We estimate that the net proceeds to us from this offering will be
approximately $170 million after deducting underwriting discounts and
commissions, an advisory services fee and estimated offering expenses that we
must pay.
Concurrently with this offering, William C. Erbey, the founder of our company
and the Chairman of our Board of Directors, has agreed to purchase $10
million of our ordinary shares in the Concurrent Private Placement at a price
per share equal to the initial public offering price, subject to the
completion of this offering. No underwriting discounts or commissions will
be paid in respect of these shares.
Pursuant to the Purchase Agreement, we will purchase the Rights to MSRs,
associated servicing advances and related assets from Ocwen Loan Servicing.
We will also assume Ocwen Loan Servicing’s obligations under the existing
advance financing facility. The closing of these transactions will occur
simultaneously with and is a condition precedent to the closing of the
Offerings. The estimated purchase price for these assets is $150 million (net
of assumed match funded liabilities of $361 million and subject to certain
closing adjustments). The outstanding amount owed on the advance financing
facility was $383 million as of December 31, 2011.
The purchase price has two components. The purchase price for the Rights to
MSRs will be based on our estimates of the value of such assets at the time
we entered into the Purchase Agreement and the outstanding unpaid principal
balance of the underlying mortgage loans at closing. The purchase price for
the associated servicing advances and other assets (such as the capitalized
debt issue costs and facility reserve account) will be equal to the net
consolidated book value as of the purchase date of all assets and liabilities
of the special purpose entities established in connection with the advanced
financing facility that owns these servicing advances, namely HomEq Servicer
Advance Facility Transferor, LLC (“HomEq Transferor”) and HomEq Servicer
Advance Receivables Trust 2010-ADV1 (the “Trust”), a Delaware statutory trust
of which HomEq Transferor is the sole beneficiary. We have agreed to pay
Barclays Bank PLC, an affiliate of Barclays Capital Inc., a conversion fee
related to our assumption of the existing advance financing facility equal
to 0.75% of the sum of (a) the aggregate principal balance of the Class A-1,
Class B and Class C Notes outstanding on the closing date plus (b) the maximum
principal balance of the Class A-2 Note.
We have obtained an opinion from MIAC relating to the fairness to us, from
a financial point of view, of the purchase price to be paid by us for the
assets acquired in connection with the Initial Acquisition. MIAC has indicated
that the methodologies and analyses used to value Rights to MSRs are
substantially similar to those used in connection with the valuation of
mortgage servicing rights. As a result, MIAC does not believe that the
structure of the Initial Acquisition has a material impact on its assessment
of the fairness, from a financial point of view, of the purchase price to us.
MIAC’s analysis, as more fully described in its fairness opinion, is based on
an analysis of the present value of expected future cash flows of the Initial
Mortgage Servicing Rights utilizing assumptions that MIAC believes are
reasonable and consistent with mortgage servicing industry best practices in
valuing mortgage servicing assets. The most significant assumptions used are
estimates of the speed at which mortgages will prepay and the aggregate
principal amount of mortgage loans that will become delinquent. Other
significant assumptions used in MIAC’s analysis include the discount rate and
the interest expense for financing servicing advances. The assumptions used
in the analysis are summarized below:
• Discount rates reflecting the yield requirements of future income streams
from the Rights to MSRs ranging from 14% to 22%.
• Interest rate used for calculating the cost of servicing advances of 1-month
LIBOR + 4%.
• Mortgage loan prepayment projections ranging from 12% to 25% of the related
mortgage lifetime projected prepayment rate.
• Delinquency rate projections ranging from 15% to over 35% of the aggregate
unpaid balance of the underlying mortgage loans.
MIAC reviewed the collateral attributes and the historical payment performance
of the Initial Mortgage Servicing Rights and compared it with similar
mortgage servicing portfolios and with standard industry mortgage performance
benchmarks to arrive at the assumptions set forth above. The selected
collateral attributes and performance comparisons MIAC utilized were the
voluntary prepayment performance, delinquency and foreclosure performance,
operational cost comparison, average loan balance, weighted average coupon
and note rate distribution, loan product type classification, geographic
distribution and servicing advance behavior.
In addition, within the evaluation of the purchase price of the Rights to
MSRs, MIAC has assumed, based upon a comparison of similar transactions,
that servicing advances and other assets related to the Initial Mortgage
Service Assets will be valued and realized at book value.
