Rithm Capital Corp. current report, 17 December 2013

Full document

Business Context and Reporting Period

Company: New Residential Investment Corp. (Note: Metadata listed Rithm Capital Corp., but filing text identifies New Residential Investment Corp.)
Filing Type: Form 8-K (Current Report)
Reporting Date: December 23, 2013 (Earliest event reported: December 17, 2013)
Event: Entry into a Material Definitive Agreement involving the acquisition of mortgage servicing rights and servicer advances.

Key Financial Metrics and Transaction Details

The filing details a significant transaction ("December Transaction") entered into by Advance Purchaser LLC (a joint venture capitalized by New Residential and third-party co-investors) with Nationstar Mortgage LLC.

  • Total Purchase Price: Approximately $3.3 billion (subject to adjustment).
  • Assets Acquired:
    • Right to repayment on approximately $3.3 billion of outstanding servicer advances.
    • Basic fee component of mortgage servicing rights (MSR) on three pools of non-Agency mortgage loans with an aggregate unpaid principal balance (UPB) of approximately $58 billion (as of Nov 30, 2013).
    • Right to purchase all future servicer advances on these pools.
  • Capitalization: Buyer to fund approximately $384 million with equity (or $440 million including working capital); remainder funded via debt incurred by wholly owned subsidiaries.
  • Ownership Structure: As of the First Closing, New Residential owned approximately 37% of the Buyer; third-party co-investors owned the remainder.
  • Financing Facilities: Approximately $2.13 billion in limited recourse variable funding notes (Barclays Facility and CS Facility) were amended and restated. Interest rates are LIBOR plus a margin of 2.0% to 2.6%.

Material Changes and Transaction Structure

The transaction is structured in stages with specific closing dates and fee arrangements:

  • First Closing (Completed Dec 17, 2013): Purchase of approximately $2.4 billion of servicer advances and basic fees on approximately $43.4 billion UPB.
  • Second Closing (Expected by Jan 31, 2014): Purchase of remaining $908 million of servicer advances and basic fees on approximately $14.3 billion UPB.
  • Call Right (Follow-On Transaction): Buyer has the right, but not the obligation, to purchase up to $3.1 billion of additional servicer advances and basic fees on two other pools. This right expires June 30, 2014.
  • Fee Allocation (Weighted Average Basic Fee: 22.4 bps):
    • Servicing Fee: ~2 bps paid to Nationstar.
    • Retained Amount: Up to 15.4 bps retained by Buyer to achieve a 14% targeted return; excess shared 50/50 with Nationstar.
    • Performance Fee: Up to 5 bps retained by Buyer to achieve targeted return; excess paid entirely to Nationstar.

Outlook, Risks, and Contingencies

Management Commentary and Outlook:

  • New Residential expects an additional co-investor to be admitted, which will alter ownership percentages.
  • There is no assurance the Call Right for the Follow-On Transaction will be exercised.

Risks and Contingencies:

  • Financing Covenants: The debt facilities contain strict covenants including interest coverage tests, collateral performance tests, minimum tangible net worth, and liquidity requirements for both Nationstar and the Buyer.
  • Events of Default: Triggers include failure to satisfy covenants, servicer default on 15% or more of the pool, change of control of the Buyer, or insolvency. Default may lead to rapid amortization or acceleration of principal repayment.
  • Recourse: Creditors of the financing facilities have no recourse to Nationstar or Buyer assets beyond the specific collateral, and vice versa.
  • Related Party Transactions: Nationstar is majority owned by Fortress funds managed by an affiliate of New Residential's manager. Several administrative agents (Barclays, Morgan Stanley, etc.) have provided financial services to New Residential.

Investor Verification Checklist

  • Verify the final closing date and conditions for the remaining $908 million tranche expected by January 31, 2014.
  • Confirm the identity and commitment of the "additional co-investor" expected to join the joint venture.
  • Monitor the exercise of the Call Right for the Follow-On Transaction prior to the June 30, 2014 expiration.
  • Review subsequent filings for compliance with the 14% targeted return hurdle and the resulting fee split between the Buyer and Nationstar.
  • Assess the impact of the $2.13 billion debt facility covenants on the joint venture's liquidity and leverage ratios.