DFAN14A 1 homeloandfanl4a-0209l5.htm FEBRUARY 9, 2015
`SCHEDULE 14A
`
`(Rule 14a-101)
`INFORMATION REQUIRED IN PROXY STATEMENT
`SCHEDULE 14A INFORMATION
`
`PROXY STATEMENT PURSUANT TO SECTION l4(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
`
`(Amendment No. )
`
`Filed by the Registrant |
`
`]
`
`Filed by a Party Other than the Registrant [x]
`
`Check the Appropriate Box:
`
`[ ] Preliminary Proxy Statement
`[
`] Confidential, for Use of the Commission Only (as permitted by
`Rule 14a-6(e)(2))
`[ ]Definitive Proxy Statement
`[ ] Definitive Additional Materials
`[x] Soliciting Material Pursuant to Rule 14a-1 1(c) or Rule 14a-12
`
` $llE
`(Name ofregistrant as specified in its charter)
`
`The Mangrove Partners Master Fund, Ltd.
`The Mangrove Partners Fund, L.P.
`Mangrove Partners Fund (Cayman), Ltd.
`Mangrove Partners
`Mangrove Capital
`N.a.thanis:LAu2.us1
`(Name of person(s) filing proxy statement, if other than the registrant)
`
`Payment of Filing Fee (Check the Appropriate Box):
`
`[x]No fee required.
`[ ]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-1 1.
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`(1) Title of each class of securities to which transaction applies:
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`(3) Per unit price or other underlying value oftransaction computed pursuant to
`Exchange Act Rule 0-1 1 (set forth the amount on which the filing fee is
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`(5) Total fee paid:
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`Page 1 of 11
`
`VIRNETX EXHIBIT 2013
`
`Mangrove v. VirnetX
`Trial lPR2015—01046
`
`

`
`(4) Date Filed:
`
`Page 2 of 11
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`

`
`The Mangrove Partners Master Fund, Ltd., together with the other participants named herein (collectively, “Mangrove”),
`is filing materials contained in this Schedule 14A with the Securities and Exchange Commission (the “SEC”) in connection
`with the solicitation of proxies by Mangrove at the 2015 annual meeting of shareholders (the “Annual Meeting”) of Home Loan
`Servicing Solutions, Ltd. Mangrove has not yet filed a proxy statement with the SEC with regard to the Annual Meeting.
`
`On February 9, 2015, Mangrove issued the following press release:
`
`Page 3 of 11
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`

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`Mangrove Partners Delivers Letter To Board Of
`Directors Of Home Loan Servicing Solutions, Ltd.
`Urging Termination Of HLSS's Relationship With
`Ocwen Loan Servicing, LLC
`
`Outlines HLSS's Opportunity to Generate Significant Value for Shareholders by Forcing Servicing Transfers Away from
`Ocwen
`
`‘ nnounces Intention to Nominate a Slate of Directors to the HLSS Board for Election at the Company's 2015 Annual
`Meeting
`
`EW YORK, Feb. 9, 2015 /PRNewswire/ -- The Mangrove Partners Master Fund, Ltd., a significant shareholder of Home Loan
`Servicing Solutions, Ltd. (Nasdaq: HLSS), today announced it has delivered a letter to the members of HLSS's Board of
`Directors.
`
`The full text of the letter follows and has been posted to www.freeHLSS.com:
`
`The Board of Directors
`
`Home Loan Servicing Solutions, Ltd.
`c/o Intertrust Corporate Services (Cayman) Limited
`190 Elgin Avenue
`George Town, Grand Cayman KY1-9005
`Cayman Islands
`
`CC: Michael Lubin, Corporate Secretary
`
`Dear Members of the Board:
`
`e are writing you in response to your letter dated February 5, 2015 ("Response"). Based on the latest publicly available
`shareholdings list, The Mangrove Partners Master Fund, Ltd. ("Mangrove Partners") is one of the ten largest shareholders 0
`Home Loan Servicing Solutions, Ltd. ("HLSS" or the "Company"). As we expressed in our February 2, 2015 letter, we believe it
`is imperative for the Company to exercise its contractual rights to terminate its relationship with Ocwen Loan Servicing, LLC
`("Ocwen") without delay. We believe that continuing to expose HLSS to Ocwen-related risks by leaving the Ocwen
`relationship intact constitutes a dereliction of your duty to the Company and a grave risk to all shareholders. Your Response
`was inadequate. As a result, it is our intention to nominate a slate of replacement directors for election this year because time is
`not the Company's friend and you as the Board are showing no signs of taking concrete action to protect shareholders in this
`serious situation.
`
`We believe that there have been multiple Termination Events under the documents governing HLSS's purchase of Rights to
`MSRs ("RMSRS") from Ocwen. Pursuant to each sale supplement governing HLSS's purchase of RMSRs from Ocwen,
`-
`Termination Event is defined as "the occurrence of any one or more of the following events...(e) Seller [Ocwen] fails to
`maintain residential primary servicer ratings for subprime loans of at
`least
`‘Average’ by Standard & Poors Rating
`Services...'SQ3' by Moody's Investors Service, Inc ("M0ody's")...and 'RPS4+' and 'RSS4+' by Fitch Ratings." A Termination
`Event therefore occurred on January 29, 2015, when Moody's downgraded Ocwen's servicer quality (SQ) assessments to SQ3-
`from SQ3 and as a special servicer of residential mortgage loans to SQ3- from SQ3. Another Termination Event occurred on
`February 4, 2015, when Fitch Ratings downgraded Ocwen's residential primary servicer rating for Subprime product to "RPS4"
`from "RPS3." Section 6.13 of the sales supplements specifies that "(i)n the case that any Termination Event occurs with respect
`0 any Servicing Agreement... [Ocwen] shall, upon HLSS's written direction to such effect, use commercially reasonable efforts
`to transfer the Servicing Rights relating to any affected Servicing Agreement to a third party servicer identified by HLSS."
`
`Page 4 of 11
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`

