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Item
1.01
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Entry
into a Definitive Material Agreement.
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On
February 9, 2021, Ocwen Financial Corporation (“Ocwen” or the “Company”) entered into a note and warrant
purchase agreement (the “Note Purchase Agreement”) with certain special purpose entities owned by funds and accounts
managed by Oaktree Capital Management, L.P. (“Oaktree”) pursuant to which the Company agreed to sell, and such special
purpose entities (the “Oaktree Investors”) agreed to purchase, in a private placement an aggregate of $285 million
principal amount of senior secured notes (the “Senior Secured Notes”) of the Company, of which $199.5 million aggregate
principal amount (the “Initial Senior Secured Notes”) will be issued and sold on an initial closing date that is contemporaneous
with the consummation of an Additional Debt Financing (as defined below), but in any event no later than March 31, 2021, and the
remaining $85.5 million aggregate principal amount (the “Additional Senior Secured Notes”) will be issued and sold
on a subsequent closing date that is no later than one year following the initial closing date. The issuance and sale of the Initial
Senior Secured Notes is subject to certain conditions, including, but not limited to, the contemporaneous consummation by the
Company or one of its subsidiaries of an additional debt financing not to exceed $450 million (the “Additional Debt Financing”).
The issuance and sale of the Additional Senior Secured Notes is also subject to certain conditions, including, but not limited
to, (i) the Company having a book value of common equity of at least $360 million and (ii) the closing of the Company’s
previously announced MSR joint venture with affiliates of Oaktree (the “MSR Joint Venture”) (for more information
on the MSR Joint Venture, see the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2020).
Concurrent
with the issuance of the Initial Senior Secured Notes, the Company will issue to the Oaktree Investors warrants to purchase shares
of the Company’s common stock equal to 12.0% of the Company’s then outstanding common stock (on a non-fully diluted
basis) (the “Warrants”) at an exercise price of $26.82 per share. The Warrants are subject to customary anti-dilution
adjustments as well as adjustments in the event of below market issuances or above market repurchases by the Company of common
stock and equity securities. The terms of the Warrants provide that, without prior receipt of shareholder approval subject to
applicable New York Stock Exchange listing rules, the Warrants may not be exercised to the extent that, upon giving effect to
such exercise, the ownership of Oaktree and its affiliates in the Company’s common stock on an as-converted basis would
exceed 19.9%. In addition, the terms of the Warrants provide that, without prior receipt of any required regulatory approvals,
the Warrants may not be exercised to the extent that, upon giving effect to such exercise, the ownership of Oaktree and its affiliates
in the Company’s common stock on an as-converted basis would exceed 9.9%. At any time that Oaktree is unable to exercise
its Warrants to purchase common stock due to these limitations, Oaktree shall have the right to exercise the Warrants to purchase
shares of a series of non-voting preferred stock of the Company having an additional $0.01 liquidation preference as compared
to the common stock but otherwise similar in rights and preferences to the common stock. In connection with the issuance of the
Warrants, the Company will also enter into a registration rights agreement with Oaktree (the “Registration Rights Agreement”)
providing the Oaktree Investors with customary registration rights with respect to the shares of common stock underlying the Warrants.
The
net proceeds before expenses from the Initial Senior Secured Notes and the Warrants on the initial closing date will be $175.0
million (after $24.5 million of original issue discount) and are expected to be used, together with the net proceeds from the
Additional Debt Financing, to repay in full an aggregate of $498 million of indebtedness, including the Company’s Senior
Secured Term Loan, all of the Company’s subsidiary PHH Mortgage Corporation’s outstanding 6.375% senior unsecured
notes due 2021 and all of the Company’s subsidiary PHH Corporation’s 8.375% senior secured second lien notes due 2022,
and the remaining proceeds are expected to be used for general corporate purposes, including to accelerate growth of the Company’s
origination and servicing business.
The
net proceeds before expenses from the Additional Senior Secured Notes will be approximately $75.0 million (after $10.5 million
of original issue discount) and are expected to be used to fund the Company’s investment in the MSR Joint Venture and for
general corporate purposes, including to accelerate growth of the Company’s originations and servicing business.
The
Senior Secured Notes will have a six-year term with no amortization of principal. Interest on the Senior Secured Notes will be
payable quarterly in arrears on the last business day of each March, June, September and December and will accrue at the rate
of 12% per annum to the extent interest is paid in cash or 13.25% per annum to the extent interest is “paid-in-kind”
through an increase in the principal amount or the issuance of additional Senior Secured Notes (“PIK Interest”). Prior
to the first anniversary of the initial closing, all of the interest on the Senior Secured Notes may, at the Company’s option,
be paid as PIK Interest. After the first anniversary of the initial closing, a minimum amount of interest will be required to
be paid in cash equal to the lesser of (i) 7% per annum of the outstanding principal amount of the Senior Secured Notes and (ii)
the total amount of unrestricted cash of the Company and its subsidiaries less the greater of $125 million and the minimum liquidity
amounts required by any agency.
The
Senior Secured Notes will be solely the obligation of the Company. The Senior Secured Notes will be secured by a pledge of substantially
all of the assets of the Company, including a pledge of the equity of the Company’s subsidiaries held directly by the Company.
The lien on the Company’s assets securing the Senior Secured Notes is expected to be junior to the lien securing the Additional
Debt Financing. The Senior Secured Notes will not be guaranteed by any of the Company’s subsidiaries nor will they be secured
by a pledge or lien on any assets of the Company’s subsidiaries.
Prior
to the fifth anniversary of their issuance, the Company will be permitted to redeem the Senior Secured Notes in whole or in part
at any time at a redemption price equal to par, plus a make-whole premium, plus accrued and unpaid interest. On and after the
fifth anniversary of their issuance, the Company will be permitted to redeem the Senior Secured Notes in whole or in part at any
time at a redemption price equal to par plus accrued and unpaid interest. Upon a change of control of the Company, the Company
will be required to offer to repurchase the Senior Secured Notes at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest. Upon consummation of certain non-ordinary course asset sales, the Company will be required to
use the proceeds thereof to offer to repurchase the Senior Secured Notes at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest, unless such proceeds are reinvested in the business or used to retire structurally senior
or secured indebtedness.
The
Senior Secured Notes will have two financial maintenance covenants: (1) a minimum book value of stockholders’ equity of
not less than $275 million and (2) a minimum amount of unrestricted cash of not less than $50 million at any time. The Senior
Secured Notes also will have affirmative and negative covenants and events of default that are customary for debt securities of
this type.
The
Note Purchase Agreement provides that in the event that the issuance and sale of the Initial Senior Secured Notes does not occur,
and on or prior to August 9, 2021, the Company or any of its subsidiaries incurs or issues additional indebtedness or issues or
sells any equity interests in certain alternative transactions to parties other than Oaktree which generate proceeds in excess
of $100 million in the aggregate, the Company will pay Oaktree an alternate transaction fee of $35 million.
There
can be no assurance that the conditions to the issuance and sale to the Oaktree Investors of the Initial Senior Secured Notes
or the Additional Senior Secured Notes will be met, or that any Additional Debt Financing will be consummated.
The
foregoing descriptions of the Note Purchase Agreement, the Warrants and the Registration Rights Agreement is a summary, is not
complete, and is qualified in its entirety by reference to the full text of each of the Note Purchase Agreement, the Warrant Certificate
and the Registration Rights Agreement which will be filed as exhibits to the Company’s Current Report on Form 8-K or Quarterly
Report on Form 10-Q following the issuance and sale of the Initial Senior Secured Notes.