© 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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ARE YOU TRULY “INVESTED” IN THIS RELATIONSHIP?
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
ARE YOU TRULY “INVESTED” IN THIS RELATIONSHIP?
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