Business Context and Reporting Period
This Form 8-K, filed on April 7, 2015, by New Residential Investment Corp. (the "Company"), reports on events occurring on April 6, 2015. The filing details the termination of an Initial Merger Agreement with Home Loan Servicing Solutions, Ltd. ("HLSS") and the simultaneous execution of a new Acquisition Agreement. The transaction was necessitated by HLSS's inability to file its 2014 Annual Report without a "Going Concern Qualification," which would have triggered defaults under HLSS's debt facilities.
Key Financial Metrics and Transaction Structure
The Company acquired substantially all assets and assumed liabilities of HLSS (excluding a Term Loan paid off prior to closing) through a Share and Asset Purchase Agreement. The aggregate consideration consisted of:
- Cash: Approximately $1.007 billion.
- Equity: 28,286,980 shares of Company Common Stock (representing 19.9% of shares outstanding prior to issuance).
HLSS will retain $50 million of cash for wind-down costs. The acquired subsidiaries hold material indebtedness, including:
- HSART Facility: Outstanding obligations of approximately $4.65 billion as of April 3, 2015 (weighted average interest rate 1.86%).
- HSART II Facility: Outstanding obligations of approximately $525 million as of April 3, 2015 (weighted average interest rate 1.78%).
- EBO Facility: Outstanding obligations of approximately $487 million as of April 3, 2015 (weighted average interest rate 2.95%).
- Note Facility: Outstanding obligations of approximately $25.6 million as of April 3, 2015.
The filing does not provide specific revenue, profit, or cash flow figures for the Company or HLSS for the reporting period; it references audited financial statements filed as Exhibit 99.2 and pro forma information as Exhibit 99.3.
Material Changes and Transaction Rationale
The primary material change is the restructuring of the acquisition of HLSS. The Initial Merger Agreement, which provided for a cash-only consideration of $18.25 per share, was terminated because HLSS could not satisfy the condition of filing an Annual Report without a Going Concern Qualification. The new Acquisition Agreement allows HLSS to file its 2014 Annual Report with an unqualified auditor opinion. Under the new structure, HLSS shareholders will receive a mix of cash and Company stock, with a subsequent "New Merger" planned to consolidate HLSS into the Company after HLSS distributes the proceeds to its shareholders.
Outlook, Risks, and Contingencies
Management Commentary and Outlook: The Company and HLSS finalized the alternative transaction to alleviate concerns regarding HLSS's going concern status. A "New Merger" is planned, subject to HLSS shareholder approval, where HLSS will merge into a Company subsidiary after winding down operations and distributing proceeds.
Risks and Contingencies:
- BlueMountain Litigation: Counsel for BlueMountain Capital Management has alleged events of default under the HSART facility. While an agreement was reached to delay judicial proceedings until April 16, 2015, unresolved issues could lead to the withholding of excess funds (approx. $11.8 million/month) or acceleration of debt.
- Ocwen Dependency: The Company's ability to obtain financing is heavily dependent on Ocwen Loan Servicing, LLC. Breaches, insolvency, or change of control at Ocwen could trigger defaults on the acquired facilities.
- Debt Acceleration: The acquired facilities contain numerous events of default, including payment defaults, covenant violations, and cross-defaults. Occurrence of these events could cause notes to become due immediately.
- Regulatory and Approval Risks: The New Merger is subject to HLSS shareholder approval and customary closing conditions. Failure to obtain approval or satisfy conditions could terminate the transaction.
Key Facts for Investor Verification
- Verify the status of the BlueMountain Capital Management allegations regarding the HSART facility and whether the April 16, 2015 deadline for judicial guidance has passed without resolution.
- Confirm the terms of the "New Merger" and the timeline for HLSS shareholder approval.
- Review the audited financial statements of HLSS (Exhibit 99.2) and the unaudited pro forma financial information (Exhibit 99.3) to assess the combined entity's leverage and liquidity.
- Monitor the relationship with Ocwen Loan Servicing, LLC, as its financial health and compliance are critical to the stability of the acquired debt facilities.
- Assess the impact of the $1.007 billion cash outlay and the issuance of 19.9% of Company stock on the Company's balance sheet and earnings per share.