After HLSS was unable to meet the previously announced merger conditions, the companies terminated the merger agreement, which would have seen New Residential acquire all of HLSS’ outstanding shares for $18.25 per share in cash.
Instead, the companies entered into a purchase agreement, under which New Residential acquired “substantially all of (HLSS’) assets” and assumed “substantially all of the liabilities of HLSS," in exchange for a purchase price of approximately $1.2 billion, or $17.08 per HLSS share on 71 million HLSS shares.
Under the terms of the deal, New Residential paid a total purchase price of approximately $1.4 billion for HLSS, with adjustment for cash and repayment of HLSS’ debt. The purchase amount was comprised of approximately $1 billion of cash and 28.2 million newly issued shares of New Residential, the companies said in a release.
“Despite our efforts to pursue the merger as initially planned, certain circumstances prompted HLSS to pursue an asset purchase agreement with New Residential,” John Van Vlack, chief executive officer of HLSS said. “We believe this alternative transaction structure made the most sense for us as it allowed HLSS to file its financial results without a going concern qualification and provide the greatest certainty on funding new servicing advances. This transaction will also enable our shareholders to maximize value for their shares.”
The companies made the announcement late Monday in a release, as well as in HLSS’ much-delayed 2014 annual report, which HLSS filed Monday with the Securities and Exchange Commission.
Just over a week ago, HLSS received a warning from NASDAQ, which notified HLSS that the company was no longer in compliance with the stock exchange’s rules for continued listing due to HLSS “not having timely filed” its 2014 annual report with SEC.
Earlier in that same week, HLSS stated that it was delaying the release of its annual report for the second time, saying in a SEC filing that it needs more time to demonstrate “its ability to operate as a growing concern” to its auditors.
The company also previously delayed its annual report earlier this month due to needing additional time to “complete the assessment of recent events related to the company’s business and determine the impact on the company’s financial statements” and other disclosures.
The delay in filing HLSS’ 10-K led Ocwen Financial (OCN), its former parent company, to also delay the release of its annual report due to issues with HLSS.
According to a recent filing with the SEC, Ocwen said it planned to file its 2014 annual report “on or before March 23,” but added that there “can be no assurance that it will be able to do so.”
The issue at hand – in addition to all of Ocwen’s other troubles – was HLSS’ ability to fund new servicing advances.
According to the SEC filing, Ocwen “continues to analyze and review” HLSS’ ability to fund servicing advances, adding that “a failure by HLSS to fund new serving advances could have a material negative impact on the company's financial condition.”
But the new agreement between HLSS and New Residential addresses the issues between Ocwen and HLSS, and in a separate agreement, Ocwen agreed to a multi-year extension of its servicing contracts with New Residential.
“When it became evident that HLSS was unable to satisfy the merger conditions as originally expected, we worked collaboratively with HLSS management to structure this asset purchase to meet our mutual goals,” New Residential’s CEO Michael Nierenberg said.
“We are extremely pleased to complete this milestone transaction; and we are excited for the opportunity to expand and strengthen our partnerships with both Nationstar Mortgage and Ocwen, the two largest nonbank servicers in the United States,” Nierenberg added.
“The extension in servicing contracts with Ocwen will further solidify their position as one of New Residential’s preferred servicers and help promote a mutually beneficial partnership between the two companies,” he continued. “Looking ahead, we remain confident in our ability to generate strong returns for our shareholders and excel as one of the leading capital providers in the mortgage servicing business.”
In a subsequent SEC filing by Ocwen, the terms of the new agreement between Ocwen and New Residential are disclosed. The terms are shown below in full:
On April 6, 2015, Ocwen Loan Servicing, LLC (“Ocwen”) entered into Amendment No. 2 to Master Servicing Rights Purchase Agreement and Sale Supplements (the “Amendment”) with HLSS Holdings, LLC (“Holdings”), Home Loan Servicing Solutions, Ltd. (“HLSS”) and MSR-EBO Acquisition LLC (“Buyer” and, together with Holdings and HLSS, the “HLSS Parties”), which Amendment is effective upon the consummation and closing of the purchase by the Buyer, directly and through HLSS Advances Acquisition Corp., of substantially all of the assets of HLSS. The Amendment revised terms of (i) the Master Servicing Rights Purchase Agreement, dated as of October 1, 2012, as amended by Amendment No. 1 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of December 26, 2012 (as so amended, the “MSR Purchase Agreement”) and (ii) certain sale supplements to the MSR Purchase Agreement (as heretofore amended, supplemented and modified from time to time, the “Sale Supplements” and, together with the MSR Purchase Agreement, the “Original Agreements”). In consideration of Ocwen’s consent to the assignment by HLSS to the Buyer of all HLSS’s right, title and interest in, to and under the Original Agreements, the Amendment will, among other things:
- Extend the term during which Ocwen is, subject to the provisions of the amended Original Agreements, entitled to be the named servicer on loans for which Rights to MSRs have been sold to HLSS (along with the associated economic benefits) for two additional years or until April 30, 2020, whichever is earlier, which would depend on the sale date for the applicable Rights to MSRs (existing terms ranged from February 2018 through October 2019 prior to the Amendment);
- Provide that such extension will not apply with respect to any servicing agreement that, as of the date that it was scheduled to terminate under the Original Agreements, is affected by an uncured Termination Event (as defined in the Sale Supplements) due to a downgrade of Ocwen’s servicer rating to “Below Average” or lower by S&P or to “SQ4” or lower by Moody’s;
- Provide that the parties will commence negotiating in good faith for an extension of the contract term and the servicing fees payable to Ocwen no later than six months prior to the end of the applicable term as extended pursuant to the Amendment; and
- Impose a two-year standstill (until April 6, 2017 and subject to certain conditions) on the rights of the HLSS Parties to replace Ocwen as named servicer.
The Amendment also provides that Ocwen will sell to HLSS, on an exclusive and “as is” basis, all economic beneficial rights to the clean-up call rights Ocwen is entitled to pursuant to servicing agreements that underlie Rights to MSRs owned by HLSS, for a payment upon exercise of 0.50% of the unpaid principal balance of all performing mortgage loans (mortgage loans that are current or thirty days or less delinquent) associated with the applicable clean up-call.
In the event there is a future downgrade of Ocwen's S&P servicer rating below its current rating of "Average," Ocwen has also agreed to compensate Holdings for certain increased costs associated with its servicing advance financing facilities, including increased costs of funding, to the extent such costs are the direct result of such downgrade. The Amendment provides that any such compensation, if required, shall not exceed $3.0 million for any calendar month or $36.0 million in the aggregate. In such an event, Holdings has agreed to use commercially reasonable efforts to assist Ocwen in curing any potential cost increases by obtaining amendments to the relevant financing agreements.
“We are very pleased to have established a new partnership with New Residential,” Ocwen’s chief financial officer, Michael Bourque, said. “Our entry into a relationship with New Residential, which includes an extension of our servicing contracts, will not only help to secure the financing of Ocwen’s servicing business but also provide additional stability to the mortgage servicing industry. We look forward to a growing and productive relationship with our new financing partner.”