Stearns files for Chapter 11 bankruptcy

October 2019 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

October 2019 Issue

Stearns Holdings, the parent company of mortgage lender Stearns Lending, filed for Chapter 11 bankruptcy in July. To facilitate the filing, the company agreed with its majority equity holder, funds affiliated with Blackstone Group, to a significant restructuring plan which will see more than $180m in bond debt removed from its balance sheet.

To implement the restructuring, Stearns and certain of its subsidiaries filed voluntary petitions for reorganisation under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of New York.

Stearns will continue to operate as normal throughout the restructuring process. In a statement announcing the restructuring, the company noted that it had filed a number of customary motions seeking court authorisation to continue to support its business operations during the court-supervised process, including the continued payment of employee wages, salaries and health benefits, as well as the continuation of all programmes in support of the company’s customers and business partners. The company expects to receive court approval for these requests. The company intends to pay suppliers and vendors in full under normal terms for goods and services provided on or after the Chapter 11 filing date.

Blackstone has also committed $60m in new investment in its role as plan sponsor and has committed to provide up to $35m in debtor in possession financing. Upon approval by the bankruptcy court, this financing, combined with cash generated from the company’s ongoing operations, will be available as needed to support the business during the court supervised restructuring process. The company has also secured firm commitments of $1.5bn from its warehouse providers. Blackstone, which had been an investor in Stearns since August 2015, when funds managed by the firm acquired a majority stake in Stearns Holdings, will provide warehouse lenders with a limited first loss guarantee. Through its role as plan sponsor, Blackstone expects to increase its ownership stake 100 percent in Stearns Holdings.

Prior to the filing, Stearns had undertaken a number of cost-cutting measures. The company cut its annual expenses by 40 percent, including job cuts, however this was not sufficient to stabilise the company’s finances, according to a court filing. The company also sold its mortgage servicing rights for around $224m in 2018 to Freedom Mortgage Corp.

The bankruptcy comes after the rise in interest rates in 2017 and 2018 “reduced the overall size of the mortgage market, increasing competition and significantly reducing market revenues,” according to Stephen Smith, president and chief financial officer of Stearns, in a court filing.

“The action we are taking today is the next step in our efforts to reposition Stearns for future growth opportunities and enhanced profitability,” said David Schneider, chief executive of Stearns Lending. “We have taken deliberate and proactive actions to reduce costs and refocus on our core businesses. We are now undertaking a comprehensive financial restructuring with the goal of moving forward in a stronger financial position. As a long-term investor in the Company, Blackstone knows our business well. They share our confidence in Stearns’ future prospects and are dedicated to supporting us through this transition. Their desire to continue their relationship and ongoing commitment to our business, employees and partners demonstrates their belief that we will come out of this process stronger than before. As we move forward, we remain firmly committed to our mission of helping homebuyers find the best loans for their current and future needs. I want to thank Stearns employees for their hard work and dedication to serving our customers and enabling them to reach their goals and achieve their dreams.”

Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal adviser to Stearns, PJT Partners is serving as financial adviser and Alvarez & Marsal is serving as restructuring adviser.

Richard Summerfield