BlueMountain Capital Management, LLC Delivers Second Notice of Default on Certain Notes to Trustee of the HLSS Servicer Advance Receivables Trust

NEW YORK, Feb. 20, 2015 /PRNewswire/ -- BlueMountain Capital Management, LLC, the investment manager of funds that hold certain Series 2012-T2 and Series 2013-T3 Notes issued in connection with the HLSS Servicer Advance Receivables Trust (the "HSART Trust"), today announced that it has sent the letter below, which provides notice of additional events of default, to the trustee of the HSART Trust.

Disclosures

This press release is being issued by BlueMountain Capital Management, LLC ("BlueMountain"), an SEC-registered investment adviser. As of February 20, 2015, funds and accounts managed by BlueMountain and/or its affiliates (i) hold certain notes issued in connection with the HLSS Servicer Advance Receivables Trust, (ii) hold certificates of certain residential mortgage-backed securities (the "RMBS Certificates") collateralized by loans serviced by Ocwen Loan Servicing, LLC, (iii) hold a short position in, and put options with respect to, the common stock of Ocwen Financial Corporation OCN ("Ocwen") and (iv) hold a short position in, and put options with respect to, the common stock of Home Loan Servicing Solutions, Ltd. HLSS ("HLSS"). BlueMountain also has directed the trustees of certain of the RMBS Certificates to investigate and/or take action with respect to Ocwen Loan Servicing, LLC.

Without making any public or other disclosure except as may be required by applicable law, funds and accounts managed by BlueMountain and/or its affiliates may, at any time, buy and sell securities and instruments issued and/or managed by Ocwen, HLSS and other companies, including, without limitation, increasing and/or covering short positions in Ocwen and/or HLSS and/or changing to long positions in Ocwen and/or HLSS, based upon such factors as BlueMountain may, in its sole and absolute discretion, deem relevant.

The information set forth herein does not constitute a recommendation or solicitation to buy or sell any security. The information set forth herein represents the opinion of BlueMountain as of the date hereof and the trustee's response to the letter is unknown. This press release contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All forward-looking statements are subject to various factors, any or all of which could cause actual events to differ materially from projected events. The information set forth herein is based upon information reasonably available to BlueMountain and obtained from sources BlueMountain believes to be reliable; however, such sources cannot be guaranteed as to their accuracy or completeness. BlueMountain makes no representation or warranty, express or implied, as to the accuracy or completeness of the information set forth herein and undertakes no duty to update its contents.

About BlueMountain Capital Management, LLC

BlueMountain Capital Management, LLC ("BlueMountain") is an absolute return manager with approximately $20 billion in assets under management. BlueMountain and its affiliates have offices in New York, London and Tokyo. More information can be found at www.bluemountaincapital.com.

Letter

Patterson Belknap Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036-6710

 

 

Re: HLSS Servicer Advance Receivables Trust
Supplemental Notice of Default
Supplemental Notice of Event of Default
Supplemental Notice of Facility Early Amortiation Event

Ladies and Gentlemen:

We write on behalf of our client BlueMountain Capital Management, LLC, as investment manager to BlueMountain Montenvers Master Fund SCA SICAV-SIF, BlueMountain Guadalupe Peak Fund L.P., and Blue Mountain Credit Alternatives Master Fund L.P. (collectively, "BlueMountain"), which own certain Series 2012-T2 and Series 2013-T3 Notes issued in connection with the HLSS Servicer Advance Receivables Trust (the "HSART Trust").  We write in reference to the Sixth Amended and Restated Indenture, dated as of January 17, 2014, including all Schedules and Exhibits thereto (the "Indenture"), by and among the HSART Trust, as Issuer, Deutsche Bank National Trust Company ("DBNT"), as Indenture Trustee, Calculation Agent, Paying Agent and Securities Intermediary, HLSS Holdings, LLC ("HLSS"), as Administrator and as Servicer (on and after the MSR Transfer Date), Ocwen Loan Servicing, LLC ("Ocwen"), as a Subservicer and as Servicer (prior to the MSR Transfer Date), Barclays Bank PLC, as Administrative Agent, Wells Fargo Securities, LLC, as Administrative Agent, and Credit Suisse AG, New York Branch, as Administrative Agent, and all agreements referenced therein, including without limitation all the Designated Servicing Agreements and Transaction Documents.  Unless otherwise specified, capitalized terms used but not defined in this letter have the meanings ascribed to them in the Indenture.

