Drive Shack Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DEBT OBLIGATIONS

DEBT OBLIGATIONS

12 Months Ended

Dec. 31, 2014

Debt Disclosure [Abstract]

DEBT OBLIGATIONS

11. DEBT OBLIGATIONS

The following table presents certain information regarding Newcastle's debt obligations and related hedges:



	December 31, 2014																								December 31, 2013
														Collateral
																							Aggregate
									Weighted		Weighted	Face								Weighted	Floating		Notional
		Outstanding				Final	Weighted		Average		Average	Amount		Outstanding		Amortized				Average	Rate		Amount of		Outstanding
	Month	Face		Carrying		Stated	Average		Funding		Life	of Floating		Face		Cost		Carrying		Life	Face		Current		Face		Carrying
Debt Obligation/Collateral	Issued	Amount		Value		Maturity	Coupon (A)		Cost (B)		(Years)	Rate Debt		Amount (C)		Basis (C)		Value (C)		(Years)	Amount (C)		Hedges(D)		Amount		Value
CDO Bonds Payable
CDO VI (E)	Apr 2005	$	92,462	$	92,462	Apr 2040	0.86%		5.36	%	5.1	$	88,949	$	98,920	$	36,327	$	67,809	5.1	$	29,734	$	46,528	$	92,018	$	92,018
CDO VIII	Nov 2006	71,813		71,717		Nov 2052	2.13%		6.55	%	2.0	64,213		210,606		151,760		162,506		1.8	72,252		58,291		264,733		264,277
CDO IX	May 2007	62,578		63,494		May 2052	0.74%		0.16	%	1.1	62,578		292,487		233,420		242,894		2.4	57,295		—		186,765		188,230
		226,853		227,673					4.28	%	3.0	215,740		602,013		421,507		473,209		2.6	159,281		104,819		543,516		544,525
Other Bonds & Notes Payable
NCT 2013-VI IMM-1 (F)	Nov 2013	31,060		27,069		Apr 2040	LIBOR+0.25%		9.31	%	2.5	31,060		N/A		N/A		N/A		N/A	N/A		—		96,129		86,319
MH Loans Portfolio I	Apr 2010	—		—		—	—%		—		—	—		N/A		N/A		N/A		N/A	N/A		—		53,753		50,424
MH Loans Portfolio II	May 2011	—		—		—	—%		—		—	—		N/A		N/A		N/A		N/A	N/A		—		93,863		93,536
		31,060		27,069					9.31	%	2.5	31,060		N/A		N/A		N/A		N/A	N/A		—		243,745		230,279
Repurchase Agreements (G)
CDO Securities (F)	Dec 2013	55,894		55,894		Jan 2015	LIBOR+1.65%		1.82	%	0.1	55,894		N/A		N/A		N/A		N/A	N/A		—		15,094		15,094
FNMA/FHLMC securities	Nov 2014	385,282		385,282		Feb 2015	0.36%		0.36	%	0.1	—		390,771		403,216		407,689		5.6	—		—		516,134		516,134
Residential Mortgage Loans	Nov 2013	—		—		—	—%		—		—	—		—		—		—		—	—		—		25,119		25,119
		441,176		441,176					0.55	%	0.1	55,894		390,771		403,216		407,689		5.6	—		—		556,347		556,347
Golf Credit Facilities (H)
First Lien Loan	Dec 2013	49,923		49,923		Dec 2018	LIBOR+4.00%	(I)	4.50	%	3.0	49,923		N/A		N/A		N/A		N/A	N/A		N/A		46,922		46,922
Second Lien Loan	Dec 2013	105,575		105,575		Dec 2018	5.50%		5.50	%	3.0	—		N/A		N/A		N/A		N/A	N/A		N/A		105,576		105,576



Vineyard II	Dec 1993	200		200		Dec 2043	2.13%		2.13	%	29.0	200	N/A	N/A	N/A	N/A	N/A	N/A	—		—
Capital Leases (Equipment)	May - Dec 2014	6,159		6,159		Jul 2020	5.25% to 7.15%		6.91	%	5.5	—	N/A	N/A	N/A	N/A	N/A	N/A	—		—
		161,857		161,857					5.24	%	3.1	50,123	N/A	N/A	N/A	N/A	N/A	—	152,498		152,498
Corporate
Junior subordinated notes payable	Mar 2006	51,004		51,231		Apr 2035	7.57%	(J)	7.36	%	20.3	—	N/A	N/A	N/A	N/A	N/A	—	51,004		51,237
		51,004		51,231					7.36	%	20.3	—	N/A	N/A	N/A	N/A	N/A	—	51,004		51,237
Subtotal debt obligation		911,950		909,006					2.96	%	2.6	352,817	992,784	824,723	880,898	3.8	159,281	104,819	1,547,110		1,534,886
Financing on subprime mortgage loans subject to call option	(K)	406,217		406,217															406,217		406,217
Total debt obligation		$	1,318,167	$	1,315,223														$	1,953,327	$	1,941,103


(A)	Weighted average, including floating and fixed rate classes.


