NEWS3311510Q_Av1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 1
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33211
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NewStar Financial, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 54-2157878 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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500 Boylston Street, Suite 1250, Boston, MA | | 02116 |
(Address of principal executive offices) | | (Zip Code) |
(617) 848-2500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer | | o | | Accelerated filer | | x |
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Non-accelerated filer | | o | | Smaller reporting company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 4, 2015, 45,948,447 shares of common stock, par value of $0.01 per share, were outstanding.
EXPLANATORY NOTE
NewStar Financial, Inc. (which is referred to throughout this Quarterly Report as “NewStar”, “the Company”, “we” and “us”) filed its Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (the “Original Form 10-Q”), with the U.S. Securities and Exchange Commission (the “SEC”) on May 7, 2015. This Amendment No. 1 is being filed to correct three typographical errors in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The revision (i) completes the information regarding loan origination on page 39 to reflect that $609 million in loans were originated in the first quarter of 2015, (ii) removes brackets that were included in the “Comparison of the Three Months Ended March 31, 2015 and 2014” section on Page 43 of the Original Form 10-Q, and (iii) corrects the sentence on page 52 that reads “at March 31, 2015, deferred financing fees were $3.0 million,” by replacing $3.0 million with $4.3 million.
Except for Part I, Item 2 and Part II, Item 6, this Amendment No. 1 does not include the text of the Original Form 10-Q. No other changes have been made to the Original Form 10-Q. This Amendment No. 1 does not reflect events occurring after the filing of the Original Form 10-Q, does not update disclosures contained in the Original Form 10-Q, and does not modify or update the Original Form 10-Q except as specifically described in this explanatory note. The information previously reported in the unaudited Financial Statements in the Original Form 10-Q has not changed.
TABLE OF CONTENTS
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| PART I FINANCIAL INFORMATION | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
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| PART II OTHER INFORMATION | |
Item 6. | Exhibits | | |
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SIGNATURES | | |
Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q/A of NewStar Financial, Inc., contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These are statements that relate to future periods and include statements about:
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• | our anticipated financial condition, including estimated loan losses; |
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• | our expected results of operation; |
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• | the anticipated timing of the closings of the investment by the Franklin Square Funds; |
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• | our growth and market opportunities; |
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• | trends and conditions in the financial markets in which we operate; |
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• | our future funding needs and sources and availability of funding; |
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• | our involvement in capital-raising transactions; |
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• | our ability to meet draw requests under commitments to borrowers under certain conditions; |
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• | our provision for credit losses; |
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• | our future development of our products and markets; |
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• | our ability to compete; and |
Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance, achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others:
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• | acceleration of deterioration in credit quality that could result in levels of delinquent or non-accrual loans that would force us to realize credit losses exceeding our allowance for credit losses and deplete our cash position; |
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• | risks and uncertainties relating to the financial markets generally, including disruptions in the global financial markets; |
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• | the market price of our common stock prevailing from time to time; |
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• | our ability to obtain external financing; |
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• | the regulation of the commercial lending industry by federal, state and local governments; |
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• | risks and uncertainties relating to our limited operating history; |
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• | our ability to minimize losses, achieve profitability, and realize our deferred tax asset; and |
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• | the competitive nature of the commercial lending industry and our ability to effectively compete. |
For a further description of these and other risks and uncertainties, we encourage you to carefully read section Item 1A. “Risk Factors” of our Annual Report on Form 10-K as amended for the year ended December 31, 2014.
The forward-looking statements contained in this Quarterly Report on Form 10-Q/A speak only as of the date of this report. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains forward-looking statements. Important factors that may cause actual results and circumstances to differ materially from those described in such statements are described in Item 1A of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014, as well as throughout this Item 2. You are cautioned not to place undue reliance on the forward-looking statements contained in this document. These statements speak only as of the date of this document, and we undertake no obligation to update or revise these statements, except as may be required by law.
Overview
NewStar Financial, Inc. is an internally-managed, commercial finance company with specialized lending platforms focused on meeting the complex financing needs of companies and private investors in the middle market. The Company is also a registered investment adviser and provides asset management services to institutional investors through a series of managed credit funds that co-invest in certain types of loans originated by the Company. Through its specialized lending platforms, the Company provides a range of senior secured debt financing options to mid-sized companies to fund working capital, growth strategies, acquisitions and recapitalizations, as well as, purchases of equipment and other capital assets.
These lending activities require specialized skills and transaction experience, as well as, a significant investment in personnel and operating infrastructure. To meet these demands, our loans and leases are originated directly by teams of credit-trained bankers and experienced marketing officers organized around key industry and market segments. These teams represent specialized lending groups that are supported by centralized credit management and operating platforms. This structure enables us to leverage common standards, systems, and industry and professional expertise across multiple businesses.
We target our marketing and origination efforts at private equity firms, mid-sized companies, corporate executives, banks, real estate investors and a variety of other referral sources and financial intermediaries to develop new customer relationships and source lending opportunities. Our origination network is national in scope and we target companies with business operations across a broad range of industry sectors. We employ highly experienced bankers, marketing officers and credit professionals to identify and structure new lending opportunities and manage customer relationships. We believe that the quality of our professionals, the breadth of their relationships and referral networks, and their ability to develop creative solutions for customers position us to be a valued partner and preferred lender for mid-sized companies and private equity funds with middle market investment strategies.
Our emphasis on direct origination is an important aspect of our marketing and credit strategy. Our national network is designed around specialized origination channels intended to generate a large set of potential lending opportunities. That allows us to be highly selective in our credit process and to allocate capital to market segments that we believe represent the most attractive opportunities. Our direct origination network also generates proprietary lending opportunities with yield characteristics that we believe would not otherwise be available through intermediaries. In addition, direct origination provides us with direct access to management teams and enhances our ability to conduct detailed due diligence and credit analysis of prospective borrowers. It also allows us to negotiate transaction terms directly with borrowers and, as a result, advise our customers’ financial strategies and capital structures, which we believe benefits our credit performance.
The Company typically provides financing commitments to companies in amounts that range in size from $10 million to $50 million. The size of financing commitments depends on various factors, including the type of loan, the credit characteristics of the borrower, the economic characteristics of the loan, and our role in the transaction. We also selectively arrange larger transactions that we may retain on our balance sheet or syndicate to other lenders, which may include funds that we manage for third party institutional investors. By syndicating loans to other lenders and our managed funds, we are able to provide larger financing commitments to our customers and generate fee income, while limiting our risk exposure to single borrowers. From time to time, however, our balance sheet exposure to a single borrower may exceed $35 million.
NewStar offers a set of credit products and services that have many common attributes, but which are highly specialized by lending group and market segment. Although both the Leveraged Finance and Business Credit lending groups structure loans as revolving credit facilities and term loans, the style of lending and approach to credit management is highly specialized. The Equipment Finance group broadens our product offering to include a range of lease financing options. The operational intensity of each product also varies by lending group.
Although NewStar operates as a single segment, the Company derives revenues from our asset management activities and four specialized lending groups that target market segments in which we believe that we have competitive advantages:
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• | Leveraged Finance, provides senior, secured cash flow loans and, to a lesser extent, second lien and unitranche loans, which are primarily used to finance acquisitions of mid-sized companies with annual cash flow (EBITDA) typically between $10 million and $50 million by private equity investment funds managed by established professional alternative asset managers; |
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• | Business Credit, provides senior, secured asset-based loans primarily to fund working capital needs of mid-sized companies with sales revenue typically totaling between $25 million and $500 million; |
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• | Real Estate, provides first mortgage debt primarily to finance acquisitions of commercial real estate properties typically valued between $10 million and $50 million by professional commercial real estate investors; |
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• | Equipment Finance, provides leases, loans and lease lines to finance purchases of equipment and other capital expenditures typically for companies with annual sales of at least $25 million; and |
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• | Asset Management, provides opportunities for qualified institutions to invest in credit funds managed by the Company with strategies to co-invest in loans originated by its Leveraged Finance lending group. |
Market Conditions
As a specialized commercial finance company, we compete in various segments of the loan market to extend credit to mid-sized companies through our national specialized lending platforms. We rely primarily on large banks for warehouse lines of credit to partially fund new loan origination and the capital markets for longer term funding through the issuance of asset-backed notes that are used to refinance bank lines and provide funding with matched duration for our leveraged loan portfolio.
Market conditions in most segments of the loan market that we target were mixed in the first quarter compared to the prior quarter. Although the first quarter tends to be a seasonally slower quarter for volumes, according to Thomson Reuters, overall middle market loan volume in the first quarter decreased as compared to the fourth quarter and as compared to the same period last year, with volume of approximately $25 billion versus $53 billion in the fourth quarter and $42 billion in the first quarter last year. The markets remained highly competitive and liquid as the supply of new capital continued to outpace demand for new financing for growth or acquisitions. The volume represented by new middle market transactions, as opposed to refinancings, decreased in the first quarter to $11.3 billion; refinancing volume was $14.1 billion. As a percentage of total volume, new transactions remained steady at 45% versus the prior quarter but decreased from 48% in the same period last year.
After hitting a trough in early 2014, the pricing environment in the broader loan market has generally strengthened since the middle of 2014 but dipped again in the first quarter of 2015. We believe that conditions in the middle market remained somewhat insulated from the impact of excessive liquidity evident in the broader loan markets as yields remained relatively stable through the first half of 2014 and have since trended upward into the first quarter of 2015. Loan yields in the large corporate market decreased in the first quarter while middle market loan yields remained relatively stable. Large corporate loan yields were down to 5.6% from 5.9% in the fourth quarter but up from 4.5% in the same quarter last year. Middle market loan yields were up to 6.7% from 6.6% in the fourth quarter and from 5.7% in the same quarter last year. With most of the new money flowing into the loan market from CLO issuance and retail loan funds targeted for broadly syndicated loans, we believe that market conditions will continue to be more challenging for large corporate lenders and that the middle market will continue to compare favorably.
Our different lending platforms provide us with certain flexibility to allocate capital and redirect our origination focus to market segments with the most favorable conditions in terms of demand and relative value. As the pricing environment for larger, more liquid loans has remained comparatively weak in the first quarter and loan demand among private equity firms in the lower middle market remained somewhat firmer, we continued to emphasize direct lending to smaller companies during the quarter. We believe that the yields on our new loan origination will continue to reflect a combination of these broad market trends and shifts in the mix of loans we originate.
