Restructuring & Reorganization
Selected Transactions

November 2007

Company Description
Credit-Based Asset Servicing and Securitization LLC (“C-BASS” or the “Company) purchased, sold and securitized credit-sensitive residential mortgage loans, mortgage-backed securities, and other asset-backed securities. The Company was jointly owned by mortgage insurers MGIC Investment Corporation and Radian Group Inc., who together held over 90% of the equity of C-BASS.

Situation Overview
From 2000 to 2006, C-BASS increased its earnings by an average of more than 40% per year and expanded its portfolio to over $6 billion.  In 2007, C-BASS started to experience significant new liquidity demands due to the extraordinary disruption in the mortgage markets.  Addressing the resulting pressure from its secured creditors, the Company, which had $302 million in cash on its balance sheet at the beginning of 2007, was able to meet $290 million in margin calls through the first six months of the year.   C-BASS was able to meet an additional $285 million in margin calls in July.  If the Company were unable to meet future margin calls, Repo lenders would have the immediate right to seize their collateral as bankruptcy law does not stay a repo lender from enforcing that right.

By the end of July, with the prices for whole loans and mortgage-backed securities continuing to plummet, the Company was constrained in its ability to raise cash needed for any additional margin calls.  Consequently, C-BASS did not meet a further $294 million in margin calls at that time.  In response, on August 1st, C-BASS obtained a seven day standstill agreement with the Company’s bank and repo secured creditors in order to develop a strategy to solve its liquidity problems.

Transaction Summary
On August 3rd, Blackstone was retained to advise C-BASS in evaluating its alternatives and assist it in meeting its immediate and long-term liquidity needs.  From August 3rd through November 13th, Blackstone assisted the Company in convincing creditors to forbear (through four additional standstills) as it developed a long-term, out-of-court restructuring solution.  Without an out-of-court solution, secured repo creditors would have seized their assets, making it unlikely that unsecured creditors, much less equity holders, would obtain any meaningful recovery, as the equity underlying approximately $1.7 billion of repos would be lost.

The strategy Blackstone pursued was multi-faceted.  First, the Company would demonstrate its ability to generate significant liquidity; second, the Company would demonstrate to creditors that a longer term solution was possible and in their best interests; third, the Company would negotiate the allocation of the new liquidity among secured creditors; and fourth, the Company would negotiate a long-term forbearance, or “Override,” with creditors.  The Override would allow C-BASS to reduce debt over time from portfolio cash flows and maximize recovery to stakeholders.

The source of new liquidity for C-BASS was the sale of Litton Loan Servicing LP (“Litton”), a wholly owned subsidiary of C-BASS.  Litton is recognized as the supreme servicer of non-traditional, lower credit mortgages.  Blackstone conducted an accelerated sale process involving over 20 interested parties.

The result was a final round “auction” between two fully-diligenced parties.  After round the clock negotiations over several days, a winning bidder was selected on September 27th, less than two months after Blackstone’s retention.  In addition, the winning bidder obtained a warrant for a 45% equity interest in C-BASS, enhancing the prospects for the proper stewardship of the C-BASS portfolio in the future.  The proceeds raised from the Litton sale were particularly effective in convincing C-BASS’s repo lenders (over $1.7 billion of debt) and bank syndicate (over $1.5 billion of debt) to support an out-of-court solution.

During the auction period, Blackstone, with management, discussed plans to convince bank and repo lenders to extend their loans for two years.  The plan was to share a portion of the Litton proceeds with repo lenders, which did not have a claim on the proceeds, and to cross-collateralize all repo lenders and provide second liens for the bank group and repo group on each other’s collateral pool.

Once the secured creditor plan was established, Blackstone assisted C-BASS in its negotiation of the Override Agreement with equity holders and four groups of unsecured creditors, totaling over $600 million. 

In total, 45 creditors were party to the successful out-of-court restructuring of approximately $4 billion of liabilities.  As a result, in less than four months, Blackstone helped C-BASS preserve the value of its mortgage-related portfolio by allowing it to produce cash flow and amortize debt in an orderly manner.  The Company and its creditors therefore avoided selling a mortgage portfolio for distressed prices in a turbulent market and incurring the costs and uncertainty of bankruptcy.

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