and the other
Pennant Entities and they have acknowledged that (i) they are responsible for
the adequacy and
Mellissa Campbell Duru, Esq.
Special Counsel
Securities and Exchange Commission
April 22, 2009
Page 21
accuracy of the disclosure in Amendment No. 1; (ii) the Staff's comments or
changes to disclosure in response to the Staff's comments do not foreclose the
Commission from taking any action with respect to the filing and (iii) they may
not assert the Staff's comments as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United States.
* * * * *
Please contact me if we can provide any additional information or
clarification with respect to this revised submission.
Very truly yours,
/s/ Michael A. Schwartz
Michael A. Schwartz