Conditions in our core funding markets have remained steady in the first quarter as many fixed income investors continued to target structured investment alternatives such as CLOs to meet their return objectives. The market had been unsettled through much of the year last year, however, as regulatory headwinds dampened demand for CLOs among banks. The broader fixed income markets remained active in the quarter as the market seems to have adjusted to changes in the Federal Reserve’s monetary policies. As a result, we believe that investors will be more cautious about holding fixed rate debt, leading to less capital flowing into the high yield market in favor of high yielding investments with shorter duration, including floating rate bank loans and CLO bonds.
New U.S. CLO issuance in the first quarter was approximately $29 billion, a 31% increase versus the same quarter in 2014, a year that saw over $123 billion in total CLO issuance. Total U.S. CLO issuance in 2013 and 2012 was $81 billion and $55 billion, respectively. After trending slightly upward through the second half of 2014, despite interest rate uncertainty and a steepening yield curve, CLO credit spreads have remained relatively steady since the end of 2014 and into the first quarter however, as regulatory uncertainty slowly diminishes. We believe marginal funding costs will be somewhat range bound at current levels until investors reset rate expectations and resolve regulatory issues. Despite this trend in the pricing environment, we believe that market conditions remain supportive for us to issue new CLOs. We also believe the availability and cost of warehouse financing among banks has continued to improve as more banks have begun to provide this type of financing and existing providers have increased their lending activity. As a result, we believe that the terms and conditions for financings available to established firms like NewStar have improved.
Loan demand in the middle market is strongly influenced by the level of refinancing, acquisition activity and private investment, which is driven largely by changes in the perceived risk environment, prevailing borrowing rates and private investment activity. These factors were generally favorable in the first quarter as we originated $609 million of new loans at attractive yields. After declining through the first half of 2014 in a muted M&A volume environment, yields have since rebounded. Although pricing remained thinner and leverage continued to trend higher in the broad loan market, conditions in our primary target markets remained somewhat more favorable with pricing widening and leverage stabilizing at levels that compare favorably to the broader loan market, in which larger corporations typically borrow from syndicates of banks and loans are issued, priced and traded in a bond-style market that is more highly correlated with the high yield debt market. We believe that demand for new middle market loans and credit products will remain relatively consistent with current levels in the near term and exhibit usual seasonality. Over the long-term, we believe that demand will improve because private equity firms have substantial un-invested capital, which we believe that they will deploy through investment strategies that emphasize investments in mid-sized companies. As a result of these factors, we anticipate that demand for loans and leases offered by the Company and conditions in our lending markets will remain favorable through 2015 and continue to provide opportunities for us to increase our origination volume.
Recent Developments
Liquidity
On May 5, 2015, we entered into a $175.0 million credit facility with Citibank, N.A. to fund leverage finance loans. The facility provides for a reinvestment period which ends on May 5, 2018 with a two-year amortization period.
On April 22, 2015, we completed the sale of $300.0 million in aggregate principal amount of 7.25% Senior Notes due 2020. We subsequently paid off our corporate credit facility with Fortress Credit Corp. with a portion of the net proceeds from this offering.
On April 10, 2015, we entered into an amendment to our credit facility with Wells Fargo Bank, National Association to fund equipment finance leases and loans. The amendment, among other things, extended the advance termination date from April 10, 2015 to April 10, 2017 and the final legal maturity date to April 10, 2019, and increased the maximum single lessee hold size to $4.0 million, subject to concentration limits.
On March 20, 2015, we completed a $496.1 million term debt securitization. As part of the securitization, investors purchased approximately $410.3 million of the floating-rate asset-backed notes. We retained all of the remaining notes and equity, which totaled approximately $85.8 million. The notes are expected to mature in January 2027.
On March 6, 2015, we entered into an amendment to our credit facility with Wells Fargo Bank, National Association to fund leveraged finance loans. The amendment, among other things, increased the commitment amount from $375.0 million to $425.0 million, increased the maximum amount that the credit facility may be increased to $475.0 million, subject to lender approval, and modified certain concentration amounts and specified threshold amounts.
Stock Repurchase
On March 24, 2015, we repurchased 1,000,000 shares of our common stock in a privately negotiated transaction with an unaffiliated third party for an aggregate purchase price of $10.3 million.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
NewStar’s basic and diluted income per share for the three months ended March 31, 2015 was $0.05 on net income of $2.5 million, compared to basic and diluted income per share for the three months ended March 31, 2014 of $0.13 and $0.12, respectively, on net income of $6.2 million. Our managed portfolio was $3.7 billion at March 31, 2015 compared to $3.4 billion at December 31, 2014. Our managed assets totaled $4.1 billion at March 31, 2015 compared to $3.8 billion as of December 31, 2014.
Loan portfolio yield
Loan portfolio yield, which is interest income on our loans and leases divided by the average balances outstanding of our loans and leases, was 6.00% and 6.18% for the three ended March 31, 2015 and 2014, respectively. The decrease in loan portfolio yield was primarily driven by a decrease in our average yield on interest earning assets from new loan and lease origination and re-pricings subsequent to March 31, 2014, and the average yield on loans which were repaid subsequent to March 31, 2014 was higher than the average yield on loans in our total loan portfolio.
Net interest margin
Net interest margin, which is net interest income divided by average interest earning assets, was 2.51% for the three months ended March 31, 2015 and 3.50% for the three months ended March 31, 2014. The primary factors impacting net
interest margin for the three months ended March 31, 2015 and 2014 were the composition of interest earning assets, non-accrual loans, changes in three-month LIBOR, credit spreads and cost of borrowings.
Efficiency ratio
Our efficiency ratio, which is total operating expenses divided by net interest income before provision for credit losses plus total non-interest income, was 47.50% for the three months ended March 31, 2015 and 42.72% for the three months ended March 31, 2014. The increase in our efficiency ratio for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was primarily due to increased interest expense driven by an increase in our interest bearing liabilities.
Allowance for credit losses ratio
Allowance for credit losses ratio, which is allowance for credit losses divided by outstanding gross loans and leases excluding loans held-for-sale, was 1.97% at March 31, 2015 and 1.84% as of December 31, 2014. The increase in the allowance for credit losses ratio from December 31, 2014 is primarily due to the increase in general provision resulting from the increase in outstanding loans due to new loan origination during the three months ended March 31, 2015, and an increase in the specific allowance of $3.0 million. During the three months ended March 31, 2015, we recorded $3.0 million of net specific provision for credit losses on impaired loans and had recoveries totaling $0.1 million. At March 31, 2015, the specific allowance for credit losses was $23.7 million, and the general allowance for credit losses was $27.0 million. At December 31, 2014, the specific allowance for credit losses was $20.7 million, and the general allowance for credit losses was $23.0 million. We continually evaluate our allowance for credit losses methodology. If we determine that a change in our allowance for credit losses methodology is advisable, as a result of the rapidly changing economic environment or otherwise, the revised allowance methodology may result in higher or lower levels of allowance. Moreover, actual losses under our current or any revised methodology may differ materially from our estimate.
Delinquent loan rate
Delinquent loan rate, which is total delinquent loans net of charge offs with outstanding cash receivables that are 60 days or more past due, divided by outstanding gross loans and leases, was 1.68% as of March 31, 2015 as compared to 1.84% as of December 31, 2014. We had delinquent loans with an outstanding balance of $43.2 million and $43.6 million as of March 31, 2015 and December 31, 2014, respectively. We expect the delinquent loan rate to correlate to current economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase.
Delinquent loan rate for accruing loans 60 days or more past due
Delinquent loan rate for accruing loans 60 days or more past due, which is total delinquent accruing loans net of charge offs with outstanding cash receivables that are 60 days or more past due and less than 90 days past due, divided by outstanding gross loans and leases. We did not have any delinquent accruing loans as of March 31, 2015 or December 31, 2014. We expect the delinquent accruing loan rate to correlate to current economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase.
Non-accrual loan rate
Non-accrual loan rate is defined as total balances outstanding of loans on non-accrual status divided by the total outstanding balance of our loans and leases held for investment. Loans are put on non-accrual status if they are 90 days or more past due or if management believes it is probable that the Company will be unable to collect contractual principal and interest in the normal course of business. The non-accrual loan rate was 3.90% as of March 31, 2015 and 3.70% as of December 31, 2014. As of March 31, 2015 and December 31, 2014, the aggregate outstanding balance of non-accrual loans was $100.3 million and $87.8 million, respectively and total outstanding loans and leases held for investment was $2.6 billion and $2.4 billion, respectively. We expect the non-accrual loan rate to correlate to economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase, although actual results may vary.
Non-performing asset rate
Non-performing asset rate is defined as the sum of total balances outstanding of loans on non-accrual status and other real estate owned, divided by the sum of the total outstanding balance of our loans and leases held for investment and other real estate owned. The non-performing asset rate was 4.01% as of March 31, 2015 and 3.84% as of December 31, 2014. As of March 31, 2015 and December 31, 2014, the sum of the aggregate outstanding balance of non-performing assets was $103.3 million and $91.0 million, respectively. We expect the non-performing asset rate to correlate to economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase, although actual results may vary.
Net charge off rate (end of period loans and leases)
Net charge off rate as a percentage of end of period loan and lease portfolio is defined as annualized charge-offs net of recoveries divided by the total outstanding balance of our loans and leases held for investment. A charge-off occurs when management believes that all or part of the principal of a particular loan is no longer recoverable and will not be repaid. Typically a charge off occurs in a period after a loan has been identified as impaired and a specific allowance has been established. We did not have any charge offs during the three months ended March 31, 2015. The net charge-off rate was 1.42% for the three months ended March 31, 2014. We expect the net charge-off rate (end of period loans and leases) to correlate to economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase, although actual results may vary.