(B)	Including the effect of applicable hedges and deferred financing cost.


(C)	Excluding restricted cash held in CDOs to be used for principal and interest payments of CDO debt.


(D)	Including $46.5 million notional amount of interest rate swap in CDO VI, which was an economic hedge not designed as a hedge for accounting purposes.


(E)	This CDO was not in compliance with its applicable over collateralization tests as of December 31, 2014. Newcastle is not receiving cash flows from this CDO (other than senior management fees and cash flows on senior classes of bonds that were repurchased), since net interest is being used to repay debt, and expects this CDO to remain out of compliance for the forseeable future.


(F)	Represents financings of previously repurchased Newcastle CDO bonds for which the collateral is eliminated in consolidation.

(G)

These repurchase agreements had less than $0.1 million accrued interest payable at December 31, 2014. $436.0 million face amount of these repurchase agreements were renewed subsequent to December 31, 2014. The counterparties on these repurchase agreements are Bank of America ($55.9 million) and Nomura ($385.3 million). Newcastle has margin exposure on $441.2 million of repurchase agreements related to the financing of certain Newcastle CDO VIII, CDO IX notes and FNMA/FHLMC securities. To the extent that the value of the collateral underlying these repurchase agreements declines, Newcastle may be required to post margin, which could significantly impact its liquidity.


(H)	The golf credit facilities are collateralized by all of the assets of the Golf business.


(I)	Interest rate on this is based on 3 month LIBOR with a LIBOR floor of 0.5%.


(J)	LIBOR +2.25% after April 2016.


(K)	Issued in April 2006 and July 2007. Secured by the general credit of Newcastle. See Note 6 regarding the securitizations of Subprime Portfolio I and II.

Certain of the debt obligations included above are obligations of consolidated subsidiaries of Newcastle which own the related collateral. In some cases, including the CDO and Other Bonds Payable, such collateral is not available to other creditors of Newcastle.

CDO Bonds Payable

Each CDO financing is subject to tests that measure the amount of over collateralization and excess interest in the transaction. Failure to satisfy these tests would cause the principal and/or interest cashflow that would otherwise be distributed to more junior classes of securities (including those held by Newcastle) to be redirected to pay down the most senior class of securities outstanding until the tests are satisfied. As a result, cash flow and liquidity are negatively impacted upon such a failure. As of December 31, 2014, CDO VI was not in compliance with its over collateralization tests.

In June 2011, Newcastle deconsolidated a non-recourse financing structure, CDO V. Newcastle determined that it does not currently have the power to direct the relevant activities of CDO V as an event of default had occurred and Newcastle may be removed as the collateral manager by a single party. So long as the event of default continues, Newcastle will not be permitted to purchase or sell any collateral in CDO V. If Newcastle is removed as the collateral manager of CDO V, it would no longer receive the senior management fees from such CDO. As of February 27, 2014, Newcastle has not been removed as collateral manager. Newcastle does not expect the failure of these additional tests to have a material negative impact on its cash flows, business, results of operations or financial condition.

On September 12, 2012, Newcastle deconsolidated a non-recourse financing structure, CDO X. Newcastle completed the sale of 100% of its interests in CDO X to the sole owner of the senior notes and another third party, in connection with the liquidation and termination of CDO X. Newcastle received $130 million for $89.75 million face amount of subordinated notes and all of its equity in CDO X. As a result, Newcastle recorded a gain on sale and deconsolidated CDO X. The sale and resulting deconsolidation has reduced Newcastle’s gross assets by $1.1 billion, reduced liabilities by $1.2 billion, decreased other comprehensive income by $25.5 million and resulted in a gain of $224.3 million in the quarter ended September 30, 2012. A condition to the sale of its interests was the right to purchase certain collateral held by CDO X. Newcastle purchased eight securities with a face amount of $101 million for 49.4% of par, or approximately $50 million. As of December 31, 2012, Newcastle had no continuing involvement with CDO X as it had been liquidated.

In June 2013, Newcastle completed the sale of 100% of the assets in CDO IV. Newcastle sold $153.4 million face amount of collateral at an average price of 95% of par, or $145.2 million. Subsequently, Newcastle paid off $71.9 million of outstanding third party debt and terminated the CDO. This transaction resulted in approximately $73.1 million of proceeds to Newcastle of which approximately $5.3 million was received in Newcastle CDO VIII. Newcastle recovered par on $59.5 million of CDO debt which had been repurchased in the past at an average price of 52% of par and $8.0 million of proceeds on its subordinated interests. This transaction has also decreased Newcastle’s comprehensive income by $0.6 million and resulted in a net gain on sale of assets of $4.2 million and a $0.8 million gain on hedge termination.

