Business Context and Reporting Period
This Form 8-K, dated November 16, 2011, reports a significant capital transaction involving Resource Capital Corp. ("RCC") and its subsidiaries. The filing details a stock purchase agreement between RCC's subsidiary, Resource TRS, Inc. ("TRS"), and Eos Partners, L.P. ("Eos") regarding LEAF Commercial Capital, Inc. ("LCC"), a subsidiary of Resource America, Inc.
Key Financial Metrics and Transaction Details
- Investment Amount: Eos invested $50.0 million in cash into LCC.
- Equity Structure: Eos received 50,000 shares of 12% Series A Participating Preferred Stock and warrants for 2,954 shares of common stock, representing a 45.1% fully-diluted interest.
- Existing Stake Conversion: TRS exchanged its prior interest for 31,341 shares of Series A Preferred Stock, 4,872 shares of 8% Series B Redeemable Preferred Stock, and 2,364 shares of Series D Redeemable Preferred Stock, representing a 26.7% fully-diluted interest.
- Debt Repayment: Approximately $11.2 million of the Eos investment was used to repay inter-company indebtedness ($8.5 million to TRS and $2.7 million to Resource America, Inc.).
- Liquidity Enhancement: LCC secured an additional $75.0 million funding commitment from Versailles Assets LLC, increasing total revolving credit facility availability to $185.0 million.
Material Changes Versus Prior Period
The transaction results in a change in accounting treatment for RCC, which will now account for its investment in LCC using the equity method on a going-forward basis. Control rights have shifted, with Eos obtaining specified control rights, including approval over fundamental corporate transactions. The capital structure of LCC has been significantly altered through the issuance of new preferred stock classes and the reduction of inter-company debt.
Outlook, Risks, and Contingencies
- Contingent Obligation: RAI and TRS have undertaken a joint and several obligation regarding the equity value of LEAF Receivables Funding 3, LLC ("LRF 3"). If the equity value of LRF 3 falls below approximately $18.7 million as of the final testing date within 90 days of December 31, 2013, RAI and TRS must contribute cash to LCC to cover the deficit.
- Stock Features: Series A Preferred Stock is voting and convertible to common stock, with mandatory conversion upon an IPO. Series B and D are non-voting and redeemable, with Series D mandatorily converting upon an IPO.
Key Facts for Investor Verification
- Verify the specific terms of the contingent obligation regarding LRF 3 equity value and the testing timeline ending in 2013.
- Confirm the impact of the shift to equity method accounting on RCC's future financial statements.
- Review the covenants and control rights granted to Eos Partners, L.P. regarding fundamental corporate transactions.
- Assess the utilization of the expanded $185.0 million credit facility and its effect on LCC's leverage.