Stearns Holdings, LLC – Seeks Authority for $1.5bn Mortgage Warehouse Facility with Barclays and Related Hedging Agreements

July 9, 2019 – The Debtors requested Court authority to enter into a new $1.5bn, post-petition warehouse facility with Barclays Bank PLC as agent (the “DIP Repo Facility”) pursuant to a Master Repurchase Agreement (the “DIP Repo Facility Agreement”). The DIP Repo Facility will refinance in full four prepetition warehouse facilities (the “Prepetition Repo Facilities”), one of which is with Barclays, and the other three of which are (i) Bank of America, N.A., (ii) Texas Capital Bank, National Association, (iii) Wells Fargo Bank, N.A.

The Debtors also requested authority to enter into a pair of arrangements related to the DIP REPO Facility: (i) Mortgage Security Forward Transfer Agreements ("MSFTAs") with Barclays Capital Inc. and Nomura Securities International Inc. (the “DIP MSFTA Counterparties”), who were counterparties to two of the Debtors’ prepetition MSFTAs, that will provide interest rate hedging availability in the amount of $2.2bn (the “DIP MSFTAs”) and (ii) certain netting agreements related to the DIP MSFTAs (the “DIP Netting Agreement” and together with the DIP Repo Facility and the DIP MSFTAs, the “DIP Facilities”). Under the DIP Netting Agreement, Stearns Lending shall grant to the DIP Repo Agent netting and setoff rights with respect to the obligations of Stearns Lending arising under the DIP Repo Facility Agreement, the DIP MSFTAs, and any other DIP Repo Document. [Docket No. 19]. 

The Debtors' also requested Court authority to (i) access $35.0mn in debtor-in-possession (“DIP”) financing, including $25.0mn on an interim basis, to be provided by affiliates of the Debtors' majority owner Blackstone Group L.P. and (ii) use cash collateral [Docket No. 20]. We cover this request separately.

The big immediate question is how will Pacific Investment Management Company LLC (“PIMCO”), the holder of approximately 67% of the outstanding principal balance of the Debtors' 2020 notes, respond? There is no small amount of bad blood between the Debtors (and their private equity sponsor, the Blackstone Group) and PIMCO and the Debtors' request for DIP financing and DIP warehousing arrangements will be the first real opportunity for PIMCO to show their post-Chapter 11 hand.

The DIP financing motion states, “In the ordinary course of business, the Company uses warehouse facilities to fund mortgage loan originations and purchases. As explained in the First Day Declaration, a warehouse facility is structured as a ’safe harbor’ repurchase agreement under which the Company sells a mortgage loan to a buyer, with the buyer agreeing to sell the mortgage loan back to the Company upon demand. This arrangement, which is typical in the mortgage industry, is how the Company actually funds the mortgage loan. The Company buys the mortgage loan back when it is prepared to permanently sell it to one or more loan buyers, such as Fannie Mae, Freddie Mac or Ginnie Mae.

When the Company agrees to provide a mortgage loan to a borrower, it issues an interest rate lock commitment to the borrower. To protect against potential interest rate exposure on the mortgage loan before it is permanently sold, the Company enters into an interest rate hedge agreement. It does so pursuant to a standard form of agreement referred to as a Mortgage Security Forward Transfer Agreement ('MSFTA')."

Terms of DIP Repo Facility:

• Borrower: Stearns Lending, LLC
• Guarantor: Holdco
• DIP Repo Facility Purchasers: Barclays Bank PLC and Nomura Corporate Funding Americas, LLC. 
• Administrative Agent: Barclays Bank PLC.
• Interest Rate:

• Maturity Date: The earlier of (i) emergence from bankruptcy and (ii) 150 days from Closing, with one 30 days extension available if an Acceptable Plan has been confirmed but the effective date of such plan has not occurred.
• Borrowing Limits: DIP Repo Facility: $1.5bn, DIP MSFTAs: $2.2bn.
• Expenses and Fees: The Debtors are authorized and directed to execute, deliver, and perform under the Agent Fee Letter and the Master Fee Letter (each as defined in the Interim Order and filed separately under seal). The Debtors are authorized and directed to pay all reasonable and documented fees and expenses of the DIP Repo Parties and prepetition warehouse lenders, whether incurred before, on or after the Petition Date and whether or not the transactions contemplated hereby are consummated. Payment of all such professional fees and expenses shall not be subject to allowance by the Bankruptcy Court or to the U.S. Trustee guidelines.

Prepetition Capital Structure

The Notes:  On August 8, 2013, Debtor Stearns Holdings sold $250.0mn in 9.375% senior secured notes due August 15, 2020. Pursuant to the indenture governing the Notes, the proceeds from the sale of mortgage servicing rights (“MSRs”) can be used, inter alia, for repayment of debt and on May 24, 2019, the Debtors offered to repurchase $42.0mn of Notes from PIMCO using proceeds from the sale of MSRs. A commitment that the Debtors failed to honor. As at the Petition date, approximately $183.0mn of Notes were outstanding. 

Warehouse Lending: The Debtors finance their mortgage origination business through warehouse lending facilities which are structured as repurchase agreements. The Debtors have four repurchase agreements with four lending institutions: (i) Bank of America, N.A., (ii) Texas Capital Bank, National Association, (iii) Wells Fargo Bank, N.A., and (iv) Barclays Bank PLC (each a “Prepetition Repo Facility” and, collectively, the “Prepetition Repo Facilities”). Pursuant to the terms of these Prepetition Repo Facilities, the Debtors sell newly originated mortgage loans to the counterparty to finance the originations of the loans, and typically repurchase the loans within 30 days of origination when the Debtors sell the loans to Fannie Mae, Freddie Mac, Ginnie Mae or other purchasers. The Debtors obtain advances of less than 100% of the principal balance of the mortgage loans from the warehouse lenders, which requires the Debtors to use working capital to fund the remaining portion of the principal balance of the mortgage loans (referred to as “haircut”). The amount of the advances provided under each Prepetition Repo Facility range from 92.5% to 99% of the principal balance of agency-eligible mortgage loans. Prior to the Petition date, there was $1.1bn of collective availability under the Prepetition Repo Facilities. 

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