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
6 Months Ended
Jun. 30, 2014
Investments In Consumer Loans Equity Method Investees  
INVESTMENTS IN CONSUMER LOANS EQUITY METHOD INVESTEES
INVESTMENTS IN CONSUMER LOANS, 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 ($1.3 billion outstanding as of June 30, 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 ($0.3 billion outstanding as of June 30, 2014) 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:
 
 
June 30, 2014
 
December 31, 2013
Consumer loan assets
 
$
2,302,297

 
$
2,572,577

Other assets
 
172,969

 
192,830

Debt(A)
 
(1,627,323
)
 
(2,010,433
)
Other liabilities
 
(15,025
)
 
(32,712
)
Equity
 
$
832,918

 
$
722,262

New Residential's investment
 
$
250,048

 
$
215,062

New Residential's ownership
 
30.0
%
 
30.0
%
 
(A)
Represents the Class A asset-backed notes with a face amount of $1.3 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 $0.3 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 was required to be used to pay down the Class A notes. In June 2014, the balance of the outstanding Class A notes was reduced to 50% of the outstanding UPB of the performing consumer loans and the managing member was reimbursed by the Consumer Loan Companies for accumulated expenses. Prospectively, 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 June 30, 2014
 
Six Months Ended June 30, 2014
Interest income
 
$
135,629

 
$
278,444

Interest expense
 
(18,106
)
 
(40,301
)
Provision for finance receivable losses
 
(27,663
)
 
(61,819
)
Other expenses, net
 
(19,279
)
 
(39,731
)
Change in fair value of debt
 
535

 
(16,332
)
Net income
 
$
71,116

 
$
120,261

New Residential's equity in net income
 
$
21,335

 
$
37,695

New Residential's ownership
 
30.0
%
 
30.0
%

 
The following is a summary of New Residential’s consumer loan investments made through equity method investees:
 
June 30, 2014
 
Unpaid Principal Balance
 
Interest in  Consumer Loan Companies
 
Carrying Value(A)
 
Weighted Average Coupon(B)
 
Weighted Average Yield
 
Weighted Average Expected Life (Years)(C)
Consumer Loans
$
2,924,133

 
30.0
%
 
$
2,302,297

 
18.1
%
 
16.8
%
 
3.5
 
(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 six months ended June 30, 2014 as follows:
 
 
For the Six Months Ended June 30, 2014
Balance at December 31, 2013
 
$
215,062

Contributions to equity method investees
 

Distributions of earnings from equity method investees(A)
 
(2,709
)
Distributions of capital from equity method investees
 

Earnings from investments in consumer loan equity method investees
 
37,695

Balance at June 30, 2014
 
$
250,048


(A)
In June 2014, the Consumer Loan Companies distributed $2.2 million in cash to, and made $0.6 million in tax withholding payments on behalf of, New Residential. The tax withholding payments were considered a non-cash distribution.