We write to supplement the notice of Events of Default that BlueMountain served on January 23, 2015 (the "January 23 Letter") with two subsequent occurrences that constitute incremental Events of Default under the Indenture.  Specifically, the recent downgrades of Ocwen's servicer rating by Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings, Inc. ("Fitch") automatically gave rise to defaults and termination events in agreements governing Ocwen's mortgage servicing rights that collateralize the obligations of the HSART Trust to the Noteholders.  Those defaults and termination events, in turn, resulted in Events of Default under the Indenture.[1]  The increased risk of loss stemming from the occurrence of these Events of Default provides additional grounds to implement the bargained-for contractual remedy of an increase in the Note Interest Rate by 3%.

The two Events of Default discussed in this letter are independent of, yet also reinforce, the Events of Default recited in the January 23 Letter.  The January 23 Letter asked the Indenture Trustee to enforce the Noteholders' contractual remedy to address the precise conduct by Ocwen that HLSS and Ocwen acknowledged in the offering memorandum for the HSART Trust posed a material risk of loss to the Noteholders.  Ocwen's admitted misconduct has caused a succession of materially negative outcomes (e.g., governmental investigations, the appointment of monitors and third-party auditors, ratings downgrades) that entitle the Noteholders to the relief sought in the prior and instant notices.  The previously-noticed Events of Default remain valid, and no determination has yet been made regarding their merits by the Indenture Trustee or any Court.  However, because both notices are predicated on irrefutable facts in the public domain and the plain reading of the governing agreements, we expect the Indenture Trustee to render a determination in the near term.

The January 23 Letter

The January 23 Letter provided notice of Events of Default pursuant to Sections 8.1(d), 8.1(g), and 8.1(m)(i) of the Indenture.  These Events of Default were predicated upon facts "stipulate[d]" and "agree[d]" to by Ocwen that, among other things, it had engaged in "numerous and significant" violations of New York law, had "inadequate and ineffective technology systems and personnel," and "regularly gives borrowers incorrect or outdated information, sends borrowers backdated letters, unreliably tracks data for investors, and maintains inaccurate records."[2]  BlueMountain requested implementation of the "express and reasoned remedy to compensate the Noteholders for the increased risk of loss associated with the specified Events of Default:  an increased rate of return."[3]  Under the terms of the Indenture, the increased Note Interest Rate was due on the next scheduled Payment Date of February 17, 2015.[4]  In advance of the February 17 Payment Date, however, DBNT represented to BlueMountain's counsel that it had not made any determination as to the merits of the Events of Default asserted in the January 23 Letter, and that it had not formally or informally solicited opinions from any Noteholders concerning the matter.  DBNT stated that, due to these considerations, it required additional time, beyond the February 17 Payment Date, to fulfill its duties as Indenture Trustee to evaluate the merits of the January 23 Letter. 

To afford DBNT a reasonable opportunity to perform its duties, BlueMountain allowed DBNT to delay making a determination as to the merits of BlueMountain's claims until after the February 17 Payment Date.  BlueMountain agreed to DBNT's request to reserve the higher interest payment due with respect to the February 17 Payment Date only.  Specifically, BlueMountain informed DBNT that it "does not object to the Trustee withholding and reserving—in lieu of distributing the Incremental Interest Payment to the Noteholders on the next Payment Date—funds in the amount of the Incremental Interest Payment due for the period from and including January 23, 2015 through February 17, 2015, with the understanding that the funds withheld shall be deducted from amounts that would otherwise be distributed to [HLSS]."[5]  BlueMountain agreed to DBNT's request even though the Events of Default specified in the January 23 Letter are predicated on irrefutable facts in the public domain and the determination of the propriety of the relief requested by BlueMountain is straightforward.  BlueMountain also informed DBNT that it "will consider additional requests, if any, by the Trustee to consent to the withholding and reserving—in lieu of distributing—of Incremental Interest Payments for future Payment Dates in view of the facts and circumstances as they exist at that time."[6]  Independent of the agreement with BlueMountain, the Trustee secured HLSS's consent to the withholding and reserving by the Trustee of higher interest payment amounts from funds that otherwise would have been distributed to HLSS.  Neither the BlueMountain nor the HLSS agreement with the Trustee is a decision on the merits of the January 23 Letter, or relieves the Trustee of its obligation to timely address the noticed Events of Default.