`
`Importantly, Section 6.13 ofthe sales supplements then proceeds to state that "HLSS shall be entitled to receive all proceeds 0 i
`such transfer" (emphasis added).
`
`e believe that there are compelling reasons why HLSS should immediately begin the process of exercising its rights to direct
`Ocwen to transfer the servicing rights to one or more different servicers. Most importantly, servicing transfers will isolate HLSS
`fi'om the risks of an ongoing relationship with Ocwen. A number of these risks were outlined in our prior letter to you. You are
`no doubt aware that Moody's downgraded HLSS's corporate family rating fiom Ba3 to B2 on October 21, 2014, citing HLSS's
`"reliance on Ocwen" as the primary reason for the downgrade. Additionally, we remind you that the California Department 0
`Business Oversight threatened to suspend Ocwen's servicing license multiple times during 2014. It is our belief that HLSS's
`continued affiliation with Ocwen is an unacceptable risk and contrary to the best interests of the Company and its shareholders.
`e believe that restructuring HLSS's servicing counterparty relationships would be a significant positive development for the
`Company in the current operating environment and would be viewed positively by all of the Company's lending relationships.
`Transferring servicing would give HLSS the opportunity to engage with servicers that have greater servicing stability, bette
`management oversight, stronger relationships with regulators, and higher ratings.
`
`In addition to shielding HLSS shareholders fiom Ocwen-related risks, we believe that a transfer of the servicing rights will
`create significant value for HLSS and its shareholders. While our valuation work shows a range of potential values, we believe
`hat a reasonable estimate of the value created by transferring the servicing rights would be between $8 and $13 per share of
`incremental value to HLSS. Based on the Company's book value on September 30, 2014, this represents an increase in book
`value of between 44% and 72%. In addition, we believe the Company's stock is currently trading at a discounted multiple due
`0 the Company's close ties to Ocwen. Once the Company ends its association with Ocwen, we see no reason why the Company
`would not return to trading at its historic multiple of between 120% and 130% of book value. In a reasonable scenario, this
`would give shareholders a value ofbetween $31 and $40 per share. We have included our analysis ofthe value available to
`HLSS with a servicing transfer in the appendix to this letter.
`
`Although you may be concemed that HLSS's exercise of its rights to force servicing transfers could create further instability at
`Ocwen, Mangrove Partners believes that Ocwen's cash flows would only be affected after the servicing transfers are completed.
`Likewise, while the servicing transfers away from Ocwen would likely cause Ocwen to tum loss-making and give rise to
`multiple covenant breaches in Ocwen's credit facility pursuant to section 6.07(a) and 6.07(b) ofthe Ocwen Senior Secured Term
`Loan Facility Agreement dated February 15, 2013, these breaches would occur only after substantially all servicing transfers
`requested by HLSS had been completed. As such, any ensuing Ocwen default would be irrelevant to HLSS and the Company's
`remaining exposure to Ocwen would be de minimis.
`
`We urge you to fulfill your fiduciary duty to act in the best interest ofthe Company by causing the Company to exercise its
`contractual rights to force a transfer ofthe servicing rights. In doing so, the Board can and should insulate HLSS from fiirther
`Ocwen risk and create substantial value for the Company and its shareholders. Your Response's vague reassurances and legal
`boilerplate did nothing to ease Mangrove Partners’ increasing and justified concerns about the direction ofthe Company. To be
`clear, we are not looking for you to make selective disclosure to us—we are looking for you to take prudent action to protect the
`Company and shareholder interests. Accordingly, until such time as the Company announces it has entered into definitive
`agreements to transfer the servicing rights away from Ocwen pursuant to competitive processes conducted by top-tier advisors,
`it is our intention to bring new leadership to the Board by nominating a highly qualified slate of directors this week.
`
`Sincerely,
`
`athaniel August
`President and Portfolio Manager
`Mangrove Partners
`
`Page 5 of 11
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`

