Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
April 30, 2007
Date of Report (Date of earliest event reported)
NOVASTAR FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 001-13533 74-2830661
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
8140 Ward Parkway, Suite 300, Kansas City, MO 64114
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(Address of principal executive offices)
(Zip Code)
(816) 237-7000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Section 1--Registrant's Business and Operations
Item 1.01 Entry into a Material Definitive Agreement.
Comprehensive Financing Facility Commitment Letter
On April 30, 2007, NovaStar Financial, Inc. (together with its affiliates,
"NovaStar") and NovaStar Mortgage, Inc. ("NovaStar Mortgage") entered into a
commitment letter (the "Commitment Letter") setting forth the terms of a
commitment for a $1.9 billion comprehensive financing facility arranged by
Wachovia Capital Markets, LLC and certain of its affiliates ("Wachovia"). The
facility would expand and replace the whole-loan and securities repurchase
agreements currently existing between Wachovia and NovaStar, other than the
Master Repurchase Agreement (2007 Servicing Rights), dated as of April 25, 2007
(the "Servicing Rights Facility") and the Master Repurchase Agreement (2007
Residual Securities) dated as of April 18, 2007 (the "Residual Securities
Facility"). In addition to the financing facilities described in this Current
Report, Wachovia and certain of its affiliates routinely engage in other
ordinary course financial transactions with NovaStar, including but not limited
to acting as an underwriter for certain securitizations sponsored by NovaStar.
The proposed facility is expected to consist of the following separate
agreements (collectively, the "Agreements"): (1) a Whole Loan Master Repurchase
Agreement; (2) a Securities Master Repurchase Agreement (Investment Grade); (3)
a Securities Master Repurchase Agreement (Non Investment Grade); (4) a Servicing
Advance Master Repurchase Agreement; and (5) a Whole Loan Master Repurchase
Agreement (New York). The aggregate purchase price under each individual
Agreement will reduce availability under the other Agreements such that the
maximum aggregate purchase price under all Agreements at any point in time will
not exceed $1.9 billion. Financing capacity under the proposed facility will be
in addition to the aggregate $100 million financing capacity under the Servicing
Rights Facility and the Residual Securities Facility.
The Agreements will be cross-collateralized with each other and all other
repurchase and similar financing facilities between NovaStar and Wachovia,
including the Servicing Rights Facility and the Residual Securities Facility.
NovaStar will be required to pay Wachovia a structuring fee in connection with
the facility and certain additional fees and expenses, including but not limited
to reimbursement of due diligence expenses and payment of certain fees in the
event of voluntary prepayment or termination by NovaStar or the occurrence of an
event of default. In addition, upon a change of control of NovaStar Financial,
Inc., Wachovia has the right to terminate the Agreements and require the payment
of a termination fee.
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Whole Loan Master Repurchase Agreement
The Whole Loan Master Repurchase Agreement will provide financing to certain
subsidiaries of NovaStar Financial, Inc. for the origination, purchase, and
holding of certain eligible mortgage loans and residential real estate owned
("REO Properties"). The facility will have a term of 364 days. Specific assets
may be financed under this Agreement for 180 days, subject to extension up to
270 days for certain amounts and up to 364 days for certain aged or
sub-performing loans and REO Properties. All obligations under the Agreement
will be guaranteed by NovaStar, and will be secured by the mortgage loans
financed under the Agreement and by a pledge of the stock of one or more special
purpose subsidiaries of NovaStar Financial, Inc. holding REO Properties financed
under the Agreement.
The amount available under this Agreement will be limited only by the $1.9
billion maximum aggregate purchase price and amounts advanced under the other
Agreements, but various categories of mortgage loans and REO Properties will be
subject to sublimits based upon certain characteristics of the assets. The
specific advance rate applicable to a particular asset will depend on, among
other matters, the type, age and performance of such asset and, in some cases,
NovaStar Financial, Inc.'s level of liquidity. For recently originated mortgage
loans under which there has been no delinquency in any of the first three
monthly payments following origination, the advance rate under this Agreement
generally will be between 95% and 98% of the market value of such loan and such
advances will bear interest at one-month LIBOR plus 0.65%. For other mortgage
loans and REO Properties, the advance rate will generally range from 65% to 95%
of market value, but may be lower pending Wachovia's review of a particular
asset, and such advances will bear interest at a rate ranging from one-month
LIBOR plus 0.65% to one-month LIBOR plus 2%. In addition, advance rates for
mortgage loans and REO Properties will be subject to additional but similar
limitations based upon the outstanding principal balance of the mortgage loan or
the appraised value of the REO Property and, in some cases, additional but
similar limitations based upon NovaStar Financial, Inc.'s valuation of the
asset.
