HOME LOAN SERVICING SOLUTIONS, LTD. (HLSS) SPO
|Company Name||HOME LOAN SERVICING SOLUTIONS, LTD.|
|Company Address||C/O INTERTRUST CORP SERVICES CAYMAN LTD
190 ELGIN AVENUE
GEORGE TOWN, GRAND CAYMAN KY1-9005
|Company Phone||(345) 945-3727|
|CEO||John P. Van Vlack|
|Employees (as of 12/20/2012)||12|
|State of Inc||--|
|Fiscal Year End||12/31|
|Exchange||Nasdaq National Market|
|Shares Over Alloted||0|
|Shareholder Shares Offered||--|
|Lockup Period (days)||180|
|Quiet Period Expiration||1/29/2013|
We estimate that the net proceeds to us from this offering will be approximately $462 million after deducting underwriting discounts and commissions and estimated offering expenses that we must pay. We intend to use the proceeds of this offering to acquire the Planned Acquisition Assets from Ocwen Loan Servicing in the Planned Acquisition. We are in discussions with Ocwen Loan Servicing regarding the composition of the Planned Acquisition Assets, but have not yet finalized the identification of the specific assets we will acquire. We expect the Planned Acquisition Assets will have similar characteristics to those Mortgage Servicing Assets acquired in the Ocwen Transactions, and that the related servicing advances, both current and future, will be eligible for funding under the Servicing Advance Facility Agreements. We have not entered into any agreement to acquire the Planned Acquisition Assets, but we expect the Planned Acquisition will be subject to the terms and conditions of the Purchase Agreement and a supplement thereto containing terms specific to the Planned Acquisition. We intend to use the remaining proceeds, if any, to purchase additional Mortgage Servicing Assets from Ocwen Loan Servicing and for working capital and general corporate purposes. We will also use our existing Servicing Advance Facility Agreements to finance the acquisition of the servicing advances related to the Planned Acquisition Assets. Upon the consummation of the Planned Acquisition, we expect that Ocwen Loan Servicing will remain the named servicer of each mortgage servicing right until such time as the Required Third Party Consents are obtained. We are continuing to pursue the Required Third Party Consents, and we will automatically obtain legal ownership of the acquired mortgage servicing rights without any additional payment to Ocwen Loan Servicing if and when we obtain the Required Third Party Consents.
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.
We are a Cayman Islands exempted company that acquires mortgage servicing assets consisting of mortgage servicing rights, rights to mortgage servicing rights, associated servicing advances and other related assets. We launched our operations on March 5, 2012 using the proceeds from our initial
public offering and a concurrent private placement with our founder and Chairman of our Board of Directors to acquire mortgage servicing assets relating to a portfolio of subprime and Alt-A mortgage loans with an unpaid principal balance of $15.2 billion from Ocwen Loan Servicing, LLC, or “Ocwen Loan Servicing.” As of March 31, 2012, our total assets and total liabilities were $546 million and $368 million, respectively. As of September 30, 2012, our total assets and total liabilities increased to $1,703 million and $1,285 million, respectively. Since completing our initial acquisition of mortgage servicing assets, we have purchased additional mortgage servicing assets from Ocwen Loan Servicing, and as of September 30, 2012, we had acquired mortgage servicing assets with an unpaid principal balance of approximately $48.0 billion from Ocwen Loan Servicing. We do not originate or purchase mortgage loans, and as a result we are not subject to the risk of loss related to the origination or ownership of mortgage loans. We have engaged Ocwen Loan Servicing, a high quality residential mortgage loan servicer, to service the mortgage loans underlying our mortgage servicing assets and therefore have not and do not intend to develop our own mortgage servicing platform. While we have only completed two full quarters of operations, we believe that our revenue and expense structure is predictable and will generate a stable income stream and that the quality of our assets is and will continue to 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 over time 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. Our results of operations for the quarter ended September 30, 2012 reflect consistent earnings that were in line with our expectations. We reported net income of $6.6 million, or $0.37 per ordinary share, for the third quarter of 2012. Our third quarter business performance highlights include the following: • declaration of dividends of $0.10 per share per month totaling $5.9 million for the quarter. • receipt of net proceeds of $236.0 million in connection with our public offering of 16,387,500 shares at $15.25 per ordinary share that closed on September 12, 2012. The net proceeds from the offering were used to acquire mortgage servicing assets from Ocwen Loan Servicing with an unpaid principal balance of $27.8 billion. • completion of the acquisition of mortgage servicing assets with an unpaid principal balance of $2.1 billion from Ocwen Loan Servicing on August 1, 2012. On September 13, 2012, we amended and restated the servicing advance facility agreements that we originally entered into simultaneously with the closing of our initial