Business Context and Reporting Period
This Form 8-K, dated December 23, 2013, reports a material definitive agreement and the creation of a direct financial obligation by Resource Capital Corp. (the "Registrant"). The filing details the issuance of floating-rate notes by a newly formed subsidiary, Resource Capital Corp. CRE Notes 2013, Ltd. (the "Issuer"), to finance a portfolio of commercial real estate mortgage loans.
Key Financial Metrics
- Total Notes Issued: $290,848,000 aggregate principal amount.
- Preferred Shares Issued: $16,927,000 notional amount sold to a consolidated subsidiary of the Registrant.
- Collateral Portfolio: Floating rate commercial real estate first mortgage loans with a principal balance of $307,775,000 (as of December 5, 2013).
- Interest Rate: Weighted average coupon of LIBOR + 1.86%.
- Company Retention: The Registrant purchased and expects to retain $33,085,000 in aggregate principal amount of below-investment grade notes and preferred shares.
- Use of Proceeds: To pay the purchase price of mortgage loans and repay pre-closing warehouse financing facilities.
Material Changes and Transaction Structure
The transaction involves the issuance of seven classes of non-recourse, floating-rate notes secured by the mortgage loan portfolio. The classes and their principal amounts are:
- Class A Senior Secured: $136,949,000
- Class A-S Second Priority Secured: $78,494,000
- Class B Third Priority Secured: $30,777,000
- Class C Fourth Priority Secured: $14,620,000
- Class D Fifth Priority Secured: $13,850,000
- Class E Sixth Priority Secured: $9,233,000
- Class F Seventh Priority Secured: $6,925,000
The Issuer intends to own the portfolio until maturity, and the Registrant will account for the issuance as a financing on its balance sheet. The notes are limited-recourse obligations of the Issuer and non-recourse obligations of the Co-Issuer.
Outlook, Risks, and Unusual Items
- Maturity and Weighted Average Life: The stated maturity date is December 15, 2028. However, the weighted average life is expected to be significantly shorter (e.g., 1.41 years for Class A, 2.13 years for Class A-S) assuming no extensions or prepayments.
- Redemption Rights: The Issuer may redeem the notes and preferred shares starting January 2016 at the direction of a majority of preferred shareholders. A "clean-up call" exists if outstanding principal is reduced to 10% of the original amount.
- Events of Default: Includes the requirement to register as an investment company or the loss of the Issuer's status as a qualified REIT subsidiary.
- Repurchase Obligations: If representations or warranties regarding the mortgage loans are inaccurate, the seller (a consolidated subsidiary) may be compelled to repurchase affected loans.
- Fee Waivers: The Special Servicer and Advancing Agent (affiliates of the Registrant) have waived their respective fees for as long as the Registrant owns the non-investment grade notes and preferred shares.
Investor Verification Checklist
- Verify the credit quality and performance of the $307.8 million collateral portfolio securing the notes.
- Confirm the Registrant's ability to service the floating-rate debt given the LIBOR + 1.86% coupon structure.
- Review the specific terms of the "clean-up call" and mandatory quarterly auction provisions starting in March 2019.
- Assess the impact of the $33.1 million retained by the Registrant on its balance sheet and risk exposure.
- Monitor the status of the Issuer as a qualified REIT subsidiary to avoid triggering an event of default.