Ditech Holding Corporation – Seeks Approval of $2.5mn in KEIP for 31 Employees, Bonuses Could Hit $30.1mn for 12 Employees in Sale Transaction

March 20, 2019 – The Debtors requested Court approval for a key employee incentive plan (the “KEIP”) that would cover 31 employees and have an estimated cost of $2.5mn. The KEIP also includes terms relating to a subset of 12 employees that would apply should the Debtors choose to “toggle” from a reorganization transaction to a sale transaction [Docket No. 228].

The motion states, “The KEIP is designed to incentivize key employees in the event of a Reorganization Transaction, with a toggle for a sale of some or all of the assets of the Debtors pursuant to an Asset Sale Transaction or Sale Transaction (together, a ‘Sale’). 

Under the KEIP, thirty-one (31) of the Debtors’ key employees (collectively, the ‘Base KEIP Participants’), who are largely responsible for the continuity of the Debtors’ day-to-day operations, will be eligible to collectively receive up to $2.5 million under the KEIP (the ‘Base KEIP’ and the ‘Base KEIP Award’). In addition, a subset of Base KEIP Participants (twelve (12) key employees) (the ‘Sale Incentive Participants’ and together with the Base KEIP Participants, the ‘KEIP Participants’) will be entitled to incremental awards in the event of a Sale that are tied directly to the recoveries for the Term Lenders (the ‘Sale KEIP Award’) in recognition of their integral role and ability to drive value in the Marketing Process.” 

Key terms of the Base KEIP:

• Base KEIP Participants: Base KEIP Participants include thirty-one (31) of the Debtors’ key employees, including eight (8) statutory insiders, who have played and will continue to play significant roles in optimizing the Debtors’ business performance, including with respect to the Debtors’ servicing functions, and meeting the ambitious financial performance metrics during these chapter 11 cases to allow the Debtors to maximize value and facilitate the successful consummation of a transaction.
• Total Program Cost: The total Base KEIP Award will be up to $2.5mn if all target Performance Metrics are met.
• Plan Period: The Performance Metrics will be measured from the Commencement Date through the consummation of a Plan (the “Plan Period”).
• Performance Metrics: Each individual’s Base KEIP Award will be earned if the following metrics are achieved: 
• Change-of-Control Milestone. The change-of-control milestone is deemed achieved upon the closing of a change-of-control transaction, including a recapitalization or such other strategic transaction as approved by the Board in its sole discretion, and each Base KEIP Participant will earn a total of 40% of his or her Base KEIP Award.
• Financial and Operational Performance Milestones. Financial Performance (25%): Financial performance accounts for 25% of total KEIP Award (the “Financial Performance Awards”). The financial performance metric is achieved and a Base KEIP Participant’s will earn his or her Financial Performance Award if the Debtors maintain their expenses at or under forecast based on the Debtors’ 2019 business plan through the end of the Base KEIP Period (the “2019 Business Plan”).

GSE Adherence (15%): Maintenance of the Debtors’ Fannie Mae STAR rating accounts for 15% of the total KEIP Award (the “GSE Adherence Award”). The GSE adherence milestone is achieved and a Base KEIP Participant will earn his or her GSE Adherence Award, provided that the Debtors maintain their Fannie Mae STAR rating, measured as of the Commencement Date through the closing of the Reorganization Transaction.

Individual Performance Rating (20%): Individual performance ratings account for 20% of each Base KEIP Participant’s Base KEIP Award (the “Individual Performance Award”). The performance rating metric is achieved and a Base KEIP Participant will earn 20% of his or her Individual Performance Award, provided that such participant achieves at least a satisfactory rating based on such participant’s overall individual performance for all goals, as determined by the Company.

• Partial Achievement of Performance Metrics. The Performance Metrics will each be determined separately such that a participant could be awarded one of the four performance awards but not another.

Key terms of the Sale Incentive:

Sale Incentive Participants:

• The Sale Incentive Participants are twelve (12) Base KEIP Participants, including six (6) “insiders,” as defined in section 101(31) the Bankruptcy Code, who will be eligible to receive the incremental amounts under the Sale KEIP.
• Total Program Cost: All Sale Incentive Awards will be distributed out of the Term Lenders’ recoveries under the Plan. The total incremental payout under the Sale KEIP ranges from $2.0 million to $30.1 million.
• Sale Plan Period: The Term Lenders’ recoveries will be measured as of the Effective Date of the Plan based upon the projected recoveries to the Term Lenders under the Plan as agreed to by the Consenting Term Lenders and the Debtors or as determined by the Bankruptcy Court.

Sale Award Mechanics:

• Base KEIP Award. As stated, Base KEIP Participants remain eligible to earn their Base KEIP Award, subject to satisfaction of the Performance Metrics.
• Incremental Sale Award. Eligibility to receive incremental compensation above the $2.5 million Base KEIP Award (the “Incremental Sale Award”) Award will be limited to the Sale Incentive Participants. Payouts increase between the threshold and maximum payout. The threshold amount is $625 million, which equals a 65% recovery for the Term Lenders, and would trigger an aggregate payment to all Sale Incentive Participants equal to $2 million (incremental to the Base KEIP Award). The maximum total value is $995 million, which equals a recovery of par plus accrued interest by the Term Lenders. If the maximum award payment is achieved, the total payout to Sale Incentive Participants is equal to $30.1 million (incremental to the Base KEIP Award).
• Eligibility to Receive KEIP Awards. Except as noted below, a Sale Incentive Participant shall only be eligible to receive his or her Sale Incentive Award if such participant is employed by the Company or a purchaser in an Asset Sale Transaction or Sale Transaction, as applicable, as of the payment date of the Sale Incentive Awards, which shall be same date that the Term Lenders receive their initial distribution under the Plan. If a Sale Incentive Participant is terminated without cause, or if under such participant’s employment agreement or offer letter, by the participant for “good reason” or similar standard, or upon disability or death, such Sale Incentive Participant will remain eligible to receive his or her Sale Incentive Award as if such participant was still employed by the Debtors.

Sale Incentive Payout Schedule:

Sale Incentive Participant Allocations:

The Court scheduled a hearing to consider the KEIP motion for April 11, 2019, with objections due by April 4, 2019.

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