The Downgrades

Since the January 23 Letter, Ocwen's servicing operations were subject to two recent rating downgrades.  First, on January 29, 2015, Moody's downgraded Ocwen's "servicer quality (SQ) assessments as a primary servicer of subprime residential mortgage loans to SQ3- from SQ3 and as a special servicer of residential mortgage loans to SQ3- from SQ3."[7]  Second, on February 4, 2015, Fitch downgraded Ocwen's servicer ratings as follows:  (i) Ocwen's residential primary servicer rating for Prime, Alt-A, Subprime, HELOC, and Closed-end Second Lien products to "RPS4" from "RPS3"; (ii) Ocwen's residential special servicer rating to "RSS4" from "RSS3"; and (iii) Ocwen's master servicer rating to "RMS4" from "RMS3."[8]  The reduction in Ocwen's servicing rating to the levels of the Moody's and Fitch downgrades (together, the "Downgrades") provides an objective measure of a material increase in risk associated with Ocwen's servicing operations.  Home Loan Servicing Solutions, Ltd. ("HLSS Ltd.") also recognized as much in its recent press release, which noted that Ocwen's "ability . . . to maintain its residential mortgage servicer ratings" is an "[i]mportant factor[] that could cause actual results to differ materially" from the company's "forward looking statements."[9]  Accordingly, as detailed below, the Designated Servicing Agreements and Transaction Documents state that such Downgrades shall automatically, without further inquiry, give rise to events of defaults and termination events, which in turn, constitute Events of Default under Sections 8.1(d) and 8.1(m)(i) of the Indenture. 

Section 8.1(d)

Under Section 8.1(d) of the Indenture, an Event of Default occurs when "the Servicer . . .  shall materially breach or default in the due observance or performance of any of its covenants or agreements in this Indenture or any other Transaction Document (subject to any cure period provided therein) . . . ."[10]  The Receivables Sale Agreement is a Transaction Document.[11]  In Section 4 of the Receivables Sale Agreement, Ocwen made a series of covenants, including a covenant titled "Default."[12]  Therein, Ocwen covenanted that—through to the date on which Ocwen "shall sell to HLSS all of the servicing rights and obligations under [the] Designated Servicing Agreement" (the "MSR Transfer Date"),[13] which has not occurred—it "is not in default . . . under any material agreement . . . including without limitation, each Designated Servicing Agreement, excluding those as a result of a breach of a Collateral Performance Test in respect of which no notice of termination has been sent[]."[14]  Ocwen further covenanted that "[e]ach Designated Servicing Agreement, as amended, is in full force and effect and no default (other than such an event resulting solely from the failure of a Collateral Performance Test under the related Servicing Agreement) exists thereunder . . . ."[15] 

A significant number of Designated Servicing Agreements have events of default or servicer termination events as a result of the Downgrades.  Ocwen Financial Corporation recently reported that out of the "approximately 4,000 private label securities (PLS) agreements" it currently services, "[t]o date, including the recent announcement from Fitch, our servicer ratings have fallen below the minimum criteria set forth in 482 PLS agreements."[16]  This represents approximately 12% of the PLS agreements serviced by Ocwen, and includes a material number of Designated Servicing Agreements.

The minimum rating criteria in the Designated Servicing Agreements validate the Downgrades as an objective measure of a material increase in the risk of loss already realized with respect to Ocwen's servicing operations.  Moreover, the right to terminate Ocwen as a servicer under Designated Servicing Agreements as a consequence of the Downgrades creates incremental risk of loss to the Noteholders.  As recited in the January 23 Letter, Ocwen and HLSS acknowledged in the offering memorandum for the HSART Trust that terminations "may result in delays or interruptions in payments on the Notes" and that the "yield on [the] Notes may be impacted."[17]  For all these reasons, the Downgrades have triggered defaults in the Designated Servicing Agreements, which, in turn, have caused additional Events of Default under Section 8.1(d) of the Indenture.