`
`VALUATION APPENDIX
`
`1. Ocwen profits as servicer on MSRs for which HLSS funds advances.
`
`indicated that agency servicing is significantly less profitable than non-agency servicing and that Ocwen intends to exit its
`agency servicing business.
`
`($ in millions)
`Total servicing segment revenue
`Total segment operating expenses (ex. interest)
`Servicing segment income from operations
`Add: MSR fair value adjustment
`Add: Transaction and transition expenses
`Add: Segment legal & regulatory charges
`Less: Mangrove Partners est. overhead allocation
`orrnalized servicing income from operations
`
`Less: Servicing fees remitted to HLSS
`Less: Other match fimded liability interest
`OCN servicing earnings after advance financing costs
`OCN annualized servicing earnings ("EBIT")
`
`OCN total MSR UPB at quarter end
`HLSS RMSR UPB at quarter end
`HLSS UPB as % OCN UPB
`
`OCN annualized EBIT attributable to HLSS UPB
`
`Valuation multiple
`Value of OCN EBIT from HLSS UPB
`
`% ofHLSS UPB serviced by OCN
`
`HLSS shares outstanding (in millions)
`Value of OCN servicing per HLSS share
`
`3 months
`
`9 months
`
`09/30/14
`$485
`(314)
`$171
`9
`8
`20
`(10)
`$198
`
`($94)
`(15)
`$90
`359
`
`09/30/14
`$1,527
`(920)
`$607
`51
`40
`22
`(30)
`$689
`
`($287)
`(47)
`$355
`473
`
`$41 1,280
`165,524
`40.2%
`
`$41 1,280
`165,524
`40.2%
`
`$145
`
`4.00x
`$578
`
`$190
`
`4.00x
`$762
`
`0.349%
`
`0.460%
`
`71
`$8.14
`
`71
`$10.73
`
`In a servicing transfer, we believe that the earnings Ocwen currently generates from the MSRs that HLSS has the right to transfer
`would be worth over $8 in incremental value per HLSS share. We have benchmarked our valuation against what HLSS has
`indicated it believes Ocwen earns on this relationship. On June 1 1, 2013, HLSS indicated in a lender presentation that Ocwen
`earns a contribution profit of 36 bps of UPB as servicer on HLSS RMSRs. As shown below, this suggests that our valuation of
`Ocwen's servicing relationship with HLSS is less than lx its contribution profit to Ocwen in our low case. We believe this
`reflects the conservatism embedded in our valuation.
`
`($ in millions)
`Ocwen subservicing fee % ofUPB
`Add: Ancillary fees % UPB
`Less: Incremental expenses % UPB
`Contribution of Ocwen subservicing % UPB
`
`September 30, 2014 HLSS RMSR UPB
`Implied contribution margin to Ocwen
`
`0.230%
`0.180%
`(0.050%)
`0.360%
`
`$165,524
`596
`
`Page 6 of 11
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`

