Business Context and Reporting Period
This Form 8-K, filed on August 30, 2013, by Ares Commercial Real Estate Corporation (ACRE), reports the closing of the acquisition of EF&A Funding, L.L.C. (d/b/a Alliant Capital LLC). Following the acquisition, Alliant became a wholly-owned subsidiary of ACRE and was renamed ACRE Capital LLC. The filing details the entry into a material definitive agreement regarding the subsidiary's financing arrangements.
Key Financial Metrics and Debt Obligations
The filing focuses on debt facilities rather than operating revenue or profit metrics. Key financial data points include:
- Bank of America Warehousing Facility: A committed line of credit up to $100 million, including a $20 million accordion feature, maturing on January 31, 2014.
- Outstanding Borrowings (BoA): Approximately $14.5 million as of August 30, 2013.
- Interest Rate (BoA): LIBOR (one-month) plus an applicable margin of 1.6%.
- Fannie Mae ASAP Facility: An uncommitted facility of $105 million with no expiration date.
- Outstanding Borrowings (Fannie Mae): $0 as of August 30, 2013.
- Interest Rate (Fannie Mae): Average 30-day LIBOR (minimum 35 basis points) plus 140 basis points.
Material Changes and Agreements
On September 5, 2013, ACRE Capital entered into a Sixth Amendment to the Bank of America Warehousing Agreement. This amendment secured Bank of America's consent to the acquisition by ACRE. The agreement allows ACRE Capital to fund Fannie Mae and FHA loans with advances made at 100% of the loan balance. The obligations are secured by a lien on all mortgage loans financed by the facility and related collateral.
Covenants, Risks, and Contingencies
The Bank of America Warehousing Agreement imposes significant affirmative and negative covenants on ACRE Capital, including restrictions on mergers, asset dispositions, incurring additional indebtedness, and making distributions. Financial covenants include requirements for tangible net worth, leverage ratio, liquidity, servicing portfolio, delinquencies, and minimum deposits.
Events of default include nonpayment, covenant breaches, cross-defaults, and changes of control. Additionally, the Fannie Mae facility contains a cross-default provision; a default under any debt agreement constitutes an event of default under the Fannie Mae facility. As of August 30, 2013, ACRE Capital was in material compliance with all debt agreements. As a Fannie Mae DUS lender, ACRE Capital shares risk for a portion of losses resulting from borrower defaults.
Investor Verification Checklist
- Verify the specific terms of the Sixth Amendment to the Bank of America Warehousing Agreement (Exhibit 10.7).
- Confirm ACRE Capital's ongoing compliance with the tangible net worth, leverage, and liquidity covenants.
- Monitor the utilization of the $100 million committed warehouse line and the $105 million uncommitted Fannie Mae facility.
- Assess the impact of the cross-default provisions between the Bank of America and Fannie Mae facilities on overall liquidity risk.
- Review the risk-sharing arrangement with Fannie Mae regarding potential borrower defaults.