Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN CONSUMER LOANS EQUITY METHOD INVESTEES

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INVESTMENTS IN CONSUMER LOANS EQUITY METHOD INVESTEES
3 Months Ended
Mar. 31, 2014
Investments In Consumer Loans Equity Method Investees  
INVESTMENTS IN CONSUMER LOANS EQUITY METHOD INVESTEES
9. INVESTMENTS IN CONSUMER LOAN EQUITY METHOD INVESTEES

 

On April 1, 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”) a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential invested approximately $250 million for 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, Springleaf acquired 47% and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf acts as the managing member of the Consumer Loan Companies. The Consumer Loan Companies initially financed $2.2 billion ($1.4 billion outstanding as of March 31, 2014) of the approximately $3.0 billion purchase price with asset-backed notes. In September 2013, the Consumer Loan Companies issued and sold an additional $0.4 billion of asset-backed notes for 96% of par. These notes are subordinate to the $2.2 billion of debt issued in April 2013. The Consumer Loan Companies were formed on March 19, 2013, for the purpose of making this investment, and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf became the servicer of the loans and provides all servicing and advancing functions for the portfolio.

 

The following tables summarize the investment in the Consumer Loan Companies held by New Residential:

 

    March 31, 2014  
Consumer loan assets   $ 2,428,397  
Other assets     189,049  
Debt (A)     (1,815,734 )
Other liabilities     (30,306 )
Equity   $ 771,406  
New Residential’s investment   $ 231,422  
New Residential’s ownership     30.0 %

 

(A) Represents the Class A asset-backed notes with a face amount of $1.4 billion, an interest rate of 3.75% and a maturity of April 2021 and the Class B asset-backed notes with a face amount of $0.4 billion, an interest rate of 4.0% and a maturity of December 2024. Substantially all of the net cash flow generated by the Consumer Loan Companies is required to be used to pay down the Class A notes. When the balance of the outstanding Class A notes is reduced to 50% of the outstanding UPB of the performing consumer loans and the managing member is reimbursed by the consumer loan companies for expenses accumulated up to that date, 70% of the net cash flow generated is required to be used to pay down the Class A notes and the equity holders of the Consumer Loan Companies and holders of the Class B notes will each be entitled to receive 15% of the net cash flow of the Consumer Loan Companies on a periodic basis.

 

    Three Months Ended March 31, 2014  
Interest income   $ 142,815  
Interest expense     (22,195 )
Provision for finance receivable losses     (34,156 )
Other expenses, net     (20,452 )
Change in fair value of debt     (16,867 )
Net income   $ 49,145  
New Residential’s equity in net income   $ 16,360  
New Residential’s ownership     30.0 %

 

The following is a summary of New Residential’s consumer loan investments made through equity method investees:

 

    March 31, 2014  
    Unpaid Principal Balance     Interest in  Consumer Loan Companies     Carrying Value (A)     Weighted Average Coupon (B)     Weighted Average Asset Yield     Weighted Average Expected Life (Years) (C)  
Consumer Loans   $ 3,098,138       30.0 %   $ 2,428,397       18.1 %     15.9 %     3.2  

 

(A) Represents the carrying value of the consumer loans held by the Consumer Loan Companies.
(B) Substantially all of the cash flows received on the loans is required to be used to make payments on the notes described above.
(C) Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.

 

New Residential’s investments in consumer loans, equity method investees changed during the three months ended March 31, 2014 as follows:

  

   

For the Three Months Ended

March 31, 2014

 
Balance at December 31, 2013   $ 215,062  
Contributions to equity method investees     —  
Distributions of earnings from equity method investees     —  
Distributions of capital from equity method investees     —  
Earnings from investments in consumer loan equity method investees     16,360  
Balance at March 31, 2014   $ 231,422