We paid MIAC a fee of $300,000 for the delivery of its fairness opinion.
Amounts paid by us or our affiliates to MIAC were $152,000 and $134,000 in
2011 and 2010, respectively.
We will automatically acquire legal ownership of the Initial Mortgage
Servicing Rights without any additional payment to Ocwen Loan Servicing if
and when we obtain the Required Third Party Consents and therefore, no
proceeds from the Offerings will be used for that purpose.
We intend to use any remaining net proceeds from the Offerings for working
capital and general corporate purposes, which may include the repayment of
indebtedness or the purchase of additional Rights to MSRs or mortgage
servicing rights.
Our success depends, in large part, on our ability to acquire Mortgage
Servicing Assets on terms consistent with our business and economic model. In
acquiring these assets, we expect to compete with independent mortgage loan
servicers, private equity firms, hedge funds and other large financial
services companies. Many of our anticipated competitors are significantly
larger than we are, have access to greater capital and other resources and
may have other advantages over us. In addition, some of our competitors may
have higher risk tolerances or different risk assessments, which could lead
them to offer higher prices for assets that we might be interested in
acquiring and cause us to lose bids for those assets. In addition, other
potential purchasers of mortgage servicing rights may be more attractive to
sellers of mortgage servicing rights if the sellers believe that these
potential purchasers could obtain any necessary third party approvals and
consents more easily than us.
In the face of this competition, we expect to take advantage of the experience
of members of our management team and their industry expertise which may
provide us with a competitive advantage and help us assess potential risks
and determine appropriate pricing for certain potential acquisitions of
Mortgage Servicing Assets. In addition, we expect that these relationships
will enable us to compete more effectively for attractive acquisition
opportunities. However, we may not be able to achieve our business goals or
expectations due to the competitive risks that we face.
as a result
we will not be subject to the risk of loss related to the origination or
ownership of mortgage loans. We will engage one or more high quality
residential mortgage loan servicers to service the mortgage loans underlying
our mortgage servicing assets and therefore do not intend to develop our own
mortgage servicing platform. We believe that our revenue and expense structure
will be predictable and will generate a stable income stream and that the
quality of our assets will be strong. We believe this combination will
accomplish our primary objective of delivering attractive and consistent
risk-adjusted returns to our shareholders. We intend to distribute at least
90% of our net income to our shareholders in the form of a monthly cash
dividend. In addition, unlike many income-oriented investment alternatives,
we believe that our income stream and the valuation of our assets are not
substantially correlated to movements in interest rates.
We have assembled an executive management team with extensive experience in
the mortgage servicing industry. Our executive officers are currently in
senior management roles at Ocwen Financial Corporation or “Ocwen.” Upon the
completion of this offering, they will resign from their positions at Ocwen
and become members of our executive management team. We believe our executive
management team’s extensive experience will provide us with the ability to
assess the vital characteristics of the mortgage loans underlying the mortgage
servicing assets we may seek to acquire and evaluate the quality of potential
mortgage servicers. We believe this experience will further enable us to
accurately value mortgage servicing assets and better forecast future asset
performance and servicing cash flows. In addition, we believe our management
team has demonstrated historical success in arranging cost-effective servicing
advance financing through a variety of economic cycles.
William C. Erbey, the founder of our company and the Chairman of our Board of
Directors and the Chairman of the Board of Directors of Ocwen, has agreed to
purchase $10 million of our ordinary shares at a price per share equal to the
initial public offering price in a private placement that will close
concurrently with this offering, which we refer to as the “Concurrent Private
Placement” and together with this offering, the “Offerings.” Following the
completion of the Offerings, Mr. Erbey will continue to serve as the Chairman
of the Board of Directors of Ocwen.
Our business strategy is focused on acquiring mortgage servicing rights. In
many cases, however, the transfer of legal ownership of mortgage servicing
rights requires the prior approval or consent of various third parties,
including rating agencies. If the seller from whom we have agreed to purchase
mortgage servicing rights has not obtained the necessary approvals and
consents to transfer legal ownership of the mortgage servicing rights to us,
we will instead seek to acquire the rights to receive the servicing fees that
the current servicer is entitled to receive, and the current servicer will
continue to service the mortgage loans and will receive compensation from us
for its servicing activities. We refer to these rights, along with the right
to acquire legal ownership of the related mortgage servicing rights
automatically upon obtaining the necessary approvals and consents to transfer
the mortgage servicing rights, as “Rights to MSRs.” Upon receipt of the
necessary third party approvals and consents, the seller would be obligated
to transfer legal ownership of the mortgage servicing rights to us without
any additional payment. Whether we acquire mortgage servicing rights or
Rights to MSRs, we would also acquire servicing advances and other associated
assets. We do not believe that our business strategy or economic performance
will be materially affected by whether we directly own mortgage servicing
rights or the related Rights to MSRs.