Net charge off rate (average period loans and leases)
Net charge off rate as a percentage of average period loan and lease portfolio is defined as annualized charge-offs net of recoveries divided by the average total outstanding balance of our loans and leases held for investment for the period. We did not have any charge offs during the three months ended March 31, 2015. The net charge-off rate was 1.41% for the three months ended March 31, 2014. We expect the net charge-off rate (average period loans and leases) to correlate to economic conditions. During times of economic expansion we expect the rate to decline, and during times of economic contraction, we expect the rate to increase, although actual results may vary.
Return on average assets
Return on average assets, which is net income divided by average total assets, was 0.36% for the three months ended March 31, 2015 and 0.98% for the three months ended March 31, 2014.
Return on average equity
Return on average equity, which is net income divided by average equity, was 1.57% for the three months ended March 31, 2015 and 4.05% for the three months ended March 31, 2014.
Review of Consolidated Results
A summary of NewStar Financial’s consolidated financial results for the three months ended March 31, 2015 and 2014 follows:
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| Three Months Ended March 31, | |
2015 | | 2014 | |
| ($ in thousands) |
Net interest income: | | |
Interest income | $ | 39,749 |
| | | $ | 33,127 | | |
Interest expense | 22,334 | | | | 12,501 | | |
Net interest income | 17,415 | | | | 20,626 | | |
Provision for credit losses | 6,978 | | | | 5,807 | | |
Net interest income after provision for credit losses | 10,437 | | | | 14,819 | | |
Non-interest income: | | | | |
Fee income | 1,158 | | | | 770 | | |
Asset management income | 920 | | | | 25 | | |
Loss on derivatives | (9) | | | | (4) | | |
Loss on sale of loans | (15) | | | | (166) | | |
Other income | 2,072 | | | | 6,093 | | |
Total non-interest income | 4,126 | | | | 6,718 | | |
Operating expenses: | | | | |
Compensation and benefits | 6,733 | | | | 7,759 | | |
General and administrative expenses | 3,499 | | | | 4,369 | | |
Total operating expenses | 10,232 | | | | 12,128 | | |
Operating income before income taxes | 4,331 | | | | 9,409 | | |
Results of Consolidated Variable Interest Entity | | | | |
Interest income | — | | | | 2,653 | | |
Interest expense – credit facilities | — | | | | 878 | | |
Interest expense – Fund membership interest | — | | | | 595 | | |
Other income | — | | | | 8 | | |
Operating expenses | — | | | | 60 | | |
Net results from Consolidated Variable Interest Entity | — | | | | 1,128 | | |
Income before income taxes | 4,331 | | | | 10,537 | | |
Income tax expense | 1,792 | | | | 4,334 | | |
Net income | $ | 2,539 |
| | | $ | 6,203 | | |
Comparison of the Three Months Ended March 31, 2015 and 2014
Interest income. Interest income increased $3.9 million, to $39.7 million for the three months ended March 31, 2015 from $35.8 million for the three months ended March 31, 2014. The increase was primarily due to an increase in average balance of our interest earning assets to $2.8 billion from $2.5 billion primarily due to new loan origination subsequent to March 31, 2014.
Interest expense. Interest expense increased $8.3 million, to $22.3 million for the three months ended March 31, 2015 from $14.0 million for the three months ended March 31, 2014. The increase is primarily due to an increase in the average balance of our interest bearing liabilities to $2.2 billion from $1.9 billion, and an increase in the average cost of funds to 4.11% from 2.97%, primarily due to increased borrowings under certain credit facilities with higher interest rates and the subordinated notes.
Net interest margin. Net interest margin decreased to 2.51% for the three months ended March 31, 2015 from 3.50% for the three months ended March 31, 2014. The decrease in net interest margin was primarily due to an increase in our average cost of interest bearing liabilities. The net interest spread, the difference between gross yield on our interest earning assets and the total cost of our interest bearing liabilities, decreased to 1.61% from 2.77%.
The following table summarizes the yield and cost of interest earning assets and interest bearing liabilities for the three months ended March 31, 2015 and 2014:
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| Three Months Ended March 31, 2015 | | Three Months Ended March 31, 2014 |
| ($ in thousands) |
| Average Balance | | Interest Income/ Expense | | Average Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost |
Total interest earning assets | $ | 2,817,452 | | | $ | 39,749 | | | 5.72 | % | | $ | 2,528,474 | | | $ | 35,780 | | | 5.74 | % |
Total interest bearing liabilities | 2,205,096 | | | 22,334 | | | 4.11 | | | 1,905,993 | | | 13,974 | | | 2.97 | |
Net interest spread | | | $ | 17,415 | | | 1.61 | % | | | | $ | 21,806 | | | 2.77 | % |
Net interest margin | | | | | 2.51 | % | | | | | | 3.50 | % |
Provision for credit losses. The provision for credit losses increased $1.2 million to $7.0 million for the three months ended March 31, 2015 from $5.8 million for the three months ended March 31, 2014. The increase in the provision was primarily due to an increase of $2.3 million of general provisions, which was primarily a result of loan growth, partially offset by a decrease of $1.1 million in specific provisions recorded during the three months ended March 31, 2015 as compared to three months ended March 31, 2014. During the three months ended March 31, 2015, we recorded net specific provisions for impaired loans of $3.0 million compared to $4.1 million recorded during the three months ended March 31, 2014. The net specific component of the provision for credit losses was primarily focused around negative credit migration related to one previously identified impaired loan. Our general allowance for credit losses covers probable losses in our loan and lease portfolio with respect to loans and leases that are not impaired and for which no specific impairment has been identified. A specific provision for credit losses is recorded with respect to loans for which it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement for which there is impairment recognized. The Company employs a variety of internally developed and third-party modeling and estimation tools for measuring credit risk, which are used in developing an allowance for loan and lease losses on outstanding loans and leases. The Company’s allowance framework addresses economic conditions, capital market liquidity and industry circumstances from both a top-down and bottom-up perspective. The Company considers and evaluates a number of factors, including but not limited to, changes in economic conditions, credit availability, industry, loss emergence period, and multiple obligor concentrations in assessing both probabilities of default and loss severities as part of the general component of the allowance for loan and lease losses.
On at least a quarterly basis, loans and leases are internally risk-rated based on individual credit criteria, including loan and lease type, loan and lease structures (including balloon and bullet structures common in the Company’s Leveraged Finance and Real Estate loans), borrower industry, payment capacity, location and quality of collateral if any (including the Company’s Real Estate loans). Borrowers provide the Company with financial information on either a monthly or quarterly basis. Ratings, corresponding assumed default rates and assumed loss severities are dynamically updated to reflect any changes in borrower condition or profile.
For Leveraged Finance loans and Equipment Finance products, the data set used to construct probabilities of default in its allowance for loan losses model, Moody’s CRD Private Firm Database, primarily contains middle market loans that share attributes similar to the Company’s loans. The Company also considers the quality of the loan or lease terms and lender protections in determining a loan loss in the event of default.
For Business Credit loans, the Company utilizes a proprietary model to risk rate the loans on a monthly basis. This model captures the impact of changes in industry and economic conditions as well as changes in the quality of the borrower’s collateral and financial performance to assign a final risk rating. The Company has also evaluated historical loss trends by risk rating from a comprehensive industry database covering more than twenty-five years of experience of the majority of the asset based lenders operating in the United States. Based upon the monthly risk rating from the model, the reserve is adjusted to reflect the historical average for expected loss from the industry database.
For Real Estate loans, the Company employs two mechanisms to capture the impact of industry and economic conditions. First, a loan’s risk rating, and thereby its assumed default likelihood, can be adjusted to account for overall commercial real estate market conditions. Second, to the extent that economic or industry trends adversely affect a substandard rated borrower’s loan-to-value ratio enough to impact its repayment ability, the Company applies a stress multiplier to the loan’s probability of default. The multiplier is designed to account for default characteristics that are difficult to quantify when market conditions cause commercial real estate prices to decline.
For consolidated variable interest entities to which the Company is providing transitional capital, we utilize a qualitative analysis which considers the business plans related to the entity, including expected hold periods, the terms of the agreements related to the entity, the Company’s historical credit experience, the credit migration of the entity’s loans in determining expected loss, as well as conditions in the capital markets. The Company provided capital on a transitional basis to the Arlington Fund. We deconsolidated the Arlington Fund on June 26, 2014. We did not recognize any losses on loans on the date of deconsolidation.
The Company periodically reviews its allowance for credit loss methodology to assess any necessary adjustments based upon changing economic and capital market conditions. If the Company determines that changes in its allowance for credit losses methodology are advisable, as a result of changes in the economic environment or otherwise, the revised allowance methodology may result in higher or lower levels of allowance. There have been no material modifications to the allowance for credit losses methodology during 2015. Given uncertain market conditions, actual losses under the Company’s current or any revised allowance methodology may differ materially from the Company’s estimate.
Additionally, when determining the amount of the general allowance, the Company supplements the base amount with an environmental reserve amount which is governed by a score card system comprised of ten individually weighted risk factors. The risk factors are designed based on those outlined in the Comptrollers of the Currency’s Allowance for Loan and Lease Losses Handbook. The Company also performs a ratio analysis of comparable money center banks, regional banks and finance companies. While the Company does not rely on this peer group comparison to set the level of allowance for credit losses, it does assist management in identifying market trends and serves as an overall reasonableness check on the allowance for credit losses computation.
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment of a loan is based upon (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price, or (iii) the fair value of the collateral if the loan is collateral dependent, depending on the circumstances and our collection strategy. Impaired loans are identified based on the loan-by-loan risk rating process described above. Impaired loans include all non-accrual loans, loans with partial charge-offs and loans which are Troubled Debt Restructurings. It is the Company’s policy during the reporting period to record a specific provision for credit losses to cover the identified impairment on a loan.
Impaired loans at March 31, 2015 were in Leveraged Finance, Real Estate, and Business Credit over a range of industries impacted by the then current economic environment including the following: Media and Communications, Industrial, Commercial Real Estate, Other Business Services, Consumer/Retail, and Building Materials. For impaired Leveraged Finance loans, the Company measured impairment based on expected cash flows utilizing relevant information provided by the borrower and consideration of other market conditions or specific factors impacting recoverability. Such amounts are discounted based on original loan terms. For impaired Real Estate loans, the Company determined that the loans were collateral dependent and measured impairment based on the fair value of the related collateral utilizing recent appraisals from third-party appraisers, as well as internal estimates of market value. As of March 31, 2015, we had impaired loans with an aggregate outstanding balance of $215.7 million. Impaired loans with an aggregate outstanding balance of $174.3 million have been restructured and classified as troubled debt restructurings. At March 31, 2015, the Company had a $23.7 million specific allowance for impaired loans with an aggregate outstanding balance of $129.2 million. As of March 31, 2015, we had two restructured impaired loans which had an outstanding balance greater than $20 million and one restructured impaired loan which had an outstanding balance greater than $30 million. In each of these cases, we added to our position to maximize our potential recovery of the outstanding principal.
