how to secure a warehouse line - it may be easier than ... to secure a warehouse line - it may be...

© 2016 Kirkland & Ellis LLP. All rights reserved.

How to Secure a Warehouse Line -It May Be Easier than Tying the Knot

April 11, 2016

Matthew R. Hays

2016

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THE WORLD OF WAREHOUSES—YOUR FIRST TIME

What, me worry? Why think about bankruptcy?

What special laws exist?

Principal ParticipantsOriginatorSponsorDepositorBorrowerServicerBackup ServicerLenderService ProvidersIndependent DirectorAdministrative AgentCustodian/ Collateral AgentThird-Party Vendors

Yes!Upfront negotiations and detailed term sheets will save both internal and external resourcesEnsure deal terms reflect the assets

Structuring goal: minimize risks to lender of sponsor insolvency or bankruptcyMethods include:true sale of receivables separateness and bankruptcy-remoteness of SPVs

Risk Retention Volcker Rule’40 Act

Who are the parties?

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It’s Important to Know Yourself.• Quality and quantity of data relating to the originator’s receivables

• Loan and pool performance

• Consistency of reporting, processes and systemsWhat Kind of Relationship Do You Want?• Does the sponsor want the flexibility to complete whole loan sales or securitization at some point?• Is it considering an IPO or other change to its equity?• Is the flexibility worth the cost?What Are (Or Should Be) Your Priorities?• Strong origination/acquisition and underwriting practices• Avoiding competing security interests• Licensing and compliance

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CREATING THE PERFECT PROFILE2

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WAREHOUSE.COM

CREATING THE PERFECT PROFILE

Matching borrowers and lenders

Do You Have the Necessary Support?• Defined servicing practices and procedures• Subservicers and backup servicers• Think about the key components of due diligence

Meet the Family• Third-party vendors often play a large role in reporting• Dig in to the people, processes and capabilities for supplying

information• How will audit requests, inspections and requests for information

be handled?

Any Exes? • Are there any other facilities?• If so, is there any exclusivity clauses or other limitations?

Not the place to find a “partner”

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THE POTENTIAL GUEST LIST

Sponsor/Originator

Admin Agent

Borrower

Servicer/ Backup Servicer

Custodian/Collateral

Agent

Depositor

Originator of Loans Purchaser of Whole

Loans

Performs actions on behalf of lenders

Services receivables in the ordinary courseBackup servicer

typically required

Granted security interest in receivables for the benefit of the agent and the lender

Purchases receivables from sponsor/originatorSPV wholly-

owned by sponsor/originator

SPV or Trust created solely for the purpose of holding assetsMay purchase receivables

directly from sponsor/originator

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LET’S DTR (DEFINE THE RELATIONSHIP) GENERALLY

Loan Agreement

DEPOSITOR

LENDER(S)

BORROWER

Receivables Purchase Agreement

Sale Agreement

SPONSOR/ORIGINATOR

Notes or Loans

Servicing Agreement

SERVICER

BACKUP SERVICER

Backup Servicing

Agreement

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A PRENUP ISN’T NECESSARY BUT THERE WILL BE PAPERWORK

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Operative Documents

Security Documents

LegalOpinions

True Sale and NonconsolidationSecurity Interest Corporate, Enforceability and

No-conflictsVolcker Rule and ’40 Act

Security AgreementBlocked Account or

Control AgreementUCC-1 Financing

Statements

Receivables Purchase AgreementSale AgreementLoan Agreement

or IndentureServicing

AgreementBackup

Servicing Agreement

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Receivables

Eligible Receivables

Excess Concentration

Amounts

Eligible Receivables less Excess Concentration Amounts =

Borrowing Base

TROUBLE FITTING? IT MAY BE TIME TO REMOVE THE EXCESS

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All receivables originated by the applicable originator or platform without regard to eligibility

Receivables from the portfolio that satisfy criteria relating to loan characteristics, origination, enforceability, form and termsBreach of Eligibility Criteria generally require repurchase by sponsor/originator

Eligible Receivables excluded from the financed pool on the basis of:• Weighted average FICO, APR or

outstanding principal amount• Geographic concentrations

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Advance rate based on Borrowing Base

Ends the revolving period and facility amortizes

Typically more limited than EODs

Net charge-off ratio trigger Delinquency ratio trigger Excess spread trigger Borrowing base

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A BREAK, BREAKUP OR DIVORCE?Smooth Sailing

It’sOver

Amortization Events

Revolving Period

Events of Default Events of Default include:

failure to pay uncured breach of reps leverage triggers, etc. change of control insolvency

Consequences include: interest rate increase acceleration ability to foreclose

assets/access collateral

subordination

Borrower may draw on the facility through the revolving period up to the maximum facility amount

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Coverage of Risk

Retention Rules

Fundamental Rules of

Risk Retention

ARE YOU TRULY “INVESTED” IN THIS RELATIONSHIP?

Applies to all “asset-backed securities” (as defined in Dodd-Frank), whether issued in:Public offering,Rule 144A ABS

offering, or Private transaction

Not applicable to transactions not involving issuance of “asset-backed securities,” but no bright line:Is it a “security”?Collateralized by “self-

liquidating financial assets”?

Sponsor or majority-owned affiliate must retain economic interest in securitized assetsIn most cases, required

retention must be 5% of ABS interests

Economic interest must be in an approved form (or combination of approved forms)

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Forms in Which Risk Retention May Be Held

Effective Date

Eligible vertical interest – either:vertical stack of

ABS interests, orsingle vertical

securityEligible horizontal

residual interestEligible horizontal

cash reserve accountSubordinated seller’s

interest in revolving pool

Final rules do not permit some requested means of risk retention:Participation

interestsRepresentative

samplesThird party credit

support, insurance or guarantees

Effective now for RMBS

For all other ABS, December 24, 2016

Eligible Horizontal Residual

Interest (EHRI)

Warehouse Issues


Sponsor holds residual interest of >5% of fair value (“FV”) under GAAP of all ABS interestsMust be subordinate to P&I on all other ABS interests

Use of FV permits counting of all aspects of residual, incl. over-collateralization, reserve accounts and excess spreadMust be first loss piece

When does the sponsor need to hold residual interest?How much should be retained?

FV can be time consuming and difficult to calculate - may be a factor in determining approach