Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On March 15, 2019, Prospect Mortgage Insurance, LLC (
PMI
), an indirect wholly owned subsidiary of Starwood Property Trust, Inc. (the
Company
), entered into a letter agreement (the
Letter Agreement
) with the Federal Home Loan Bank of Chicago (
FHLB
) to amend the Amended and Restated Advances, Collateral Pledge and Security Agreement dated as of July 7, 2017 between PMI and the FHLB (as amended, the
Advances Agreement
).
PMI is a captive insurance entity that is a member of the FHLB. Under the Advances Agreement, PMI may obtain advances from the FHLB backed by qualifying collateral. The advances to PMI under the Advances Agreement bear interest at either a fixed or floating rate of interest as agreed upon by PMI and FHLB per each transaction.
The Letter Agreement modifies the Advances Agreement by increasing the permitted amount to be drawn by PMI to the lesser of (i) $2.0 billion or (ii) the amount equal to 40% of PMIs total assets.
Pursuant to the Letter Agreement, and to the extent there are outstanding advances owing to FHLB in excess of the following amounts, PMI is required to gradually reduce the outstanding advances owing to FHLB to maximum amounts as follows: (i) $1.6 billion on or before September 15, 2020, (ii) $1.2 billion on or before October 15, 2020, (iii) $800 million on or before November 15, 2020, (iv) $400 million on or before December 15, 2020, (v) $120 million on or before January 15, 2021, and (vi) $0 on or before February 19, 2021.
The Advances Agreement, the Letter Agreement and the associated guaranty contain various affirmative and negative covenants including the following financial covenants applicable to the Company:
(i)
the ratio of earnings before interest, tax, depreciation and amortization (
EBITDA
) to interest expense for any calendar quarter shall not be less than 1.4 to 1.0;
(ii)
the ratio of total indebtedness to total assets shall not be greater than 0.8 to 1.0;
(iii)
cash liquidity of the Company shall not be less than $75 million and near cash liquidity of the Company shall not be less than $175 million;
(iv)
tangible net worth of the Company shall not be less than the sum of (x) actual tangible net worth of the Company as of March 15, 2019, plus (y) seventy-five percent (75%) of the net cash proceeds (net of underwriting discounts and commissions and other out-of pocket expenses incurred by the Company in connection with such issuance or sale) received by the Company from the issuance or sale of equity interests (other than equity interests constituting convertible debt securities) occurring after March 15, 2019, plus (z) seventy-five percent (75%) of any increase in capital or shareholders equity (or like caption) on the balance sheet of the Company resulting from the settlement, conversion or repayment of any convertible debt securities of the Company occurring after March 15, 2019; and
(v)
ratio of EBITDA to fixed charges shall not be less than 1.5 to 1.0.
In connection with the modifications to the Advances Agreement contemplated by the Letter Agreement, the Company executed a guaranty of all obligations of PMI under the Advances Agreement. Previously, the Company had guaranteed only a portion of the obligations of PMI under the Advances Agreement.
The foregoing summary does not purport to be a complete description and is qualified in its entirety by reference to the terms and conditions of the Advances Agreement and the Letter Agreement, copies of which will be filed as exhibits to the Companys Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2019.
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