Non-interest income. Non-interest income decreased $2.6 million, to $4.1 million for the three months ended March 31, 2015 from $6.7 million for the three months ended March 31, 2014. For the three months ended March 31, 2015, non-interest income was primarily comprised of a $1.2 million unrealized gain on a total return swap, $1.2 million of fee income, $0.9 million of asset management fees, $0.5 million of unused fees, and $0.2 million of income from other real estate owned properties. For the three months ended March 31, 2014, non-interest income was primarily comprised of a $6.5 million gain on the sale of an equity interest in an impaired borrower, a $1.6 million loss from equity method of accounting interests, $0.8 million of fee income, $0.7 million of income from other real estate owned properties, and $0.4 million of unused fees.
As a result of certain of our troubled debt restructurings, we have received equity interests in several of our impaired borrowers. The equity interests in certain impaired borrowers is initially recorded at fair value when the debt is restructured and is subsequently analyzed at the end of each quarter. In situations where we are deemed to be under the equity method of accounting, we record our ownership share of the borrowers’ results of operations in non-interest income. Additionally, our corresponding share of our borrowers’ results of operations may directly impact the remaining net book value of these respective loans. These equity interests may give rise to potential capital gains or losses, for tax purposes. This could impact future period tax rates depending on our ability to recognize capital losses to the extent of any capital gains.
Operating expenses. Operating expenses decreased $2.0 million, to $10.2 million for the three months ended March 31, 2015 from $12.2 million for the three months ended March 31, 2014. Compensation and benefits expense decreased $1.0 million and general and administrative expenses decreased $1.0 million.
Results of Consolidated Variable Interest Entity. In April 2013, we announced that we had formed a new managed credit fund, the Arlington Fund, in partnership with an institutional investor to co-invest in middle market commercial loans originated by NewStar. As the managing member of Arlington Fund, we retained full discretion over Arlington Fund’s investment decisions, subject to usual and customary limitations, and earned management fees as compensation for our services. From inception, the Company was deemed to be the primary beneficiary of Arlington Fund and, therefore,
consolidated the financial results of Arlington Fund with the Company’s results of operations and statements of financial position since April 2013.
Upon completion of the Arlington Program’s term debt securitization on June 26, 2014, our membership interests in Arlington Fund were redeemed and new membership interests in the Arlington Program were issued to its equity investors. As a result of the repayment of our advances as the Class B lender under the warehouse facility and the redemption of our membership interests in the Arlington Fund, we have no ownership or financial interests in the Arlington Fund or its successors except to the extent that we receive management fees as collateral manager of the Arlington Program. Additionally, the Arlington Program employs an independent investment professional who is responsible for investment decision making on behalf of the program. As a result, we deconsolidated the Arlington Fund from our statements of financial position beginning on June 26, 2014 and will not consolidate the Arlington Program’s operating results or statements of financial position as of that date.
Although we consolidated all of the assets and liabilities of Arlington Fund during the period from April 4, 2013 through June 26, 2014, our maximum exposure to loss was limited to our investments in membership interests in Arlington Fund, our Class B Note receivable, and the management fee receivable from Arlington Fund. These items defined our economic relationship with Arlington Fund but were eliminated upon consolidation. We managed the assets of Arlington Fund solely for the benefit of its lenders and investors. If we were to have liquidated, the assets of Arlington Fund would not have been available to our general creditors. Conversely, the investors in the debt of Arlington Fund had no recourse to our general assets. Therefore, we did not consider this debt our obligation.
Income taxes. For the three months ended March 31, 2015 and 2014, we provided for income taxes based on an effective tax rate of approximately 41%for each period.
As of March 31, 2015 and December 31, 2014, we had net deferred tax assets of $30.4 million and $28.1 million, respectively. In assessing if we will be able to realize our deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We considered all available evidence, both positive and negative, in determining the realizability of deferred tax assets at March 31, 2015. We considered carryback availability, the scheduled reversals of deferred tax liabilities, projected future taxable income during the reversal periods, and tax planning strategies in making this assessment. We also considered our recent history of taxable income, trends in our earnings and tax rate, positive financial ratios, and the impact of the downturn in the current economic environment (including the impact of credit on allowance and provision for loan losses; and the impact on funding levels) on the Company. Based upon our assessment, we believe that a valuation allowance was not necessary as of March 31, 2015. As of March 31, 2015, our deferred tax asset was primarily comprised of $26.8 million related to our allowance for credit losses and $9.6 million related to equity compensation, which was partially offset by deferred tax liabilities related to our Equipment finance portfolio.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity consist of cash flow from operations, credit facilities, term debt securitizations and proceeds from equity and debt offerings. We believe that these sources will be sufficient to fund our current operations, lending activities and other short-term liquidity needs. Subject to market conditions, we continue to explore opportunities for the Company to increase its leverage, including through the issuance of high yield debt securities, convertible debt securities, share repurchases, secured or unsecured senior debt or revolving credit facilities, to support loan portfolio growth and/or strategic acquisitions, which may be material to us. In addition to opportunistic funding related to potential growth initiatives, our future liquidity needs will be determined primarily based on prevailing market and economic conditions, the credit performance of our loan portfolio and loan origination volume. We may need to raise additional capital in the future based on various factors including, but not limited to: faster than expected increases in the level of non-accrual loans; lower than anticipated recoveries or cash flow from operations; and unexpected limitations on our ability to fund certain loans with credit facilities. We may not be able to raise debt or equity capital on acceptable terms or at all. The incurrence of additional debt will increase our leverage and interest expense, and the issuance of any equity or securities exercisable, convertible or exchangeable into Company common stock may be dilutive for existing shareholders.
During the first quarter of 2015, the U.S. economy showed mixed signals while growth has seemed to moderate somewhat as the quarter saw steady-to-favorable trends in employment, consumer confidence and consumer spending, while most indicators in manufacturing and housing were generally steady-to-unfavorable. The Fed has continued to maintain it will act carefully to keep interest rates low until the economy is stronger and that any potential interest rate increases would be considered on a meeting-to-meeting basis, citing sluggish wage growth and low inflation as concerns. We expect broader favorable trends and slow growth in the U.S. to continue and monetary policy to remain conducive to moderate growth in the near term. We expect Treasury and investment grade bond rates remain relatively low and investors to continue to focus on allocating capital to riskier, higher yielding, fixed and floating rate asset classes in order to generate additional yield from their investments. The larger, more liquid segments of the securitization markets also continued to display strong volume and pricing. With the strengthening of the high yield loan markets as well as the broader securitization market, conditions in the securitization market for loans (the CLO market) remain attractive for issuers such as NewStar, despite some lingering uncertainty surrounding regulatory changes. We believe that the CLO market, which the Company partially relies upon for funding, has stabilized to a point that it will provide a reliable source of capital for companies like NewStar. In addition to these signs of stabilizing market conditions, we believe the Company has substantially greater financial flexibility and increased financing options due to the improvement in our financial performance.
We believe that our ability to access the capital markets, secure new credit facilities, and renew and/or amend our existing credit facilities continues to demonstrate an overall improvement in the market conditions for funding and indicates progress in our ability to obtain financings on improved terms in the future. Despite these signs of improving market conditions and relative stability in recent years, we cannot assure these conditions will continue, and it is possible that the financial markets could experience stress, volatility, and/or illiquidity. If they do, we could face materially higher financing costs and reductions in leverage, which would affect our operating strategy and could materially and adversely affect our financial condition.
Cash and Cash Equivalents
As of March 31, 2015 and December 31, 2014, we had $28.7 million and $33.0 million, respectively, in cash and cash equivalents. We may invest a portion of cash on hand in short-term liquid investments. From time to time, we may use a portion of our unrestricted cash to pay down our credit facilities creating undrawn capacity which may be redrawn to meet liquidity needs in the future.
Restricted Cash
Separately, we had $214.9 million and $95.4 million of restricted cash as of March 31, 2015 and December 31, 2014, respectively. The restricted cash represents the balance of the principal and interest collections accounts and pre-funding amounts in our credit facilities, our term debt securitizations and customer holdbacks and escrows. The use of the principal collection accounts’ cash is limited to funding the growth of our loan and portfolio within the facilities or paying down related credit facilities or term debt securitizations. As of March 31, 2015, we could use $29.3 million of restricted cash to fund new or existing loans. The interest collection account cash is limited to the payment of interest, servicing fees and other expenses of our credit facilities and term debt securitizations and, if either a ratings downgrade or failure to receive ratings confirmation occurs on the rated notes in a term debt securitization at the end of the funding period or if coverage ratios are not met, paying down principal with respect thereto. Cash to fund the growth of our loan portfolio and to pay interest on our term debt securitizations represented a large portion of our restricted cash balance at March 31, 2015.
Asset Quality and Allowance for Loan and Lease Losses
If a loan is 90 days or more past due, or if management believes it is probable we will be unable to collect contractual principal and interest in the normal course of business, it is our policy to place the loan on non-accrual status. If a loan financed
by a term debt securitization is placed on non-accrual status, the loan may remain in the term debt securitization and excess interest spread cash distributions to us will cease until cash accumulated in the term debt securitization equals the outstanding balance of the non-accrual loan, or if an overcollateralization test is present, excess interest spread cash is diverted, and used to de-lever the securitization to bring the ratio back into compliance. When a loan is on non-accrual status, accrued interest previously recognized as interest income subsequent to the last cash receipt in the current year will be reversed, and the recognition of interest income on that loan will stop until factors indicating doubtful collection no longer exist and the loan has been brought current. We may make exceptions to this policy if the loan is well secured and is in the process of collection. As of March 31, 2015, we had impaired loans with an aggregate outstanding balance of $215.7 million. Impaired loans with an aggregate outstanding balance of $174.3 million have been restructured and classified as troubled debt restructurings. Impaired loans with an aggregate outstanding balance of $100.3 million were on non-accrual status. During the three months ended March 31, 2015, we had recoveries of impaired loans totaling $0.1 million and no charge-off of impaired loans. Impaired loans of $43.2 million were greater than 60 days past due and classified as delinquent. During the three months ended March 31, 2015, we recorded $3.0 million of net specific provisions for impaired loans. Included in our specific allowance for impaired loans was $9.3 million related to delinquent loans.
