continuing turmoil and crisis in subprime mortgages – challenges and opportunities of the sale...
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CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND
OPPORTUNITIES OF THE SALE PROCESS
Van C. Durrer, II
Skadden, Arps, Slate, Meagher & Flom LLP
PRESENTED BY:
Don D. Grubman
Hahn & Hessen LLP
Weston Anson
CONSOR Intellectual Asset Management
Stuart M. Brown
Edwards Angell Palmer & Dodge LLP
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Overview
Plan v. Sale Considerations Intellectual Property Issues Sale Considerations Regulatory Impact on Sales Auction Issues Valuation Issues Mortgage Loan Purchase Agreement Terms Mortgage Loan Purchase and Servicing Agreement
Issues
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Plan v. Sale Considerations
Estates prefer immediate sales but licensing and operational issues create obstacles and challenges to maximizing value Timing and Notice issues – Sale is Faster Sub Rosa Plan Objection? Certainty of close huge issue More power in plan context to address transitional
and operational issues especially in servicing rights or staged asset sales
Financial buyer’s willingness to pay more may outweigh adequate assurance/licensing uncertainties
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Plan v. Sale Considerations
Plan Approach (cont’d.) Segregation of Business/Bankruptcy Liabilities
• Purchasers typically assume only “business” or operational liabilities
• Estate remains responsible for “bankruptcy” liabilities (expenses related to administration of the bankruptcy estate)
Other Considerations
• More expensive
• Additional benefits and protections
• Greater flexibility in timing/form of payment and structure of transaction
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Plan v. Sale Considerations
Certainty of Close Financial Considerations
• When is the payment made to the estate-at or prior to actual closing?
• What is the danger to the estate of increased liability?
Wasting asset issues Complexity of Plan closing
• Negotiation of incidental plan terms
• Disclosure and voting process
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Plan v. Sale Considerations
Case Studies New Century—sale and extensive mutual transitional
service and sub-servicing arrangements ResMAE—sale of tangible assets and “keep-well”
pending plan confirmation and licensing American Home Mortgage—hybrid approach
involving separate “economic” and “legal” closings
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Intellectual Property and Intangible Asset Issues
Loan Servicing Continuity Control
Other Intangibles IT/Software Databases Systems
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Role of Backup Service Provider
Identification of all intangibles Bundling similar intangibles together Market valuation of the assets (see Valuation
scenarios) Monitor existing contracts Manage the portfolio Dispose of the assets in an orderly manner
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Sale Considerations
Wasting Assets Declining Unpaid Balances (UPBs) Employee departures Necessity of ongoing funding to make advances
Servicing Expenses/Trustee Issues Servicer receives payments from borrower (servicers
pay themselves percent of monthly payment and forward rest to Investor)
Servicer responsible to deposit taxes and insurance (“T&I”) and principal and interest (“P&I”) in custodial accounts – These often consist of millions of dollars held for many beneficiaries but may not be estate property
Other Servicer advances – liquidity concerns
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Sale Considerations
Access to Data Finding and sorting out who owns what – Stipulation
and Funding Issues Interests of Secured and Unsecured Creditors
Are there liens on all of the assets being sold? Different secured lenders (e.g., banks, equipment
lien holders) may have different interests. Allocation of consideration “Home run” vs. “Sure thing” Costs of sale-who pays and what is covered?
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Regulatory Impact on Sales
Licenses and Other State Law Issues Origination and Servicing Licenses Required State Licensing Procedures
• Pre- and post-closing
• Notice v. approval Options for Unlicensed Purchasers
• Lease back purchased assets necessary for debtor to provide servicing pending approval (special caveat)
• Purchase equity of already-licensed debtor through reorganization plan; fund operational costs pending close
• Bifurcate economic and legal closings
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Auction Issues
Transparency Open and fair process encourages bidding and
ensures court approval thus maximizing value for the estate• Equal access to information (this includes sharing
information requested by and provided to a single bidder with all bidders)
• Coordination with creditors’ committee• Some access to estate’s analysis of bids
especially contract assumption and non-monetary terms
• Meaningful pre-auction negotiation with bidders to smooth out differences
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Auction Issues
Non-Monetary Considerations in Valuing Bids Due diligence expense reimbursement Difference in approach (plan v. sale or designation
rights) Human capital costs The ugly underbelly of holdbacks
Selection of Executory Contracts and Leases Executory (§365) v Non-Executory (§363)
• “Executory Contracts” are contracts where material performance remains on the part of both parties
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Key Valuation Issues
Does the IP maintain its value in Bankruptcy? What sort of liquidation discount is experienced when IP
is sold in an orderly disposal? How do you value these assets in a liquidation scenario? Is there a formula to establish the descending value of
these assets in liquidation? How do you market and dispose of these assets most
cost-effectively and time-effectively?
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Context Continuum™
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Other Auction Issues
Investment Agreement Issues Servicing Retained v. Servicing Released Negotiation intensive–tension between buyback of
servicing rights v. replacement with qualified servicer (adequate assurance)
Human Capital Delicate balance between minimizing costs and
maximizing business value Continuity of a critical mass of management is
necessary under some states’ licensing
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Auction Issues
Holdback Escrow v. Adjustment Triggers and Timing Reconciliation process (exclusive remedy?) Bid Improvement by Holdback Reduction
• New Century—Carrington improved original price of approx. $140 million for purchase of servicing business in part through reduction of holdback, assumption of cure costs, and assumption of paid time off (PTO) obligations
• New Century—Residential Mortgage Solution LLC won auction of mortgage loans by eliminating holdback
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Mortgage Loan Purchase Agreement Terms
Exchange of Funds/Data The Loan Originator executes with a number of investors
and terms vary Mortgage file held in trust for investor Investor has repurchase and “premium recapture
rights” if purchased loans default or are prepaid in certain time (e.g., 90 or 120 days)
Servicer required to provide information to investor These details matter for securitization purposes
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Mortgage Loan Purchase and Servicing Agreement Issues
Cure Issues What is being cured?
• Recapture Obligations?
• Premium Recapture?
These obligations can exceed the value of the servicing rights
• Information failures? Adequate Assurance?
• Can purchaser service?
• Is it qualified under relevant state and federal regulations?
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Mortgage Loan Purchase and Servicing Agreement Issues
Severability If sale requires cure of EPD (early payment default)
claims, sale will not be viable Can servicing rights (on “servicing-retained” deal) be
severed from Mortgage Loan Purchase and Servicing Agreement (MLPSA) and sold separately from other MLPSA provisions?
“Stand-alone” servicing agreements may be entered into concurrently with Mortgage Loan Purchase Agreement (MLPA); can these servicing rights be transferred independent of such agreements even where cross-defaulted?
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Mortgage Loan Purchase and Servicing Agreement Issues
In AHM servicing sale to Wilbur Ross, Judge Sontchi (DE) applied In re Gardinier (11th Cir.) test regarding severability: Nature and purpose of agreements different? Separate and distinct consideration? Parties’ obligations interrelated? Held that servicing rights severable even within
single document Indemnification and waterfall provisions found to be
unenforceable anti-assignment provisions Interplay with safe harbor provisions