public offering and the Initial Ocwen Purchase to (i) add Wells Fargo Securities, LLC as an administrative agent, (ii) create a master trust (the “Trust”) that can issue multiple series of notes with varying maturity dates and credit ratings ranging from AAA to BBB, including 2a-7 money market eligible notes and medium term notes and (iii) allow for deferred servicing fees to be included in the borrowing base as principal and interest advances for pooling and servicing agreements that meet certain conditions. This resulted in a reduced cost of our financing. Our executive management team has extensive experience in the mortgage servicing industry and each of our executive managers was formerly in a senior management role at Ocwen. We believe our executive management team’s extensive experience provides us with the ability to assess the vital characteristics of the mortgage loans underlying the mortgage servicing assets we have acquired and may seek to acquire and evaluate the quality of our current and potential mortgage servicers. We believe this experience further enables us to accurately value mortgage servicing assets and better forecast future asset performance and servicing cash flows. In addition, our management team has demonstrated historical success in arranging cost-effective servicing advance financing through a variety of economic cycles. Under the terms of our professional services agreement with Ocwen, which we refer to as the “Ocwen Professional Services Agreement” throughout this prospectus, the Company and its management team provide Ocwen valuation and analysis services for mortgage servicing rights, advance financing management, treasury management, legal services and other similar services. None of our officers or employees holds positions at Ocwen or its affiliates. Nonetheless, because of our management team’s past or current relationships with Ocwen, conflicts of interest could occur with respect to the services performed under the Ocwen Professional Services Agreement or the other agreements the Company has with Ocwen. Matters that could give rise to conflicts include pricing, valuation and quality of assets or services that Ocwen and the Company purchase from one another, including Mortgage Servicing Assets (as defined below) or services under the Ocwen Professional Services Agreement. In addition, William C. Erbey, the Chairman of our Board of Directors, is the Chairman of the Board of Directors of Ocwen. We will seek to mitigate these potential conflicts through oversight by the independent members of our Board of Directors. 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 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. Acquiring Rights to MSRs results in the Company recording assets such as Notes Receivable—Rights to MSRs and match funded advances, and liabilities such as match funded liabilities. It also entitles us to collect the contractual servicing fees related to such Rights to MSRs, which are typically 50 basis points annually of the unpaid principal balance of the related mortgage loans. Servicing fees collected are reduced by the portion of fees paid to Ocwen, and the retained fees are further reduced by the amortization of the Notes Receivable—Rights to MSRs, to arrive at revenue or Interest Income—Notes Receivable—Rights to MSRs. This source of revenue allows us to pay operating expenses and other expenses such as interest expense on the match funded liability, and the income that remains is expected to compensate our investors for their investment. These balances are expected to grow in the future in periods where we are acquiring additional Mortgage Servicing Assets. In periods when we are not acquiring additional Mortgage Servicing Assets, these balances would likely decrease as the underlying mortgage loans are repaid. Upon receipt of the necessary third party approvals and consents, the seller is 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 also acquire servicing advances and other associated assets. We do not believe that our business strategy or economic performance has been or will be materially affected by whether we directly own mortgage servicing rights or the related Rights to MSRs. All of our acquisitions of mortgage servicing assets to date have been structured as acquisitions of Rights to MSRs and we expect that any additional acquisitions of mortgage servicing assets will be structured in the same manner, at least in the near term. 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 mortgage servicing rights related to the Rights to MSRs that we have acquired and any mortgage servicing rights we may acquire in the future and which are or will be serviced by Ocwen Loan Servicing as the “Ocwen Mortgage Servicing Rights.” We have not and do not intend to develop our own mortgage servicing platform but instead will rely on high quality third-party residential mortgage loan servicers. All of the Rights to MSRs that we have acquired to date have been acquired from, and are serviced by, Ocwen Loan Servicing. 