The market value of the assets will be determined by Wachovia in its sole
discretion. If, in Wachovia's opinion, the market value of assets that are then
financed under the Agreement decreases for any reason, NovaStar will be required
to repay the margin or difference in market value, or provide additional
collateral.
NovaStar Mortgage will remain the servicer of the mortgage loans purchased by
Wachovia under this Agreement, provided Wachovia will have the right to replace
NovaStar Mortgage as the servicer if the adjusted tangible net worth of NovaStar
falls below a certain amount.
Securities Master Repurchase Agreement (Investment Grade)
The Securities Master Repurchase Agreement (Investment Grade) will provide
financing for certain eligible investment grade mortgage securities, will have a
sublimit of $400 million, and will have a term of 364 days. All obligations
under the Agreement will be
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guaranteed by NovaStar, and will be secured by the mortgage securities financed
under the Agreement and by a pledge of the stock of certain of NovaStar
Financial Inc.'s subsidiaries.
The advance rate under this Agreement will be between 70% and 97% of the market
value of the mortgage securities securing the advance, depending upon the rating
assigned to the applicable mortgage security. The interest rate applicable to
such advances will be equal to the commercial paper rate paid by an affiliate of
Wachovia to fund the advances plus an amount ranging from 0% to 0.65%, depending
on the rating assigned to the mortgage securities securing the advance.
The market value of the mortgage securities will be determined by Wachovia in
its sole discretion. If, in Wachovia's opinion, the market value of mortgage
securities that are then financed under the Agreement decreases for any reason,
NovaStar will be required to repay the margin or difference in market value, or
provide additional collateral.
Securities Master Repurchase Agreement (Non-Investment Grade)
The Securities Master Repurchase Agreement (Non-Investment Grade) will provide
financing for certain eligible non-investment grade mortgage securities, will
have a sublimit of $400 million, and will have a term of 364 days. All
obligations under the Agreement will be guaranteed by NovaStar, and will be
secured by the mortgage securities financed under the Agreement and by a pledge
of the stock of certain of NovaStar Financial, Inc.'s subsidiaries.
The advance rate under this Agreement will be 65% of the market value of the
mortgage securities securing the advance. The interest rate applicable to such
advances will range from one-month LIBOR plus 1% to one-month LIBOR plus 2.5%,
depending on the type of mortgage securities securing the advance.
The market value of the mortgage securities will be determined by Wachovia in
its sole discretion. If, in Wachovia's opinion, the market value of mortgage
securities that are then financed under the Agreement decreases for any reason,
NovaStar will be required to repay the margin or difference in market value, or
provide additional collateral.
Servicing Advance Master Repurchase Agreement
The Servicing Advance Master Repurchase Agreement will provide financing for
certain eligible receivables of NovaStar Mortgage in respect of servicing
advances made by NovaStar Mortgage under servicing agreements that permit the
pledge of such receivables and are otherwise acceptable to Wachovia in its sole
discretion. The Agreement will have a sublimit of $75 million and will have a
term of 364 days. The advance rate under this agreement will be between 85% and
90% of the amount of the applicable receivable, depending on the nature of the
advance giving rise to the receivable. Such advances will bear interest at
one-month LIBOR plus 1.25%.
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Whole Loan Master Repurchase Agreement (New York)
The Whole Loan Master Repurchase Agreement (New York) will provide for borrowing
capacity of $1 million as required for certain regulatory purposes and will be
substantially similar to the existing $1 million master repurchase agreement
between NovaStar Mortgage and Wachovia, but congruent with the terms and
conditions of the other Agreements described above.
The closing of the facilities is subject to certain customary closing
conditions, including but not limited to completion of definitive documentation,
and receipt of approval from Wachovia's credit committee. There can be no
assurance that the closing of the facility will occur. The parties expect that
the definitive documentation for the facilities will contain customary
representations and warranties, covenants and events of default that are
consistent with those set forth in the Servicing Rights Facility and the
Residual Securities Facility, including but not limited to covenants requiring
NovaStar Financial, Inc. to maintain a certain minimum adjusted tangible net
worth and a certain minimum amount of liquidity, and limiting NovaStar
Financial, Inc.'s ability to pay dividends.