We closely monitor the credit quality of our loans and leases which are partly reflected in our credit metrics such as loan delinquencies, non-accruals, and charge-offs. Changes to these credit metrics are largely due to changes in economic conditions and seasoning of the loan and lease portfolio.
We have provided an allowance for loan and lease losses to provide for probable losses inherent in our loan and lease portfolio. Our allowance for loan and lease losses as of March 31, 2015 and December 31, 2014 was $49.9 million and $43.0 million, respectively, or 1.94% and 1.81% of loans and leases, gross, respectively. As of March 31, 2015, we also had a $0.8 million allowance for unfunded commitments, resulting in an allowance for credit losses of 1.97%.
The allowance for credit losses is based on a review of the appropriateness of the allowance for credit losses and its two components on a quarterly basis. The estimate of each component is based on observable information and on market and third-party data believed to be reflective of the underlying credit losses being estimated.
It is the Company’s policy that during the reporting period to record a specific provision for credit losses for all loans which we have identified impairments. Subsequently, we may charge-off the portion of the loan for which a specific provision was recorded. All of these loans are classified as impaired (if they have not been so classified already as a result of a troubled debt restructuring) and are disclosed in the Allowance for Credit Losses footnote to the financial statements.
Activity in the allowance for loan losses for the three months ended March 31, 2015 and for the year ended December 31, 2014 was as follows: |
| | | | | | | |
| Three Months Ended March 31, 2015 | | Year Ended
December 31,
2014 |
| ($ in thousands) |
Balance as of beginning of period | $ | 42,983 | | | $ | 41,403 | |
General provision for loan and lease losses | 3,905 | | | 4,779 | |
Specific provision for loan losses | 2,981 | | | 22,070 | |
Net (charge offs) recoveries | 68 | | | (25,269) | |
Balance as of end of period | 49,937 | | | 42,983 | |
Allowance for losses on unfunded loan commitments | 802 | | | 710 | |
Allowance for credit losses | $ | 50,739 | | | $ | 43,693 | |
During the three months ended March 31, 2015 we recorded a total provision for credit losses of $7.0 million. The Company increased its allowance for credit losses to 1.97% of gross loans at March 31, 2015 compared to 1.84% at December 31, 2014.
Borrowings and Liquidity
As of March 31, 2015 and December 31, 2014, we had outstanding borrowings totaling $2.5 billion and $2.2 billion, respectively. Borrowings under our various credit facilities and term debt securitizations are used to partially fund our positions in our loan portfolio.
As of March 31, 2015, our funding sources, maximum debt amounts, amounts outstanding and unused debt capacity, subject to certain covenants and conditions, are summarized below:
|
| | | | | | | | | | | | | | |
Funding Source | Maximum Debt Amount | | Amounts Outstanding | | Unused Debt Capacity | | Maturity |
| ($ in thousands) |
Credit facilities | $ | 735,000 | | | $ | 369,894 | | | $ | 365,106 |
| | | 2015-2017 |
Term debt securitizations(1) | 1,581,983 | | | 1,572,484 | | | 9,499 | | | | 2022-2027 |
Repurchase agreement | 79,760 | | | 79,760 | | | — | | | | 2017 |
Corporate debt | 238,500 | | | 238,300 | | | 200 | | | | 2016-2018 |
Subordinated notes | 300,000 | | | 200,000 | | | 100,000 | | | | 2024 |
Total | $ | 2,935,243 | | | $ | 2,460,438 | | | $ | 474,805 |
| | | |
| |
(1) | Maturities for term debt are based on contractual maturity dates. Actual maturities may occur earlier. |
We must comply with various covenants. The breach of certain of these covenants could result in a termination event and the exercise of remedies if not cured. At March 31, 2015, we were in compliance with all such covenants. These covenants are customary and vary depending on the type of facility. These covenants include, but are not limited to, failure to service debt obligations, failure to meet liquidity covenants and tangible net worth covenants, and failure to remain within prescribed facility portfolio delinquency, charge-off levels, and overcollateralization tests. In addition, we are required to make termination or make-whole payments in the event that certain of our existing credit facilities are prepaid. These termination or make-whole payments, if triggered, could be material to us individually or in the aggregate, and in the case of certain facilities, could be caused by factors outside of our control, including as a result of loan prepayment by the borrowers under the loan facilities that collateralize these credit facilities.
Credit Facilities
As of March 31, 2015 we had four credit facilities through certain of our wholly-owned subsidiaries: (i) a $425 million credit facility with Wells Fargo Bank, National Association (“Wells Fargo”) to fund leveraged finance loans, (ii) a $125 million credit facility with DZ Bank AG Deutsche Zentral-Genossenschaftbank Frankfurt (“DZ Bank”) to fund asset-based loans, (iii) a $110 million credit facility with Wells Fargo to fund asset-based loans, and (iv) a $75 million credit facility with Wells Fargo to fund equipment leases and loans.
We have a $425.0 million credit facility with Wells Fargo to fund leveraged finance loans. On March 6, 2015, we entered into an amendment to this facility which, among other things, increased the commitment amount to $425.0 million from $375.0 million, with the ability to further increase the commitment amount to $475.0 million, subject to lender approval and other customary conditions, and modified certain concentration amounts and specified threshold amounts. The credit facility had an outstanding balance of $163.8 million and unamortized deferred financing fees of $3.1 million as of March 31, 2015. Interest on this facility accrued at a variable rate per annum. The facility provides for a revolving reinvestment period which ends on November 5, 2015 with a two-year amortization period.
We have a $125.0 million credit facility with DZ Bank that had an outstanding balance of $89.9 million and unamortized deferred financing fees of $0.1 million as of March 31, 2015. Interest on this facility accrues at a variable rate per annum. As part of the agreement, there is a minimum interest charge of $1.6 million per annum. If the facility is not utilized to cover this minimum requirement, then a make-whole fee is assessed to satisfy the minimum requirement. We are permitted to use the proceeds of borrowings under the credit facility to fund advances under asset-based loan commitments. The commitment amount under the credit facility provides for reinvestment until it matures on June 30, 2015 with no amortization period.
We have a $110.0 million credit facility with Wells Fargo to fund asset-based loan origination. The credit facility had an outstanding balance of $89.3 million and unamortized deferred financing fees of $0.7 million as of March 31, 2015. The credit facility may be increased to an amount up to $300.0 million subject to lender approval and other customary conditions. Interest on this facility accrues at a variable rate per annum. The credit facility provides for reinvestment until it matures on December 7, 2017 with no amortization period.
We have a note purchase agreement with Wells Fargo under the terms of which Wells Fargo agreed to provide a $75.0 million credit facility to fund equipment leases and loans. The credit facility had an outstanding balance of $27.0 million and unamortized deferred financing fees of $0.9 million as of March 31, 2015. Interest on this facility accrues at a variable rate per annum. On April 10, 2015, we entered into an amendment to this facility which, among other things, extended the reinvestment period to April 10, 2017 and the final maturity date to April 10, 2019, and modified certain concentration amounts and specified threshold amounts.
Corporate Credit Facility
On January 5, 2010, we entered into a note agreement with Fortress Credit Corp., which was subsequently amended on August 31, 2010, January 27, 2012, November 5, 2012, and December 4, 2012. The agreement was amended and restated on
May 13, 2013 and further amended on June 3, 2013. On March 6, 2014, as permitted under the corporate credit facility with Fortress Credit Corp., we requested and received an increase of $28.5 million to the Initial Funding under this credit facility. On May 15, 2014, as permitted under the corporate credit facility with Fortress Credit Corp., we requested and received a new $10.0 million term loan (the “Term C Loan”). The credit facility, as amended, consists of a $238.5 million term note with Fortress Credit Corp. as agent, which consists of the existing outstanding balance of $100.0 million (the “Existing Funding”), an initial funding of $98.5 million (the “Initial Funding”), and three subsequent borrowings, of $5.0 million (the “Delay Draw Term A”), $25.0 million (the “Delay Draw Term B”) and the $10.0 million Term C Loan. The Existing Funding, the Initial Funding, the Delay Draw Term A, and the Term C Loan mature on May 11, 2018. The Delay Draw Term B matures on June 3, 2016. The Initial Funding, the Existing Funding and the Delay Draw Term A accrue interest at the London Interbank Offered Rate (LIBOR) plus 4.50% with an interest rate floor of 1.00%. The Delay Draw Term B accrues interest at LIBOR plus 3.375% with an interest rate floor of 1.00%. The Term C Loan accrues interest at LIBOR plus 4.25% with an interest rate floor of 1.00%.
We are permitted to use the proceeds of borrowings under the credit facility for general corporate purposes including, but not limited to, funding loans, working capital, paying down outstanding debt, acquisitions and repurchasing capital stock and dividend payments up to $37.5 million, The $37.5 million may be adjusted upward by the amount of fiscal year-end net income excluding depreciation and amortization expense.
The term note may be prepaid at any time without a prepayment penalty. The term note may be prepaid at par in the event of a change of control. As of March 31, 2015, the term note had an outstanding principal balance of $238.3 million and unamortized deferred financing fees of $3.9 million. On April 22, 2015, we paid off the term note with Fortress Credit Corp.
