How to Secure a Warehouse Line - It May Be Easier than Tying the Knot

Transcription

1 2016 How to Secure a Warehouse Line - It May Be Easier than Tying the Knot Matthew R. Hays April 11, Kirkland & Ellis LLP. All rights reserved.

2 1 THE WORLD OF WAREHOUSES YOUR FIRST TIME What special laws exist? Risk Retention Volcker Rule 40 Act What, me worry? Yes! Upfront negotiations and detailed term sheets will save both internal and external resources Ensure deal terms reflect the assets Who are the parties? Why think about bankruptcy? Structuring goal: minimize risks to lender of sponsor insolvency or bankruptcy Methods include: true sale of receivables separateness and bankruptcyremoteness of SPVs Principal Participants Originator Sponsor Depositor Borrower Servicer Backup Servicer Lender Service Providers Independent Director Administrative Agent Custodian/ Collateral Agent Third-Party Vendors 2

3 2 CREATING THE PERFECT PROFILE It s Important to Know Yourself. Quality and quantity of data relating to the originator s receivables Loan and pool performance Consistency of reporting, processes and systems What Kind of Relationship Do You Want? Does the sponsor want the flexibility to complete whole loan sales or securitization at some point? Is it considering an IPO or other change to its equity? Is the flexibility worth the cost? What Are (Or Should Be) Your Priorities? Strong origination/acquisition and underwriting practices Avoiding competing security interests Licensing and compliance 3

4 CREATING THE PERFECT PROFILE Do You Have the Necessary Support? Defined servicing practices and procedures Subservicers and backup servicers Think about the key components of due diligence Meet the Family Third-party vendors often play a large role in reporting Dig in to the people, processes and capabilities for supplying information How will audit requests, inspections and requests for information be handled? Any Exes? Are there any other facilities? If so, is there any exclusivity clauses or other limitations? WAREHOUSE.COM Matching borrowers and lenders Not the place to find a partner 4

5 3 THE POTENTIAL GUEST LIST Originator of Loans Purchaser of Whole Loans Purchases receivables from sponsor/originator SPV whollyowned by sponsor/originator Sponsor/ Originator Depositor Borrower SPV or Trust created solely for the purpose of holding assets May purchase receivables directly from sponsor/originator Admin Agent Custodian/ Collateral Agent Servicer/ Backup Servicer Performs actions on behalf of lenders Services receivables in the ordinary course Backup servicer typically required Granted security interest in receivables for the benefit of the agent and the lender 5

6 4 LET S DTR (DEFINE THE RELATIONSHIP) GENERALLY SERVICER Servicing BACKUP SERVICER Backup Servicing SPONSOR/ORIGINATOR Receivables Purchase DEPOSITOR Sale BORROWER Notes or Loans Loan LENDER(S) 6

7 5 A PRENUP ISN T NECESSARY BUT THERE WILL BE PAPERWORK Legal Opinions True Sale and Nonconsolidation Security Interest Corporate, Enforceability and No-conflicts Volcker Rule and 40 Act Security Documents Security Blocked Account or Control UCC-1 Financing Statements Operative Documents Receivables Purchase Sale Loan or Indenture Servicing Backup Servicing 7

8 6 TROUBLE FITTING? IT MAY BE TIME TO REMOVE THE EXCESS Receivables All receivables originated by the applicable originator or platform without regard to eligibility Eligible Receivables Excess Concentration Amounts Receivables from the portfolio that satisfy criteria relating to loan characteristics, origination, enforceability, form and terms Breach of Eligibility Criteria generally require repurchase by sponsor/originator Eligible Receivables excluded from the financed pool on the basis of: Weighted average FICO, APR or outstanding principal amount Geographic concentrations Eligible Receivables less Excess Concentration Amounts = Borrowing Base Advance rate based on Borrowing Base 8

9 7 A BREAK, BREAKUP OR DIVORCE? Smooth Sailing Revolving Period Borrower may draw on the facility through the revolving period up to the maximum facility amount Amortization Events Ends the revolving period and facility amortizes Typically more limited than EODs Net charge-off ratio trigger Delinquency ratio trigger Excess spread trigger Borrowing base It s Over Events of Default Events of Default include: failure to pay uncured breach of reps leverage triggers, etc. change of control insolvency Consequences include: interest rate increase acceleration ability to foreclose assets/access collateral subordination 9

10 8 ARE YOU TRULY INVESTED IN THIS RELATIONSHIP? Coverage of Risk Retention Rules Fundamental Rules of Risk Retention Applies to all assetbacked securities (as defined in Dodd-Frank), whether issued in: Public offering, Rule 144A ABS offering, or Private transaction Sponsor or majorityowned affiliate must retain economic interest in securitized assets In most cases, required retention must be 5% of ABS interests Not applicable to transactions not involving issuance of assetbacked securities, but no bright line: Is it a security? Collateralized by selfliquidating financial assets? Economic interest must be in an approved form (or combination of approved forms)

11 ARE YOU TRULY INVESTED IN THIS RELATIONSHIP? Forms in Which Risk Retention May Be Held Effective Date Eligible vertical interest either: vertical stack of ABS interests, or single vertical security Eligible horizontal residual interest Eligible horizontal cash reserve account Subordinated seller s interest in revolving pool Effective now for RMBS Final rules do not permit some requested means of risk retention: Participation interests Representative samples Third party credit support, insurance or guarantees For all other ABS, December 24, 2016

12 ARE YOU TRULY INVESTED IN THIS RELATIONSHIP? Eligible Horizontal Residual Interest (EHRI) Sponsor holds residual interest of >5% of fair value ( FV ) under GAAP of all ABS interests Must be subordinate to P&I on all other ABS interests Use of FV permits counting of all aspects of residual, incl. overcollateralization, reserve accounts and excess spread Must be first loss piece Warehouse Issues When does the sponsor need to hold residual interest? How much should be retained? FV can be time consuming and difficult to calculate - may be a factor in determining approach