In June 2013, Newcastle completed the purchase of $116.8 million aggregate face amount of securities that are collateralized by certain Newcastle CDO VIII Class I notes for an aggregate purchase of approximately $103.1 million, or an average price of 88.3% of par. Simultaneously, Newcastle financed the purchase with $60.0 million received pursuant to a master repurchase agreement with the seller of the securities (“CDO VIII Repack”). The terms of the repurchase agreement included a rate of one-month LIBOR plus 150 bps and a 30-day maturity. The purchase of the securities and the repurchase agreement were treated as a linked transaction and accordingly recorded on a net basis as a non-hedge derivative instrument, with changes in market value recorded on the statement of income. In May 2014, the CDO VIII Class I notes were repaid in full and the repurchase agreement was terminated.

As of December 31, 2014, CDO VI was not in compliance with its applicable over collateralization tests and, consequently, Newcastle was not receiving cash flows from this CDO currently (other than senior management fees and interest distributions from senior classes of bonds Newcastle owns). Based upon Newcastle’s current calculations, Newcastle expects this CDO to remain out of compliance for the foreseeable future. Moreover, given current market conditions, it is possible that all of Newcastle’s CDOs could be out of compliance with their over collateralization tests as of one or more measurement dates within the next twelve months.

Repurchase Agreements

In July 2014, Newcastle financed an additional $20.0 million face amount of previously repurchased CDO bonds payable with repurchase agreements for $12.0 million. These repurchase agreements bear interest at one month LIBOR + 1.65%, mature in August 2014 and are subject to customary margin provisions.

In November 2014, Newcastle financed $391.9 million face amount of purchased FNMA/FHLMC securities with repurchase agreements with carrying value of $385.3 million as of December 31, 2014. These repurchase agreements bear interest at 0.36%, mature in February 2015 and are subject to customary margin provisions.

Credit Facilities

In December 2013, the Golf business entered into two loan agreements (“First Lien Loan” and “Second Lien Loan”) with General Electric Capital Corporation (“GECC”). The loans mature on December 30, 2017. The terms of the loans may be extended for an additional 12-month period.

The First Lien Loan has a principal balance of $54.5 million (of which $49.9 million was funded to date). The interest rate on the First Lien Loan is 3-month LIBOR, with a floor of 0.50%, plus a margin of 4.00% (less the impact of the interest rate cap agreement that limits Newcastle’s exposure on LIBOR to 4.79% on a notional amount of $94.0 million). As of December 31, 2014, LIBOR was below the floor. Repayments of principal shall commence on January 1, 2017 based on a 30-year amortization schedule, with the entire outstanding amount due on the maturity date.

The Second Lien Loan has a principal balance of $105.6 million and bears interest as at 5.5% per annum. Interest is paid on a monthly basis, and the monthly repayments of principal commence on January 1, 2017 based on a 30-year amortization schedule, with the entire outstanding amount due on the maturity date.

As of December 31, 2014 approximately $4.6 million of the facilities is subject to a working capital hold-back provision and can be used only to ensure that there are adequate funds for the settlement of third party lease terminations and to cover modifications events, and operating expenses, including up to $2.5 million of interest on these loans.

Golf is obligated under a $200,000 loan with the City of Escondido, California (“Vineyard II”). The principal amount of the loan is payable in five equal installments of $40,000 each upon reaching the "Achievement Date”, which is the date on which the previous 36-month period equals or exceeds 240,000 rounds of golf played on the property. As of December 31, 2014, 240,000 rounds of golf have not been achieved within an applicable 36-month period. The interest rate is adjusted annually and is equal to 1% plus an Index amount, as defined in the loan agreement. As of December 31, 2014, the interest rate is 2.13%.

Capital Leases - Equipment

The Golf business leases certain golf carts and other equipment under capital lease agreements. The agreements normally provide for minimum rentals plus executory costs. Lease terms for golf carts are 66 months with a purchase price option at the termination of the lease. Lease terms for equipment are generally 36-60 months with bargain purchase options at lease expiration.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2014 are as follows:



2015	$	1,325
2016	1,325
2017	1,325
2018	1,325
2019	1,446
Thereafter	700
Total minimum lease payments	7,446
Less: imputed interest	1,287
Present value of net minimum lease payments	$	6,159

Maturity Table

Newcastle’s debt obligations (gross of $2.9 million of discounts at December 31, 2014) have contractual maturities as follows:



	Nonrecourse		Recourse		Total
2015	$	929	$	441,176	$	442,105
2016	994		—		994
2017	156,563		—		156,563
2018	1,140		—		1,140
2019	1,340		—		1,340
Thereafter	665,021		51,004		716,025
Total	$	825,987	$	492,180	$	1,318,167

Debt Covenants

Newcastle’s non-CDO financings and Golf credit facilities contain various customary loan covenants. Newcastle was in compliance with all of these covenants as of February 23, 2015.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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