Subordinated notes
On December 4, 2014, we completed the initial closing of an investment of long-term capital from funds sponsored by Franklin Square Capital Partners ("Franklin Square") and sub-advised by GSO Capital Partners. The Franklin Square funds purchased $200.0 million of 10-year subordinated notes (the "Subordinated Notes") that rank junior to the Company's existing and future senior debt. The Company is required to borrow an additional $100.0 million of notes in increments of at least $25.0 million by December 2015. The Subordinated Notes were recorded at par less the initial relative fair value of the warrants issued in connection with the investment on December 4, 2014 and January 23, 2015 (see Note 8) which was $43.2 million as pf December 31, 2014 and $63.4 million as of March 31, 2015. The debt discount will amortize over time and will be recorded as non-cash interest expense as the Subordinated Notes accrete to par value. As of March 31, 2015, unamortized deferred financing fees were $5.9 million. The Subordinated Notes bear interest at 8.25% and include a Payment-in-Kind ("PIK Toggle") feature that allows the Company, at its option, to elect to have interest accrued at a rate of 8.75% added to the principal of the Subordinated Notes instead of paying it in cash. The Subordinated Notes have a ten year term and mature on December 4, 2024. They are callable during the first three years with payment of a make-whole premium. The prepayment premium decreases to 103% and 101% after the third and fourth anniversaries of the closing, respectively. They are callable at par after December 4, 2019. The Subordinated Notes require a mandatory payment at the end of each accrual period, beginning on December 5, 2019. The Company is required to make a cash payment of principal plus accrued interest in an amount required to prevent the Subordinated Notes from being treated as an "Applicable High Yield Discount Obligation" within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended. Events of default under the Subordinated Notes include failure to pay interest or principal when due subject to applicable grace periods, material uncured breaches of the terms of the Subordinated Notes, and bankruptcy/insolvency events.
Term Debt Securitizations
In June 2007 we completed a term debt securitization transaction. In conjunction with this transaction we established a separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Trust 2007-1 (the “2007-1 CLO Trust”) and sold and contributed $600 million in loans and investments (including unfunded commitments), or portions thereof, to the 2007-1 CLO Trust. We remain the servicer of the loans. Simultaneously with the initial sale and contribution, the 2007-1 CLO Trust issued $546.0 million of notes to institutional investors. We retained $54.0 million, comprising 100% of the 2007-1 CLO Trust’s trust certificates. At March 31, 2015, the $280.3 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $334.3 million. At March 31, 2015, deferred financing fees were $0.3 million. The 2007-1 CLO Trust permitted reinvestment of collateral principal repayments for a six-year period which ended in May 2013. During 2012, we purchased $0.2 million of the 2007-1 CLO Trust’s Class C notes. During 2010, we purchased $5.0 million of the 2007-1 CLO Trust’s Class D notes. During 2009, we purchased $1.0 million of the 2007-1 CLO Trust’s Class D notes.
During 2009, Moody’s downgraded all of the notes of the 2007-1 CLO Trust. As a result of the downgrade, amortization of the 2007-1 CLO Trust changed from pro rata to sequential, resulting in scheduled principal payments thereafter made in order of the notes seniority until all available funds are exhausted for each payment. During 2010, Standard and Poor’s downgraded the Class A-1 notes, the Class A-2 notes, the Class C notes and the Class D notes of the 2007-1 CLO Trust. The
downgrade did not have any material consequence as the amortization of the 2007-1 CLO Trust changed from pro rata to sequential after the Moody’s downgrade in 2009.During the second quarter of 2011, Moody’s upgraded the Class C notes, the Class D notes, and the Class E notes. During 2011, Standard and Poor’s upgraded the Class D notes. During the fourth quarter of 2011, Moody’s upgraded all of the notes of the 2007-1 CLO Trust. During the third quarter of 2012, Fitch affirmed its ratings of all of the notes of the 2007-1 CLO Trust. During the second quarter of 2013, Moody’s upgraded the Class B notes, the Class C notes, the Class D notes, and the Class E notes and affirmed its ratings of the Class A-1 notes and the Class A-2 notes of the 2007-1 CLO Trust. During the third quarter of 2013, Fitch affirmed its ratings on all of the notes of the 2007-1 CLO Trust. During the first quarter of 2014, Standard and Poor’s upgraded its ratings on all notes of the 2007-1 CLO Trust. During the second quarter of 2014, Moody’s affirmed the ratings of the Class B notes, the Class C notes, and the Class D notes of the 2007-1 CLO Trust.
We receive a loan collateral management fee and excess interest spread. We also receive payments with respect to the classes of notes we own in accordance with the transaction documents. We expect to receive a principal distribution as owner of the trust certificates when the term debt is retired. If loan collateral in the 2007-1 CLO Trust is in default under the terms of the indenture, the excess interest spread from the 2007-1 CLO Trust could not be distributed until the undistributed cash plus recoveries equals the outstanding balance of the defaulted loan or if we elected to remove the defaulted collateral.
The following table sets forth selected information with respect to the 2007-1 CLO Trust:
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| Notes originally issued | | Outstanding balance March 31, 2015 | | Borrowing spread to LIBOR | | Ratings (S&P/Moody’s/ Fitch)(1) |
| ($ in thousands) | | | | |
2007-1 CLO Trust | | | | | | | |
Class A-1 | $ | 336,500 | | | $ | 134,675 | | | 0.24 | % | | AAA/Aaa/AAA |
Class A-2 | 100,000 | | | 42,365 | | | 0.26 | | | AAA/Aaa/AAA |
Class B | 24,000 | | | 24,000 | | | 0.55 | | | AA+/Aa1/AA |
Class C | 58,500 | | | 58,293 | | | 1.30 | | | A-/A2/A |
Class D | 27,000 | | | 21,000 | | | 2.30 | | | BBB-/Baa2/BBB+ |
Total notes | 546,000 | | | $ | 280,333 | | | | | |
Class E (trust certificates) | 29,100 | | | $ | 29,100 | | | N/A | | CCC-/Ba3/BB |
Class F (trust certificates) | 24,900 | | | 24,900 | | | N/A | | N/A |
Total for 2007-1 CLO Trust | $ | 600,000 | | | $ | 334,333 | | | | | |
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(1) | These ratings were initially given in June 2007, are unaudited and are subject to change from time to time. During the first quarter of 2009, Fitch affirmed its ratings on all of the notes. During the first quarter of 2009, Moody’s downgraded the Class C notes and the Class D notes. During the third quarter of 2009, Moody’s downgraded the Class A-1 notes, the Class A-2 notes and the Class B notes. During the second quarter of 2010, Standard and Poor’s downgraded the Class A-1 notes, the Class A-2 notes, the Class C notes, and the Class D notes. During the second quarter of 2011, Moody’s upgraded the Class C notes and the Class D notes. During the second quarter of 2011, Standard and Poor’s upgraded the Class D notes. During the fourth quarter of 2011, Moody’s upgraded all of the notes. During the third quarter of 2012, Fitch affirmed its ratings on all of the notes. During the second quarter of 2013, Moody’s upgraded the Class B notes, the Class C notes, the Class D notes and the Class E notes to the ratings shown above, and affirmed its ratings of the Class A-1 notes and the Class A-2 notes. During the third quarter of 2013, Fitch affirmed its ratings on all of the notes. During the first quarter of 2014, Standard and Poor’s upgraded its ratings on all notes to the ratings shown above. During the second quarter of 2014, Moody’s affirmed the above ratings of the Class B notes, the Class C notes, and the Class D notes. |
On December 18, 2012, we completed a term debt securitization transaction. In conjunction with this transaction we established a separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2012-2 LLC (the “2012-2 CLO”) and sold and contributed $325.9 million in loans and investments (including unfunded commitments), or portions thereof, to the 2012-2 CLO. We remain the servicer of the loans. Simultaneously with the initial sale and contribution, the 2012-2 CLO issued $263.3 million of notes to institutional investors. We retained $62.6 million, comprising 100% of the 2012-2 CLO’s membership interests, Class E notes, Class F notes, and subordinated notes. At March 31, 2015, the $263.3 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $325.9 million. At March 31, 2015, deferred financing fees were $2.0 million. The 2012-2 CLO permits reinvestment of collateral principal repayments for a three-year period ending in January 2016. Should we
determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
We receive a loan collateral management fee and excess interest spread. We also receive payments with respect to the classes of notes we own in accordance with the transaction documents. We expect to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2012-2 CLO is in default under the terms of the indenture, the excess interest spread from the 2012-2 CLO may not be distributed if the overcollateralization ratio, or other collateral quality tests, is not satisfied.
The following table sets forth selected information with respect to the 2012-2 CLO:
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| Notes originally issued | | Outstanding balance March 31, 2015 | | Borrowing spread to LIBOR | | Ratings (Moody’s/S&P)(1) |
| ($ in thousands) | | | | |
2012-2 CLO | | | | | | | |
Class A | $ | 190,700 | | | $ | 190,700 | | | 1.90 | | Aaa/AAA |
Class B | 26,000 | | | 26,000 | | | 3.25 | | Aa2/N/A |
Class C | 35,200 | | | 35,200 | | | 4.25 | | A2/N/A |
Class D | 11,400 | | | 11,400 | | | 6.25 | | Baa2/N/A |
Total notes | 263,300 | | | 263,300 | | | | | |
Class E | 16,300 | | | 16,300 | | | N/A | | Ba1/N/A |
Class F | 24,100 | | | 24,100 | | | N/A | | B2/N/A |
Subordinated notes | 22,183 | | | 22,183 | | | N/A | | N/A |
Total for 2012-2 CLO | $ | 325,883 | | | $ | 325,883 | | | | | |
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(1) | These ratings were initially given in December 2012, are unaudited and are subject to change from time to time. |
On September 11, 2013, we completed a term debt securitization transaction through our separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2013-1 LLC (the “2013-1 CLO”) and sold and contributed $247.6 million in loans and investments (including unfunded commitments), or portions thereof, to the 2013-1 CLO. We remain the servicer of the loans. Simultaneously with the initial sale and contribution, the 2013-1 CLO issued $338.6 million of notes to institutional investors. We retained $61.4 million, comprising 100% of the 2013-1 CLO’s membership interests, Class F notes, Class G notes, and subordinated notes. At March 31, 2015, the $329.1 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $390.5 million. At March 31, 2015, deferred financing fees were $4.3 million. The 2013-1 CLO permits reinvestment of collateral principal repayments for a three-year period ending in September 2016. Should we determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
We receive a loan collateral management fee and excess interest spread. We also receive payments with respect to the classes of notes we own in accordance with the transaction documents. We expect to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2013-1 CLO is in default under the terms of the indenture, the excess interest spread from the 2013-1 CLO may not be distributed if the overcollateralization ratio, or other collateral quality tests, is not satisfied.
