Ares Commercial Real Estate Corp current report, 11 January 2019

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Business Context and Reporting Period

Company: Ares Commercial Real Estate Corporation (ACRE)
Filing Type: Form 8-K (Current Report)
Date of Report: January 11, 2019
Event: Entry into a Material Definitive Agreement regarding the 2019 FL3 CLO Securitization.

Key Financial Metrics and Transaction Details

This filing details an amendment and restatement of an indenture governing a Commercial Mortgage-Backed Securities (CMBS) transaction. Key figures include:

  • Total Secured Floating Rate Notes: Approximately $504.1 million principal balance.
  • Preferred Equity: $52.9 million in the Issuer.
  • Collateral Pool: 17 mortgage assets with an aggregate principal balance of approximately $557.0 million.
  • Additional Mortgage Assets: Six new assets totaling approximately $228.8 million added to the pool.
  • Offered Notes (Third Party): Aggregate principal balance increased from $272.9 million to $445.6 million.
  • Retained Notes: Approximately $58.5 million retained by a wholly owned subsidiary of the Company.
  • Weighted Average Coupon: Decreased from LIBOR + 1.85% to LIBOR + 1.70% for Offered Notes.

Note Class Breakdown (Offered Notes)

Class Original Balance ($M) New Balance ($M) New Interest Rate
Class A 170.6 278.5 LIBOR + 1.180%
Class A-S 37.5 61.3 LIBOR + 1.400%
Class B 10.2 16.7 LIBOR + 2.000%
Class C 20.5 33.4 LIBOR + 2.740%
Class D 34.1 55.7 LIBOR + 3.940%

Material Changes Versus Prior Period

The transaction replaces the indenture governing the 2017 FL3 CLO Securitization. Material changes include:

  • Expansion of Note Balance: The aggregate principal balance of notes held by third parties increased by approximately $172.7 million.
  • Collateral Expansion: The collateral pool was expanded by six additional mortgage assets ($228.8 million).
  • Interest Rate Adjustment: The weighted average coupon for Offered Notes was reduced from LIBOR + 1.85% to LIBOR + 1.70%.
  • Reinvestment Period: The reinvestment period for acquiring additional assets extends to March 2021.

Guidance, Outlook, and Risks

Redemption Terms:

  • After January 16, 2023, the Issuer may redeem Offered Notes subject to a 1.0% make-whole prepayment fee.
  • Class D Notes may be redeemed (subject to a 1.0% fee) once senior classes (A, A-S, B, C) are repaid in full.
Payment Waterfall: Interest and principal payments intended for Retained Notes and Preferred Shares may be diverted to repay principal on Offered Notes to satisfy senior note overcollateralization ratios. Regulatory Status: Additional Offered Notes were issued privately and are not registered under the Securities Act of 1933; they cannot be offered or sold in the U.S. absent registration or an exemption. Management Commentary: The filing text does not provide explicit management commentary or forward-looking guidance beyond the transaction mechanics.

Investor Verification Checklist

  • Verify the credit quality and performance of the six additional mortgage assets ($228.8 million) added to the collateral pool.
  • Confirm the current LIBOR rate to calculate the actual yield on the new note classes.
  • Review the specific "Rating Agency Confirmation" requirements for future reinvestments during the period ending March 2021.
  • Assess the impact of the payment waterfall diversion on the expected returns of the Retained Notes and Preferred Equity held by the Company.
  • Monitor the overcollateralization ratios to determine the likelihood of principal diversion from retained interests.