We will use the proceeds from the Offerings to purchase the right to receive
servicing and other related fees, associated servicing advances and other
related assets from Ocwen Loan Servicing, LLC or “Ocwen Loan Servicing,”
a wholly owned subsidiary of Ocwen, simultaneously with the closing of the
Offerings. These Rights to MSRs are related to mortgage servicing rights
owned by Ocwen Loan Servicing with respect to 116 pooling and servicing
agreements with an unpaid principal balance of approximately $16 billion as
of December 31, 2011, which we refer to as the “Initial Mortgage Servicing
Rights.” Ocwen Loan Servicing will not have obtained the necessary third p
arty approvals and consents to transfer legal ownership of the Initial
Mortgage Servicing Rights to us prior to the closing of the Offerings, and
as result, the transfer of legal ownership of the Initial Mortgage Servicing
Rights will occur automatically only if and when such approvals and consents
are received.
Throughout this prospectus, when we refer to our “Mortgage Servicing Assets,”
we are referring to the Rights to MSRs that we own and the mortgage servicing
rights that we may acquire in the future, and when we refer to “Purchased
Assets,” we are referring to the Mortgage Servicing Assets, together with the
associated servicing advances and any other assets related to such Mortgage
Servicing Assets that we have acquired. We refer to the acquisition of the
Initial Purchased Assets described in more detail below as the “Initial
Acquisition.” See “The Acquisition of the Initial Purchased Assets” below
for a description of the Purchased Assets that we intend to acquire in
connection with the Initial Acquisition.
We do not intend to develop our own mortgage servicing platform but instead
will rely on high quality third-party residential mortgage loan servicers.
Ocwen Loan Servicing is a leader in the residential subprime and Alt-A
mortgage servicing industry based on its historical servicing performance
through a variety of real estate and economic cycles. Prior to the transfer
of legal ownership of the Initial Mortgage Servicing Rights to us, Ocwen Loan
Servicing will remain obligated to service the underlying mortgage loans and
will remit to us the servicing and other related fees (excluding any
ancillary income that Ocwen Loan Servicing will retain) it collects in each
month related to the Initial Mortgage Servicing Rights. Following the
transfer of legal ownership of any Initial Mortgage Servicing Rights to us,
Ocwen Loan Servicing will service the underlying mortgage loans on our behalf
as subservicer, and we will receive the servicing and other related fees
(excluding any ancillary income). As compensation for its servicing and
subservicing activities, Ocwen Loan Servicing will receive from us a monthly
base fee initially equal to 12% of such recognized servicing fees collected
each month. Ocwen Loan Servicing will also have the opportunity to earn
a monthly performance based incentive fee that will fluctuate based on
collections and servicing advance reduction criteria with respect to the
underlying mortgage loans. We believe this arrangement will align the
interests of both companies. We will compensate Ocwen Loan Servicing for the
services it performs for us prior to the transfer of legal ownership of the
Initial Mortgage Servicing Rights to us. The method used to calculate the
fees that we will pay to Ocwen Loan Servicing under the Purchase Agreement
with respect to the Rights to MSRs related to the Initial Mortgage Servicing
Rights will be the same as the method used to calculate the fees that we will
pay to Ocwen Loan Servicing under the Subservicing Agreement with respect to
any Initial Mortgage Servicing Rights that we subsequently acquire. As
a result, the compensation to be paid to Ocwen Loan Servicing will not vary
based on whether Ocwen Loan Servicing or we hold legal title to the underlying
Initial Mortgage Servicing Rights. See “The Acquisition of the Initial
Purchased Assets” below for a description of the Purchase Agreement, the
Subservicing Agreement and the other agreements governing the Initial
Acquisition.