Section 8.1(m)(i)

Under Section 8.1(m)(i) of the Indenture, an Event of Default occurs when there is "an event of default under any full-recourse, term loan facility under which a Subservicer, HLSS or [HLSS Ltd.] is borrower, including, without limitation, the loan facility evidenced by that certain Senior Secured Term Loan Facility Agreement."[18]  The Downgrades gave rise to additional Events of Default under the Senior Secured Term Loan Facility Agreement, as follows:

• Ocwen is the borrower and a Loan Party under the Senior Secured Term Loan Facility Agreement. See Senior Secured Term Loan Facility Agreement § 1.01 (definition of "Loan Party").
• Section 8.01(e) of the Senior Secured Term Loan Facility Agreement, titled "Default in Other Agreements," provides that an Event of Default arises upon the occurrence of, among other things, the "breach or default by any Loan Party with respect to any other material term of . . . any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness, in each case beyond the grace period, if any, provided therefor, if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness (or a trustee on behalf of such holder or holders), to cause, that Indebtedness to become or be declared due and payable (or redeemable) prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be." Id. § 8.01(e)(ii)(2).
• The Master Servicing Rights Purchase Agreement and each related Sale Supplement[19] are items of Indebtedness under Section 8.01(e) of the Senior Secured Term Loan Facility Agreement.[20]
• The Downgrades constitute Termination Events under each Sale Supplement.[21] Upon the occurrence of a Termination Event, HLSS obtains the right to direct Ocwen to sell its mortgage servicing rights to pay amounts due to HLSS.[22] Other market participants seem to suggest that the Termination Events do not afford Ocwen's other secured lenders similar rights, and therefore, proceeds from a sale of Ocwen's rights will benefit HLSS exclusively.[23] To the contrary, the Termination Events trigger a cross-default under the Senior Secured Loan Facility Agreement, which entitles the participating lenders to accelerate Ocwen's debt (among other remedies).[24] Moreover, under the loan facility, the participating lenders may make claims to the proceeds from the servicing transfer.[25]

In summary, the Downgrades gave rise to a Termination Event in each of the Sales Supplements, which gave rise to an Event of Default under the Senior Secured Term Loan Facility Agreement, thus constituting an Event of Default under the Indenture.[26]

* * * *

Please be advised that this notice is without prejudice to, and with express reservation of, any additional rights and remedies that BlueMountain has under the Indenture or otherwise.  Also, please do not hesitate to contact me with any questions relating to the above at the telephone number or email address listed at the top of this letter.

Very truly yours,

Erik Haas

cc: HLSS Holdings, LLC      
as Administrator and as Servicer
(on and after the MSR Transfer Date)
1661 Worthington Road, Suite 100
West Palm Beach, FL 33409
Attention: Corporate Secretary

 

[1]      DBNT is required to provide "written notice specifying the nature and status of any . . . Event of Default, Facility Early Amortization Event or other event or occurrence which could have an Adverse Effect."  See Indenture § 3.3(b).  Such notice must be provided to the Noteholders, the Indenture Trustee, the Issuer and each Note Rating Agency promptly after receiving knowledge of such event, but no later than three Business Days thereafter.  Id.

[2]      January 23 Letter at 2-5 (quoting from Consent Order Pursuant to New York Banking Law § 44, In re Ocwen Fin. Corp. & Ocwen Loan Servicing, LLC (NYSDFS Dec. 22, 2014), http://www.dfs.ny.gov/
about/ea/ea141222.pdf).

[3]      January 23 Letter at 18.

[4]      See Indenture § 1.1 (definition of "Payment Date").

[5]      Letter to DBNT, dated February 16, 2015, at 1-2.

[6]      Id. at 2.

[7]      Moody's, Moody's downgrades Ocwen's SQ subprime and special servicer assessments, Jan. 29, 2015, https://www.moodys.com/research/Moodys-downgrades-Ocwens-SQ-subprime-and-special
servicer-assessments--PR_316552.  

[8]      Fitch, Fitch Downgrades Ocwen's RMBS Primary, Special and Master Servicer Ratings; Outlook Stable, Feb. 4, 2015, https://www.fitchratings.com/creditdesk/press_releases/detail.cfm?
pr_id=979187.

[9]      HLSS Ltd., Home Loan Servicing Solutions, Ltd. Signs Agreement with Deutsche Bank National Trust Company, Feb. 18, 2015, http://www.sec.gov/Archives/edgar/data/1513161/00015131611 5000008/ex991pressreleasefebruary1.htm.  The press release also listed HLSS Ltd.'s "ability to enforce [its] contractual remedies against Ocwen" and Ocwen's "ability . . . to obtain or maintain ratings of its financing facilities" as "[i]mportant factors" that could affect the company's projections.  Id.

[10]     An Event of Default arises under Section 8.1(d) if such default continues for five days after the earlier of (i) "actual discovery by a Responsible Officer of the Issuer, the Receivables Seller, the Servicer, the Depositor or the Administrator, as applicable, or (ii) the date on which written . . . notice of such failure, requiring the same to be remedied, shall have been given from the Indenture Trustee or any Noteholder to a Responsible Officer of the Issuer, the Receivables Seller, the Servicer, the Depositor or the Administrator . . . ."  Indenture § 8.1(d).