The Commitment Letter does not set forth all of the terms and conditions of the
proposed Agreements; rather, it only summarizes the major points of
understanding which will be the basis of the final repurchase agreements and
related documents.
Waiver Under the Servicing Rights Facility and the Residual Securities Facility
On April 30, 2007, Wachovia Bank, N.A. and Wachovia Investment Holdings, LLC
consented to NovaStar Financial, Inc. declaring and paying dividends on NovaStar
Financial Inc.'s 8.90% Series C Cumulative Redeemable Preferred Stock and on the
trust preferred securities issued by NovaStar Capital Trust I and NovaStar
Capital Trust II for the quarter ended June 30, 2007, and waived certain
breaches and any defaults under the Servicing Rights Agreement and the Residual
Securities Agreement that may result from such payments. In addition to the
financing facilities described in this Current Report, Wachovia and certain of
its affiliates routinely engage in other ordinary course financial transactions
with NovaStar, including but not limited to acting as an underwriter for certain
securitizations sponsored by NovaStar. The foregoing is a summary of the terms
of the waiver and is qualified in its entirety by reference to the full text of
the waiver which is attached hereto as Exhibit 10.1, and is incorporated herein
by reference.
This Current Report on Form 8-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
regarding management's beliefs, estimates, projections, and assumptions with
respect to, among other things, NovaStar's future operations, business plans and
strategies, as well as industry and market conditions, all of which are subject
to change at any time without notice. Actual results and operations for any
future period may vary materially from those discussed herein. Some important
factors that could cause actual results to differ materially from those
anticipated include: NovaStar's ability to generate and maintain sufficient
liquidity on favorable terms; the size, frequency and structure of NovaStar's
securitizations; NovaStar's ability to sell loans it originates in the
marketplace;
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impairments on NovaStar's mortgage assets; increases in prepayment or default
rates on NovaStar's mortgage assets; increases in loan repurchase requests;
inability of potential borrowers to meet NovaStar's underwriting guidelines;
changes in assumptions regarding estimated loan losses and fair value amounts;
finalization of the amount and terms of any severance provided to terminated
employees; finalization of the accounting impact of NovaStar's
previously-announced reduction in workforce; events impacting the subprime
mortgage industry in general, including events impacting NovaStar's competitors
and liquidity available to the industry; the initiation of margin calls under
NovaStar's credit facilities; the ability of NovaStar's servicing operations to
maintain high performance standards and maintain appropriate ratings from rating
agencies; NovaStar's ability to generate acceptable origination volume while
maintaining an acceptable level of overhead; residential property values;
NovaStar's continued status as a REIT; interest rate fluctuations on NovaStar's
assets that differ from NovaStar's liabilities; the outcome of litigation or
regulatory actions pending against it or other legal contingencies; NovaStar's
compliance with applicable local, state and federal laws and regulations or
opinions of counsel relating thereto and the impact of new local, state or
federal legislation or regulations or opinions of counsel relating thereto or
court decisions on NovaStar's operations; NovaStar's ability to adapt to and
implement technological changes; compliance with new accounting pronouncements;
NovaStar's ability to successfully integrate acquired businesses or assets with
NovaStar's existing business; the impact of general economic conditions; and the
risks that are from time to time included in NovaStar's filings with the SEC,
including NovaStar's Annual Report on Form 10-K for the year ended December 31,
2006. Other factors not presently identified may also cause actual results to
differ. Words such as "believe," "expect," "anticipate," "promise," "plan," and
other expressions or words of similar meanings, as well as future or conditional
verbs such as "will," "would," "should," "could," or "may" are generally
intended to identify forward-looking statements. This Current Report speaks only
as of its date and NovaStar expressly disclaims any duty to update the
information herein.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits. The following exhibits are filed herewith:
10.1 Waiver dated April 30, 2007, executed by Wachovia Bank, N.A.
and Wachovia Investment Holdings, LLC.
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SIGNATURE
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.
NOVASTAR FINANCIAL, INC.
DATE: May 3, 2007 /s/ Gregory S. Metz
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Gregory S. Metz
Chief Financial Officer
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Exhibit Index
Exhibit
Number Description
10.1 Waiver dated April 30, 2007, executed by Wachovia Bank, N.A. and
Wachovia Investment Holdings, LLC.
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