We anticipate future growth through subsequent acquisitions of Mortgage
Servicing Assets. As part of our strategy to acquire additional Mortgage
Servicing Assets, we intend to purchase substantially all of the remaining
mortgage servicing rights currently owned by Ocwen Loan Servicing or, to the
extent that Ocwen Loan Servicing has not received the necessary third party
approvals and consents to transfer such mortgage servicing rights to us prior
to the closing of any subsequent acquisitions of mortgage servicing rights,
the related Rights to MSRs. As of December 31, 2011, this related to
approximately $55 billion of unpaid principal balance of subprime and Alt-A
mortgage loans. This amount is expected to increase by approximately $42
billion of unpaid principal amount in connection with the consummation of
Ocwen’s proposed acquisition of Saxon Mortgage Services, Inc. and Ocwen’s
proposed acquisition from JPMorgan Chase Bank, N.A. of mortgage servicing
rights with an unpaid principal balance of approximately $15 billion as of
December 31, 2011 (collectively, the “Pending Ocwen Acquisitions”). We have
not entered into any agreement to acquire these assets, and our ability to
do so will depend on a number of factors, including access to adequate
financing. In addition, we believe that competitive and regulatory dynamics
in the mortgage servicing industry will present us with opportunities to
acquire Mortgage Servicing Assets from banks, other financial institutions
and independent mortgage servicers. We believe that our business model and
capital structure will enable us to competitively bid for these Mortgage
Servicing Assets, particularly as we develop a longer operating history.
Although we do not expect to maintain excess cash for potential future
acquisitions of Mortgage Servicing Assets, any excess cash flow generated
from the amortization of our Mortgage Servicing Assets and the reduction in
outstanding servicing advances may be used to acquire additional Mortgage
Servicing Assets. We intend to primarily fund any future acquisition of
Mortgage Servicing Assets and associated servicing advances with the proceeds
of issuances of additional ordinary shares and additional advance financing
facilities or other financing arrangements. The provisions of our Amended
and Restated Memorandum and Articles of Association (“Articles of
Association”) restrict our ability to issue and sell additional ordinary
shares at a price below our then current net asset value per share without
first obtaining the prior approval of holders of at least a majority of the
outstanding ordinary shares voted with respect to such approval. Future sales
of ordinary shares by us will dilute the ownership percentage of our then
existing shareholders, including shareholders that purchase in this offering.
We were incorporated as an exempted company in the Cayman Islands, which
currently does not levy income taxes on individuals or companies. We expect
to be treated as a passive foreign investment company (“PFIC”) under U.S.
federal income tax laws. We intend to distribute at least 90% of our net
income to our shareholders in the form of a monthly dividend that will
primarily be based on projected annual earnings, although we are not required
by law to do so. Payment of a monthly dividend is not a condition of our tax
status, and our decision to pay this dividend is not expected to be impacted
by any changes in our status for U.S. tax purposes. Except for our subsidiary
that is taxed as a corporation for U.S. federal income tax purposes, we do
not expect to be treated as engaged in a trade or business in the United
States and thus do not expect to be subject to more than a nominal amount
of U.S. federal income taxation.
On January 30, 2012, our Board of Directors declared a contingent interim
dividend of $0.10 per ordinary share (subject to proration for partial months)
with respect to each of the three calendar months following the completion of
the Offerings and the Initial Acquisition. These dividends will be payable
to holders of record of our ordinary shares on the last business day of each
such month, subject to all applicable laws, and will be paid on the 10th day
of the immediately following month, or the first business day thereafter if
such date falls on a weekend or holiday. The following chart sets forth the
record and payment dates of the initial contingent interim dividends assuming
the completion of the Offerings and the Initial Acquisition occurs during
March 2012:
Record Date Payment Date Amount per
Ordinary Share
March 30, 2012 April 10, 2012 $0.08
April 30, 2012 May 10, 2012 $0.10
May 31, 2012 June 11, 2012 $0.10
These dividends will be contingent upon the consummation of the Offerings and
the successful completion of the Initial Acquisition as described below under
“The Acquisition of the Initial Purchased Assets.” Our Board of Directors has
the right to rescind these dividends at any time prior to the applicable
dividend payment date.
------
Our principal executive offices are located in the Cayman Islands c/o Walkers
Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand
Cayman KYI-9005, Cayman Islands. We also maintain offices in the United States
located at 2002 Summit Boulevard, Sixth Floor, Atlanta, Georgia 30319 and at
1661 Worthington Road, Suite 100, West Palm Beach, Florida 33409. We can be
reached by telephone at (561) 682-7721.
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