`
`2. Clean up call rights.
`
`On a December 22, 2014 conference call, Ocwen stated that it owns call rights: "(A)s the servicer of almost $200 billion of UPB
`of private label mortgages. .
`. we estimate that we will execute approximately $5 billion of calls over the next two years and they
`could be worth two to three points of profit to [Ocwen]." Since these clean up call rights belong to the servicer ofthe private
`label mortgages, their value should accrue to HLSS as part of the price it receives in a transfer ofthe MSRs.
`
`Ocwen non-agency servicing UPB at 9/30
`HLSS RMSR UPB at 9/30
`HLSS UPB % OCN UPB
`
`Ocwen serviced in-the-money clean up call UPB
`% that HLSS is entitled to
`
`UPB that HLSS is entitled to
`
`HLSS clean up call profit - Low %
`HLSS clean up call profit - Low $
`Value of clean-up call rights per HLSS share — Low
`
`HLSS clean up call profit - High %
`HLSS clean up call profit - High $
`Value of clean-up call rights per HLSS share — High
`
`Amount
`
`$171,998
`165,524
`96.2%
`
`$5,000
`96.2%
`
`$4,812
`
`2.0%
`$96
`$1.36
`
`3.0%
`$144
`$2.03
`
`Based on the guidance given by Ocwen's management, it is Mangrove Partners’ opinion that the clean up call rights to which
`HLSS is entitled could be worth at least $ 1-2 per share, taking into consideration only those clean up call rights that were in-
`he-money as of December 2014.
`
`Page 7 of 11
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`

`
`3. Altisource Portfolio Solutions, S.A. ("ASPS") profits from Ocwen's non-agency portfolio.
`
`In January 2015, ASPS provided estimates of potential Technology and Mortgage Services pre-tax income it expects to generate
`from Ocwen's existing non-GSE portfolio. We believe that substantially all of this pre-tax income is generated from Ocwen's
`non-agency portfolio. HLSS owns the RMSRS to over 96% of Ocwen's non-agency servicing portfolio. A third party servicer to
`which HLSS transfers servicing could derive significant value fiom perfonning the services that ASPS is currently perfonning,
`and we believe that HLSS could be compensated for this in the sale price of the servicing rights. Our estimate ofthe value
`another servicer could realize from the cash flows that ASPS forecast in its recent presentation is presented below.
`
`2018
`$131
`(35)
`$96
`
`2019
`$1 13
`(35 )
`$78
`
`96.2%
`
`96.2%
`
`$92
`
`(32)
`$60
`
`$60
`
`$75
`
`(26)
`$49
`195
`$244
`
`$130
`$3 88
`
`71
`$5.47
`
`(Sin millions)
`Segment pre-tax income ("P’IT')
`Less: Mangrove Partners est. G&A
`Adjusted PTI
`
`HLSS UPB % OCN non-GSE UPB
`
`ASPS PTI attributable to HLSS
`
`Less: Taxes
`et income - Approximates FCF
`Terminal value (4x 2019 Net income)
`Cash flows for discounting
`
`2015
`$205
`(35)
`$170
`
`96.2%
`
`$164
`
`(5 7)
`$106
`
`2016
`$174
`(35 )
`$139
`
`96.2%
`
`$134
`
`(47)
`$87
`
`$106
`
`$87
`
`2017
`$152
`(35)
`$117
`
`96.2%
`
`$113
`
`(39)
`$73
`
`$73
`
`15.0%
`
`$99
`
`$71
`
`$52
`
`$37
`
`HLSS shares outstanding at 9/30/14 (in millions)
`Value per HLSS share
`
`Based on ASPS's projections, the cash flows that a buyer of the MSRs could realize may be worth over $5 per HLSS share.
`Although this value would likely be divided between HLSS and the MSR purchaser, it may also be conservative because it
`excludes earnings related to mortgage charge-off collection services that would likely be valuable to another servicer.
`
`4. Transaction comparable.
`
`In January 2014, Ocwen agreed to acquire a primarily private label mortgage servicing portfolio from Wells Fargo with total
`principal balance of $39 billion (the "Wells Fargo Portfolio"). The agreed-upon purchase price was $2.7 billion, including $280
`million for the MSR, $115 million for deferred servicing fees, and $2.3 billion for outstanding servicing advances. Although
`this transaction was not consummated, it serves as a point of reference for the value HLSS could receive in a sale to a third party.
`
`ells Fargo transaction valuation
`
`MSR purchase price
`% of UPB to be acquired (deal multiple)
`
`Advance for deferred servicing fees
`% of UPB to be acquired
`
`Outstanding servicing advances
`% of UPB to be acquired
`
`HLSS potential MSR valuation
`($ millions)
`
`Amount
`
`$39,000
`
`$280
`0. 718%
`
`$115
`0.295%
`
`$2,300
`5.897%
`
`Page 8 of 11
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`

