Business Context and Reporting Period
This Form 8-K Current Report was filed by Ares Commercial Real Estate Corporation on April 14, 2014, regarding events occurring on April 9, 2014. The filing details the entry into a material definitive agreement to establish a new financing facility.
Key Financial Metrics and Facility Terms
- Facility Size: $195.0 million revolving master repurchase facility (the "UBS Facility").
- Counterparty: UBS Real Estate Securities Inc.
- Interest Rate: One-month LIBOR plus 1.88% (excluding amortization of commitment and exit fees).
- Maturity: Initial maturity date of April 7, 2017, subject to annual extensions at UBS's sole discretion.
- Collateral: Commercial mortgage loans, commercial real estate mezzanine loans, and other eligible assets approved by UBS.
- Guaranty: The facility is fully guaranteed by Ares Commercial Real Estate Corporation.
Material Changes and Covenants
The Company entered into the UBS Facility to finance eligible assets. The agreement imposes specific financial covenants that the Company must maintain:
- Recourse Debt to Tangible Net Worth: Maximum ratio of 3.0 to 1.
- Total Debt to Tangible Net Worth: Maximum ratio of 4.0 to 1.
- Tangible Net Worth: Must maintain at least 80% of the Company's net worth as of September 30, 2013, plus 80% of proceeds from subsequent equity issuances.
- Fixed Charge Coverage Ratio: Minimum ratio of 1.25 to 1 (adjusted-EBITDA to fixed charges) for the preceding 12-month period.
The facility includes margin call provisions allowing UBS to act if the aggregate asset value falls below the aggregate purchase price. It also includes a minimum price differential provision and an exit fee upon termination if certain conditions are not met.
Guidance, Outlook, and Risks
The filing does not provide updated financial guidance, revenue forecasts, or management commentary on future performance beyond the execution of this facility. The primary risk disclosed relates to the margin call provisions and the requirement to maintain strict financial covenants. Failure to meet these covenants or asset value thresholds could trigger default or additional fees.
Investor Verification Checklist
- Verify the Company's current tangible net worth to ensure compliance with the 80% maintenance covenant relative to the September 30, 2013 baseline.
- Review the Company's current recourse and total debt levels against the 3.0:1 and 4.0:1 leverage ratios.
- Assess the quality and eligibility of the commercial mortgage and mezzanine loans intended to be pledged under the facility.
- Examine the specific terms of the commitment fee installments and potential exit fees in the attached Exhibits 10.1 and 10.2.