The following table sets forth selected information with respect to the 2013-1 CLO:
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| Notes originally issued | | Outstanding balance March 31, 2015 | | Borrowing spread to LIBOR | | Ratings (S&P/Moody’s)(2) |
| ($ in thousands) | | | | |
2013-1 CLO | | | | | | | |
Class A-T | $ | 202,600 | | | $ | 202,600 | | | 1.65 | | AAA/Aaa |
Class A-R | 35,000 | | | 25,500 | | | (1) | | AAA/Aaa |
Class B | 38,000 | | | 38,000 | | | 2.30 | | AA/N/A |
Class C | 36,000 | | | 36,000 | | | 3.80 | | A/N/A |
Class D | 21,000 | | | 21,000 | | | 4.55 | | BBB/N/A |
Class E | 6,000 | | | 6,000 | | | 5.30 | | BBB-/N/A |
Total notes | 338,600 | | | 329,100 | | | | | |
Class F | 17,400 | | | 17,400 | | | N/A | | N/A |
Class G | 15,200 | | | 15,200 | | | N/A | | N/A |
Subordinated notes | 28,800 | | | 28,800 | | | N/A | | N/A |
Total for 2013-1 CLO | $ | 400,000 | | | $ | 390,500 | | | | | |
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(1) | Class A-R Notes accrue interest at the Class A-R CP Rate so long as they are held by a CP Conduit, and otherwise will accrue interest at the Class A-R LIBOR Rate or, in certain circumstances, the Class A-R Base Rate, but in no event shall interest rate payable pari passu with the Class A-T Notes exceed the Class A-R Waterfall Rate Cap. |
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(2) | These ratings were initially given in September 2013, are unaudited and are subject to change from time to time. |
On April 17, 2014, we completed a term debt securitization transaction through our separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2014-1 LLC (the “2014-1 CLO”) and sold and contributed $249.6 million in loans and investments (including unfunded commitments), or portions thereof, to the 2014-1 CLO. We remain the servicer of the loans. Simultaneously with the initial sale and contribution, the 2014-1 CLO issued $289.5 million of notes to institutional investors. We retained $58.9 million, comprising 100% of the 2014-1 CLO’s membership interests, Class E notes, Class F notes, and subordinated notes. At March 31, 2015, the $289.5 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $348.4 million. At March 31, 2015, deferred financing fees were $3.0 million. The 2014-1 CLO permits reinvestment of collateral principal repayments for a four-year period ending in April 2018. Should we determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
We receive a loan collateral management fee and excess interest spread. We also receive payments with respect to the classes of notes we own in accordance with the transaction documents. We expect to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2014-1 CLO is in default under the terms of the indenture, the excess interest spread from the 2014-1 CLO may not be distributed if the overcollateralization ratio, or other collateral quality tests, is not satisfied.
The following table sets forth selected information with respect to the 2014-1 CLO:
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| Notes originally issued | | Outstanding balance March 31, 2015 | | Borrowing spread to LIBOR | | Ratings (Moody’s)(2) |
| ($ in thousands) | | | | |
2014-1 CLO | | | | | | | |
Class A | $ | 202,500 | | | $ | 202,500 | | | 1.80 | | Aaa |
Class B-1 | 20,000 | | | 20,000 | | | 2.60 | | Aa2 |
Class B-2 | 13,250 | | | 13,250 | | | (1) | | Aa2 |
Class C | 30,250 | | | 30,250 | | | 3.60 | | A2 |
Class D | 23,500 | | | 23,500 | | | 4.75 | | Baa3 |
Total notes | 289,500 | | | 289,500 | | | | | |
Class E | 18,500 | | | 18,500 | | | N/A | | N/A |
Class F | 14,000 | | | 14,000 | | | N/A | | N/A |
Subordinated notes | 26,375 | | | 26,375 | | | N/A | | N/A |
Total for 2014-1 CLO | $ | 348,375 | | | $ | 348,375 | | | | | |
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(1) | Class B-2 Notes accrue interest at a fixed rate of 4.902%. |
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(2) | These ratings were initially given in April 2014, are unaudited and are subject to change from time to time. |
On March 20, 2015, we completed a term debt securitization transaction through our separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2015-1 LLC (the “2015-1 CLO”) and sold and contributed $336.3 million in loans and investments (including unfunded commitments), or portions thereof, to the 2015-1 CLO. We remain the servicer of the loans. Simultaneously with the initial sale and contribution, the 2015-1 CLO issued $410.3 million of notes to institutional investors. We retained $85.8 million, comprising 100% of the 2015-1 CLO’s membership interests and subordinated notes. At March 31, 2015, the $410.3 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $496.1 million. At March 31, 2015, deferred financing fees were $4.3 million. The 2015-1 CLO permits reinvestment of collateral principal repayments for a four-year period ending in April 2019. Should we determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
We receive a loan collateral management fee and excess interest spread. We also receive payments with respect to the classes of notes it owns in accordance with the transaction documents. We expect to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2015-1 CLO is in default under the terms of the indenture, the excess interest spread from the 2015-1 CLO may not be distributed if the overcollateralization ratio, or if other collateral quality tests, are not satisfied.
The following table sets forth selected information with respect to the 2015-1 CLO:
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| | | | | | | | | | | |
| Notes originally issued | | Outstanding balance March 31, 2015 | | Borrowing spread to LIBOR | | Ratings (Moody’s/Fitch)(2) |
| ($ in thousands) | | | | |
2015-1 CLO | | | | | | | |
Class A-1 | $ | 253,500 | | | $ | 253,500 | | | 1.80% | | Aaa/AAA |
Class A-2 | 35,000 | | | 35,000 | | | (1) | | Aaa/AAA |
Class B | 50,000 | | | 50,000 | | | 2.80% | | Aa2/ N/A |
Class C | 38,500 | | | 38,500 | | | 3.85% | | A2/N/A |
Class D | 33,250 | | | 33,250 | | | 5.50% | | Baa3/N/A |
Total notes | 410,250 | | | 410,250 | | | | | |
Subordinated notes | 85,815 | | | 85,815 | | | N/A | | N/A |
Total for 2015-1 CLO | $ | 496,065 | | | $ | 496,065 | | | | | |
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(1) | Class A-2 Notes accrue interest at a spread over Libor of 1.65% from the closing date to, but excluding March 20, 2017, and 2.00% thereafter. |
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(2) | These ratings were initially given in March 2015, are unaudited and are subject to change from time to time. |
Repurchase Agreement
On June 7, 2011, we entered into a five-year, $68.0 million financing arrangement with Macquarie Bank Limited backed primarily by a portfolio of commercial mortgage loans previously originated by us. The financing was structured as a master repurchase agreement under which we sold the portfolio of commercial mortgage loans to Macquarie for an aggregate purchase price of $68.0 million. We also agreed to repurchase the commercial mortgage loans from time to time (including a minimum quarterly amount), and agreed to repurchase all of the commercial mortgage loans by June 7, 2016. Upon the repurchase of a commercial mortgage loan, we are obligated to repay the principal amount related to such mortgage loan plus accrued interest (at a rate based on LIBOR plus a margin) to the date of repurchase. We will continue to service the commercial mortgage loans. On October 2, 2013, we entered into an amendment to this financing arrangement which, among other things, extended the date it had agreed to repurchase all of the commercial mortgage loans by one year to June 7, 2017, provided for $25.5 million of additional advances for existing eligible assets owned by us, allowed for the advance of up to $15.0 million to fund an additional commercial mortgage loan, and released $41.1 million of principal payments to us as unrestricted cash. The facility accrues interest at a variable rate per annum, which was 5.17% as of March 31, 2015. As of March 31, 2015, unamortized deferred financing fees were $0.8 million and the outstanding balance was $52.6 million. During the three months ended March 31, 2015, we made principal payments totaling $4.6 million. As part of the amended agreement, there is a minimum aggregate interest margin payment of $9.2 million required to be made over the life of the facility. We cannot control the rate at which the underlying commercial mortgage loans are repaid. If the facility is not utilized to cover this minimum requirement, then a make-whole fee is required to be made to satisfy the minimum aggregate interest margin payment.
We entered into a repurchase transaction with Deutsche Bank AG, pursuant to the terms of a Global Master Repurchase Agreement (2000 version), dated as of February 13, 2015 between Deutsche Bank AG and NS Bond Funding I LLC (the “Repurchase Agreement”). Pursuant to the Repurchase Agreement, Deutsche Bank AG will purchase securities and simultaneous agree to sell the securities back at a specified date. Under the terms of the Repurchase Agreement, we are required at all times to maintain a level of overcollateralization for the obligations, which is maintained through daily margining. As of March 31, 2015, the outstanding balance was $27.2 million. We have made certain representations and warranties and is required to comply with various covenants and requirements customary for financing arrangements of this nature.
Stock Repurchase Program
On March 24, 2015, the Company repurchased 1,000,000 shares of its common stock in a privately negotiated transaction with an unaffiliated third party for an aggregate purchase price of $10.3 million.
On December 22, 2014, the Company repurchased 1,000,000 shares of its common stock in a privately negotiated transaction with an unaffiliated third party for an aggregate purchase price of $10.2 million.
On August 13, 2014, the Company’s Board of Directors authorized the repurchase of up to $10.0 million of the Company’s common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares purchased are determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program, which will expire on August 15, 2015 unless extended by the Board of Directors, may be suspended or discontinued at any time without notice. As of March 31, 2015, the Company had repurchased 465,092 shares of its common stock under this program at a weighted average price per share of $11.38.