`
`HLSS RMSR UPB at 9/30/2014
`
`Wells Fargo deal multiple
`Implied fair value of MSR assets
`
`Less: HLSS RMSR carrying value
`Potential gain to HLSS
`
`+ HLSS shares outstanding at 9/30/14
`Value per HLSS share
`
`$165,524
`
`0.718%
`$1,188
`
`(619)
`$569
`
`71
`$8.02
`
`e note that this analysis does not take into account the cost of capital associated with deferred servicing fees that Ocwen
`agreed to pay up fiont, nor the difference in servicing advance requirements between the Wells Fargo Portfolio and the RMSRs
`that HLSS currently owns. Servicing advances as a percentage of HLSS's RMSR UPB stood at 3.685% at September 30, 2014,
`compared to servicing advances as a percentage of UPB in the Wells Fargo Portfolio of 5 .897%. Also, the HLSS portfolio is
`entirely private label, whereas over 8% ofthe UPB associated with the Wells Fargo Portfolio was Fannie Mae or Freddie Mac
`servicing. This suggests that based on a comparable transaction analysis, HLSS's exercise of its right to transfer servicing away
`from Ocwen could result in a gain to HLSS shareholders well in excess of $8 per share. This gain would represent an increase of
`approximately 45% to HLSS's September 30, 2014 book value per share.
`
`Page 9 of 11
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`

`
`5. HLSS's RMSRs are valued on its balance sheet using assumptions that are more conservative than realized performance.
`
`A servicing transfer that results in the sale of MSRs that HLSS finances is likely to result in a significant gain to HLSS.
`
`Wtd.
`
`Actual
`3 months
`
`09/30/14
`Average
`High
`Low
`Valuation input
`10%
`18%
`28%
`12%
`Prepayment speeds
`l9%*
`25%
`35%
`15%
`Delinquency rates
`* represents non-performing loans and real estate as a % oftotal residential assets serviced at 9/30/14
`
`CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
`
`Actual
`9 months
`
`09/30/14
`10%
`l9%*
`
`The Mangrove Partners Master Fund, Ltd. ("Mangrove"), together with the other participants named herein, intends to make a
`preliminary filing with the Securities and Exchange Commission ("SEC") of a proxy statement and accompanying proxy card to
`be used to solicit votes for the election of a slate of director nominees at the 2015 annual meeting of shareholders of Home Loan
`Servicing Solutions, Ltd. (the "Company").
`
`MANGROVE STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT
`AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
`INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT
`
`HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE
`COPIES OF THE PROXY STATEMENT WITHOUT CHARGE UPON REQUEST.
`
`The participants in the proxy solicitation are anticipated to be Mangrove, The Mangrove Partners Fund, L.P. ("Mangrove LP"),
`Mangrove Partners Fund (Cayman), Ltd. ("Mangrove Fund Cayman"), Mangrove Partners, Mangrove Capital and Nathaniel
`August (collectively, the "Participants").
`
`As ofthe date hereof, Mangrove owned 1,655,719 shares of the Company's Common Stock. As the two controlling shareholders
`of Mangrove, each ofMangrove LP and Mangrove Fund Cayman may be deemed the beneficial owner ofthe shares of Common
`Stock ofthe Company owned by Mangrove. Mangrove Partners is the investment manager of each of Mangrove, Mangrove LP
`and Mangrove Fund Cayman. Mangrove Capital is the general partner ofMangrove LP. Mr. August is the Director of each of
`Mangrove Partners and Mangrove Capital. By virtue of these relationships, each ofMangrove Partners, Mangrove Capital and
`Mr. August may be deemed to beneficially own the shares of Common Stock of the Company owned by Mangrove.
`
`‘ bout Mangrove Partners
`
`Mangrove Partners is a value-oriented investment manager. Its investment objective is to organically compound net worth
`while minimizing the chances of a permanent loss of capital. Its goal is to generate positive returns from both long and short
`investments as opposed to employing a relative value or market hedging strategy.
`
`Cautionary Statement Regarding Forward-Looking Statements
`
`The information herein contains "forward-looking statements." Specific forward-looking statements can be identified by the fact
`that they do not relate strictly to historical or current facts and include, without limitation, words such as "may," "will,"
`"expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "seeks," "could," "should" or the
`negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our
`objectives, plans or goals are forward-looking. Our forward-looking statements are based on our current intent, belief,
`expectations, estimates and projections regarding the Company and projections regarding the industry in which it operates.
`These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are
`difficult to predict and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-
`looking statements as a prediction of actual results and actual results may vary materially fiom what is expressed in or indicated
`by the forward-looking statements.
`
`Page 10 of 11
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