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 any Ocwen 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 Rights to MSRs. Following the transfer of legal ownership of any Ocwen 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 receives from us a monthly base fee initially equal to 12% of such recognized servicing fees collected each month. Ocwen Loan Servicing also earns a monthly performance-based incentive fee that fluctuates based on collections and servicing advance reduction criteria with respect to the underlying mortgage loans. We believe this arrangement aligns 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 Ocwen Mortgage Servicing Rights to us. The method used to calculate the fees that we pay to Ocwen Loan Servicing under the Purchase Agreement with respect to the Rights to MSRs is 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 Ocwen 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 Ocwen Mortgage Servicing Rights. The assets we have purchased from Ocwen to date have pertained solely to subprime and Alt-A loans. This reflects the fact that the majority of the assets Ocwen owns pertain to servicing subprime and Alt-A loans. Additionally, the prepayment rate on subprime and Alt-A loans has demonstrated little correlation to interest rates in recent years which is a characteristic that we find attractive and which fits within our business strategy. We intend to continue to acquire assets pertaining to subprime and Alt-A mortgage loans that were originated prior to 2008. Given the low volume of originations of subprime and Alt-A loans since 2007, at some point in the future we may be unable to acquire sufficient similar assets, which would likely cause us to reduce or not be able to pay dividends to our shareholders and we would reevaluate our long-term business strategy at such time. If we are unable to acquire sufficient assets meeting our investing criteria, we may return cash to shareholders in the form of increased dividends, a special dividend or share repurchases, the effect of which may be to reduce future earnings and dividends. We anticipate future growth through subsequent acquisitions of Mortgage Servicing Assets. As part of our strategy to acquire additional Mortgage Servicing Assets, we expect to acquire over time substantially all of Ocwen Loan Servicing’s remaining mortgage servicing rights relating to subprime and Alt-A mortgage loans, which had an unpaid principal balance of approximately $63.8 billion as of September 30, 2012. In addition, in connection with Ocwen’s announced acquisition of Homeward Residential Holdings, Inc. and Ocwen Loan Servicing’s announced acquisition of certain assets of Residential Capital, LLC, Ocwen and Ocwen Loan Servicing are anticipated to acquire additional rights to service mortgage loans with approximately $120.0 billion of unpaid principal balance that are similar to those in our current portfolio. We believe that Ocwen perceives that it has benefited from the transfer of Rights to MSRs to us in connection with our previous acquisition transactions. Although we cannot guarantee that future acquisition transactions will occur, we also believe that Ocwen will benefit from such transactions and therefore will continue to sell mortgage servicing assets to us in this manner which will allow us to maintain or grow the unpaid principal balance of our servicing portfolio. We intend to continue to acquire additional similar mortgage servicing assets from Ocwen in the near term in two ways: • In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase mortgage servicing assets that are similar to our initial portfolio from Ocwen Loan Servicing under substantially similar terms. We refer to such transactions as “flow transactions.” We expect flow transactions to take place at regular intervals. Certain terms of such flow transactions, including the servicing incentive fee and advance ratio targets, will vary over time through these transactions. • In order to increase the scale of our business we will look for opportunities to issue additional equity in the form of ordinary shares to allow us to execute larger purchases of mortgage servicing assets similar to our initial portfolio from Ocwen under similar terms. We refer to such transactions as “follow on purchases.” These follow on purchases will be subject to equity market conditions and will likely require that additional advance financing capacity be arranged in advance or concurrent with each transaction in order to maintain leverage similar to our current level. Although 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 and we remain open to purchasing mortgage servicing assets from third parties other than Ocwen Loan Servicing, given the large amount of mortgage servicing assets remaining at Ocwen Loan Servicing, we do not view initiating purchases from other third parties as a near-term priority. 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. ----- Our principal executive offices are located in the Cayman Islands c/o Intertrust Corporate Services (Cayman) Limited (formerly Walkers Corporate Services Limited), 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) 682-7561, and our website is www.hlss.com.
|Auditor||Deloitte & Touche LLP|
|Company Counsel||Kramer Levin Naftalis and Frankel LLP|
|Company Counsel||Walkers and Kramer Levin Naftalis & Frankel LLP|
|Lead Underwriter||Barclays Capital Inc|
|Lead Underwriter||BofA Merrill Lynch|
|Lead Underwriter||Citigroup Global Markets Inc|
|Lead Underwriter||Wells Fargo Securities, LLC|
|Transfer Agent||American Stock Transfer & Trust Company, LLC|
|Underwriter||Keefe, Bruyette & Woods, Inc|
|Underwriter||Sterne, Agee and Leach, Inc|
|Underwriter Counsel||Shearman & Sterling LLP|
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