[11]     See Indenture § 1.1 (defining "Transaction Documents" to include the Receivables Sale Agreement, which is defined as "[t]he Third Amended and Restated Receivables Sale Agreement, dated as of March 13, 2013 . . .").

[12]     Receivables Sale Agreement § 4(a)(xxi). 

[13]     Id. at 2 ("Recitals").

[14]     Id. § 4(a)(xxi) (emphasis added).

[15]     Id. § 4(a)(xxiii) (emphasis added).  Ocwen also covenanted in this section that "each of the Designated Servicing Agreements is a Facility Eligible Servicing Agreement until the MSR Transfer Date."  Id.  As discussed in the January 23 Letter, the Designated Servicing Agreements no longer qualify as Facility Eligible Servicing Agreements, which serves as another basis for an Event of Default under Section 8.1(d) of the Indenture.

[16]     Ocwen Financial Corporation, Company Update for Stakeholders, Feb. 5, 2015, http://www.sec.gov/Archives/edgar/data/873860/000101905615000118/ex99_1.htm.

[17]     See January 23 Letter at 14 (quoting the offering memorandum at 43, 59).

[18]     Indenture § 8.1(m)(i).

[19]     See Sale Supplements dated as of February 10, 2012, May 1, 2012, August 1, 2012, September 13, 2012, March 13, 2013, May 21, 2013 and July 1, 2013, by and between Ocwen and HLSS (collectively, "Sale Supplements").

[20]     The term "Indebtedness" is broadly defined to encompass any agreement requiring Ocwen to pay amounts to another entity, including agreements secured by interests in any property or assets owned or held by Ocwen.  See Senior Secured Term Loan Facility Agreement § 1.01 (definition of "Indebtedness"); see also id. § 6.01 (providing that "Parent and the Borrower shall not . . . [d]irectly or indirectly . . . become . . .liable with respect to any Indebtedness, except . . . . (q) Indebtedness to HLSS pursuant to the HLSS Transactions").  As HLSS Ltd. explained, Ocwen's "obligations under the [Master Servicing Rights] Purchase Agreement with respect to the Rights to MSRs will be secured by a security interest in the Initial Mortgage Servicing Rights and the proceeds of the Initial Mortgage Servicing Rights."  Form S-1, Amendment No. 8 to Form S-1, Registration Statement, dated Feb. 28, 2012, http://www.sec.gov/Archives/edgar/data/1513161/000119312512083105/
d151656ds1a.htm.  HLSS Ltd. further stated that it "will account for the acquired Rights to MSRs as a financing" and that it will "record the servicing fees that [it] receive[s] with respect to the Rights to MSRs, net of servicing costs related to such Rights to MSRs, as payments on the note and apportion these payments between interest income and principal repayment."  Form S-1/A, Amendment No. 2, Registration Statement, dated Dec. 18, 2012, http://www.sec.gov/Archives/edgar/data/1513161/
000119312512505688/0001193125-12-505688-index.htm.

[21]     See Sale Supplements § 1.1 (definition of "Termination Event").

[22]     See id. § 6.13.

[23]     Letter by Mangrove Partners to the Board of Directors of HLSS, Ltd., dated Feb. 9, 2015, at 1, http://nebula.wsimg.com/877b1c8c7c62f637df12bed832e1400b?AccessKeyId=1EAB89B7CDECFC76E87B&disposition=0&alloworigin=1.  

[24]     Senior Secured Term Loan Facility Agreement § 8.01 (setting forth consequences of Events of Default).

[25]     See id. ("the Administrative Agent may cause the Collateral Agent to enforce any and all Liens and security interests created pursuant to Security Documents").

[26]     As stated in the January 23 Letter, under the Indenture, Events of Default trigger a Facility Early Amortization Event, and vice versa.  (Indenture §§ 1.1, 8.1(s).)

 

Media Contacts:

Dukas Public Relations
Doug Hesney
(212) 704-7385
Doug@dukaspr.com

Finsbury
Kal Goldberg / Kyle Giunta
(646) 805-2000
Kal.Goldberg@finsbury.com / Kyle.Giunta@finsbury.com

 

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SOURCE BlueMountain Capital Management, LLC