On May 5, 2014, the Company’s Board of Directors authorized the repurchase of up to $20.0 million of the Company’s common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares purchased were determined by the Company’s management based on its evaluation of market conditions and other factors. The Company completed repurchase program during July 2014. Under this stock repurchase program, the Company repurchased 1,519,615 shares of its common stock at a weighted average price per share of $13.13 in the aggregate.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We maintain an overall risk management strategy that may incorporate the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our operations are subject to risks resulting from interest rate fluctuations on our interest-earning assets and our interest-bearing liabilities. We seek to provide maximum levels of net interest income, while maintaining acceptable levels of interest rate and liquidity risk. As such, we may enter into interest rate swap and interest rate cap agreements to hedge interest rate exposure to interest rate fluctuations on floating rate funding agreement liabilities that are matched with fixed rate securities. Under the interest rate swap contracts, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. We record the exchanged amount in net interest income in our statements of operations. Under the interest rate cap contracts, we agree to exchange, at specified intervals, the difference between a specified fixed interest (the cap) and floating interest amounts calculated on an agreed-upon notional principal amount, but only if the floating interest rate exceeds the cap rate. The interest rate caps may not be matched to specific assets or liabilities and would not qualify for hedge accounting.
Gains and losses on derivatives not designated as hedges, including any cash payments made or received, are reported as gain or (loss) on derivatives in our consolidated statements of operations.
On December 4, 2014, we entered into a total return swap ("TRS") for senior floating rate loans with Citibank, N.A. ("Citibank"). The TRS with Citibank enables us, through a wholly owned financing subsidiary NewStar TRS I LLC, to obtain the economic benefits of the loans subject to the TRS, despite the fact that such loans will not be directly owned by us, in return for an interest payment to Citibank. The underlying loan portfolio of the TRS is typically large, liquid broadly syndicated loans. We act as the manager of the TRS and select the specific loans to be subject to the TRS. The TRS does not qualify for hedge accounting treatment as it does not offset the risks of another investment position. The initial maximum market value (determined at the time such loan becomes subject to the TRS) of the portfolio of loans subject to the TRS was $75.0 million. On March 2, 2015, we entered into an amendment to the TRS that increased the maximum value to $150.0 million. As of March 31, 2015, the fair value of the underlying loan portfolio was $141.2 million. Interest accrues at one-month LIBOR+1.60% per annum. We are required to cash collateralize a specified percentage of each loan included under the TRS in accordance with margin requirements. As of March 31, 2015, we had cash collateral on deposit with Citibank of $49.1 million. Our obligations under the TRS are non-recourse to us, and or exposure is limited to the value of the cash collateral. Citibank may terminate the TRS on or after December 4, 2015, and we can terminate the TRS at any time upon providing 10 days notice, subject to a termination fee if terminated prior to December 4, 2015. At March 31, 2015 the TRS had an unrealized gain of $0.3 million.
OFF BALANCE SHEET ARRANGEMENTS
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our borrowers. These financial instruments include unfunded commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
Unused lines of credit are commitments to lend to a borrower if certain conditions have been met. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each borrower’s creditworthiness on a case-by-case basis. The amount of collateral required is based on factors that include management’s credit evaluation of the borrower and the borrower’s compliance with financial covenants. Due to their nature, we cannot know with certainty the aggregate amounts that will be required to fund our unfunded commitments. The aggregate amount of these unfunded commitments currently exceeds our available funds and will likely continue to exceed our available funds in the future.
At March 31, 2015, we had $330.0 million of unused lines of credit. Of these unused lines of credit, unfunded commitments related to revolving credit facilities were $292.0 million and unfunded commitments related to delayed draw term loans were $32.0 million. $6.0 million of the unused revolving commitments are unavailable to the borrowers, which may be related to the borrowers’ inability to meet covenant obligations or other similar events.
Revolving credit facilities allow our borrowers to draw up to a specified amount, subject to customary borrowing conditions. The unfunded revolving commitments of $292.0 million are further categorized as either contingent or unrestricted. Contingent commitments limit a borrower’s ability to access the revolver unless it meets an enumerated borrowing base covenant or other restrictions. At March 31, 2015, we categorized $169.2 million of the unfunded commitments related to revolving credit facilities as contingent. Unrestricted commitments represent commitments that are currently accessible, assuming the borrower is in compliance with certain customary loan terms and conditions. At March 31, 2015, we had $122.8 million of unfunded unrestricted revolving commitments.
During the three months ended March 31, 2015, revolver usage averaged approximately 50%, which is in line with the average of 49% over the previous four quarters. Management’s experience indicates that borrowers typically do not seek to exercise their entire available line of credit at any point in time. During the three months ended March 31, 2015, revolving commitments decreased $19.3 million.
Delayed draw credit facilities allows our borrowers to draw predefined amounts of the approved loan commitment at contractually set times, subject to specific conditions, such as capital expenditures or acquisitions in corporate loans or for tenant improvements in commercial real estate loans. During the three months ended March 31, 2015, delayed draw credit facility commitments increased $9.7 million.
Standby letters of credit are conditional commitments issued by us to guarantee the performance by a borrower to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to our borrowers. At March 31, 2015 we had $8.0 million of standby letters of credit.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2 to the consolidated financial statements included in the Company’s 2014 Annual Report, as updated in Note 2 to the unaudited consolidated financial statements in this Quarterly Report. These policies require numerous estimates and assumptions, which may prove inaccurate or subject to variations. Changes in underlying factors, assumptions or estimates could have a material impact on the Company’s future financial condition and results of operations. The most critical of these significant accounting policies are the policies for revenue recognition, allowance for credit losses, income taxes, stock compensation and valuation methodologies. As of the date of this report, the Company does not believe that there has been a material change in the nature or categories of its critical accounting policies or its estimates and assumptions from those discussed in its 2014 Annual Report.
Item 6. Exhibits.
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Exhibit Number | | Description | | Method of Filing |
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3(a) | | Amended and Restated Certificate of Incorporation of the Company. | | Previously filed as Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on April 2, 2007 (File No. 001-33211) and incorporated herein by reference. |
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3(b) | | Amended and Restated Bylaws of the Company. | | Previously filed as Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on April 2, 2007 (File No. 001-33211) and incorporated herein by reference. |
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4(a) | | Indenture by and between NewStar Commercial Loan Funding 2015-1 LLC, as Issuer, and U.S. Bank National Association, as Trustee, dated as of March 20, 2015. | | Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference. |
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10(a)(1) | | Third Amendment to Fifth Amended and Restated Loan and Servicing Agreement, dated as of January 13, 2015, by and among NewStar CP Funding LLC, the Company, Wells Fargo Bank, National Association, Capital One, National Association, and Wells Fargo Securities, LLC. | | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on January 16, 2015 and incorporated herein by reference. |
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10(a)(2) | | Fourth Amendment to Fifth Amended and Restated Loan and Servicing Agreement, dated as of March 6, 2015, by and among NewStar CP Funding LLC, the Company, Wells Fargo Bank, National Association, Capital One, National Association, and Wells Fargo Securities, LLC.
| | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 11, 2015 and incorporated herein by reference.
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10(b)(1) | | Master Loan Sale Agreement by and among the Company, NewStar Commercial Loan Depositor 2015-1 LLC, and NewStar Commercial Loan Funding 2015-1 LLC, dated as of March 20, 2015. | | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference.
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10(b)(2) | | Collateral Management Agreement by and between the Company and NewStar Commercial Loan Funding 2015-1 LLC, dated as of March 20, 2015. | | Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference.
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31(a) | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
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31(b) | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
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32 | | Certifications pursuant to 18 U.S.C. Section 1350. | | Filed herewith. |
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101 | | The following materials from the Quarterly Report of NewStar Financial, Inc. on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014, (iv)Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014, (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, and (vi) Notes to the Condensed Consolidated Financial Statements. | | Previously filed as Exhibit 101 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 001-33211) filed on May 7, 2015. |
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101.INS | | XBRL Instance Documents | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | |
101.CAL | | XBRL Calculation Linkbase Document | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | |
101.LAB | | XBRL Label Linkbase Document | | |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | NEWSTAR FINANCIAL, INC. |
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Date: May 14, 2015 | | By: | | /S/ JOHN KIRBY BRAY |
| | | | John Kirby Bray |
| | | | Chief Financial Officer |
EXHIBIT INDEX
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Exhibit
Number | | Description | | Method of Filing |
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3(a) | | Amended and Restated Certificate of Incorporation of the Company. | | Previously filed as Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on April 2, 2007 (File No. 001-33211) and incorporated herein by reference. |
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3(b) | | Amended and Restated Bylaws of the Company. | | Previously filed as Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on April 2, 2007 (File No. 001-33211) and incorporated herein by reference. |
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4(a) | | Indenture by and between NewStar Commercial Loan Funding 2015-1 LLC, as Issuer, and U.S. Bank National Association, as Trustee, dated as of March 20, 2015. | | Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference. |
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10(a)(1) | | Third Amendment to Fifth Amended and Restated Loan and Servicing Agreement, dated as of January 13, 2015, by and among NewStar CP Funding LLC, the Company, Wells Fargo Bank, National Association, Capital One, National Association, and Wells Fargo Securities, LLC. | | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on January 16, 2015 and incorporated herein by reference. |
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10(a)(2) | | Fourth Amendment to Fifth Amended and Restated Loan and Servicing Agreement, dated as of March 6, 2015, by and among NewStar CP Funding LLC, the Company, Wells Fargo Bank, National Association, Capital One, National Association, and Wells Fargo Securities, LLC.
| | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 11, 2015 and incorporated herein by reference.
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10(b)(1) | | Master Loan Sale Agreement by and among the Company, NewStar Commercial Loan Depositor 2015-1 LLC, and NewStar Commercial Loan Funding 2015-1 LLC, dated as of March 20, 2015. | | Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference.
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10(b)(2) | | Collateral Management Agreement by and between the Company and NewStar Commercial Loan Funding 2015-1 LLC, dated as of March 20, 2015. | | Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-33211) filed on March 24, 2015 and incorporated herein by reference.
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31(a) | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
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31(b) | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
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32 | | Certifications pursuant to 18 U.S.C. Section 1350. | | Filed herewith. |
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101 | | The following materials from the Quarterly Report of NewStar Financial, Inc. on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014, (iv)Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014, (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, and (vi) Notes to the Condensed Consolidated Financial Statements. | | Previously filed as Exhibit 101 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 001-33211) filed on May 7, 2015.
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101.INS | | XBRL Instance Documents | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | |
101.CAL | | XBRL Calculation Linkbase Document | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | |
101.LAB | | XBRL Label Linkbase Document | | |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | |