10-K: Great Ajax Corp. Announces Strategic Transaction with Rithm Capital, Plans Management Changes

Great Ajax Corp. has entered into a strategic transaction with Rithm Capital, including a credit agreement and plans for management and board restructuring, following the termination of its merger agreement with Ellington Financial.

Summary

• Great Ajax Corp. has entered into a strategic transaction with Rithm Capital, which includes a credit agreement for up to $70 million, a warrant issuance, and a securities purchase agreement.
• The company will terminate its existing management agreement and plans to enter into a new agreement with RCM GA Manager LLC, an affiliate of Rithm.
• The board of directors will be reconstituted to a five-member board, including two existing directors, one Rithm nominee, and two new independent directors.
• The company will issue warrants to Rithm to purchase common stock at an exercise price of $5.36 per share, with the number of shares capped at 19.99% of the outstanding common stock unless stockholder approval is obtained.
• The company will also issue shares of common stock to Rithm at a purchase price of $4.87 per share for gross proceeds of approximately $14.0 million.
• The company has entered into exchange agreements with holders of its preferred stock and warrants to exchange these securities for an aggregate of 12,046,222 shares of common stock.
• The company will seek stockholder approval for the transactions and has entered into support agreements with directors, executive officers, and certain institutional stockholders representing 44% of the outstanding common stock.
• The company expects to use the net proceeds from the private placement towards repayment of any amounts borrowed under the Facility and/or repayment of the 2024 Notes.
• The company's credit agreement with NIC RMBS LLC includes financial covenants requiring a minimum net asset value, a minimum ratio of unencumbered assets to debt, a maximum ratio of recourse indebtedness to equity, a minimum liquidity covenant, and a maximum ratio of facility loans to net assets.

Sentiment

Score: 4

Explanation: The document presents a mix of positive and negative developments. The strategic transaction with Rithm provides a much-needed credit facility and potential for restructuring, but the company is also facing significant losses and management changes. The overall sentiment is cautiously optimistic, but with significant risks and uncertainties.

Positives

• The strategic transaction with Rithm provides a new credit facility to address upcoming debt maturities.
• The restructuring of the board and management may bring fresh perspectives and expertise.
• The support agreements from key stockholders indicate confidence in the transaction.
• The exchange of preferred stock and warrants for common stock simplifies the capital structure.
• The new credit facility will be used to repay the outstanding 2024 Notes upon their maturity in April 2024.

Negatives

• The company is terminating its existing management agreement, which may cause disruption.
• The company will incur a termination fee to the Manager, payable in shares of common stock.
• The company's credit agreement includes financial covenants that must be met.
• The company's credit agreement includes a 10% per annum interest rate on outstanding loans.
• The company's ability to issue shares of common stock in exchange for preferred stock is limited to 19.99% of outstanding shares until stockholder approval is obtained.

Risks

• The transactions with Rithm are subject to stockholder approval and other closing conditions, which may not be met.
• Failure to consummate the transactions with Rithm could adversely affect the company's stock price and future business.
• The company's ability to obtain financing on favorable terms is uncertain.
• The company's termination of the Manager may lead to difficulties in transitioning to a new management agreement.
• The company's financial condition may be impacted by the declining financial condition of the Servicer.
• The company's ability to sell NPLs, RPLs, and SBC loans at attractive prices is subject to market conditions.
• The company's share price may continue to be volatile.
• The company's ability to qualify as a REIT is subject to various complex requirements.
• The company's ability to maintain its exemption from registration under the Investment Company Act is subject to limitations on its operations.

Future Outlook

The company expects to continue its strategy of acquiring RPLs, SBC loans, and NPLs through joint ventures, while also managing its existing portfolio and exploring strategic alternatives. The company also expects to incur significant losses from the sale of certain mortgage loans that it has identified and proposes to sell in the near future.

Management Comments

• The board regularly evaluates and considers our strategic direction, our objectives and our succession plans, as well as our ongoing business, all with a view to maximizing long-term value for our stockholders.
• Our principal objective is to generate attractive risk-adjusted returns for our stockholders over the long-term through dividends and capital appreciation.

Industry Context

The announcement reflects a trend of consolidation and strategic partnerships in the mortgage REIT sector, as companies seek to navigate challenging market conditions and optimize their capital structures. The company is also addressing the impact of rising interest rates and inflation on its loan portfolio.

Comparison to Industry Standards

• The company's strategic transaction with Rithm is similar to other recent deals in the mortgage REIT sector, where companies are seeking to strengthen their balance sheets and improve their access to capital.
• The company's focus on acquiring RPLs, NPLs, and SBC loans is a common strategy among mortgage REITs, but the specific geographic focus and underwriting criteria may vary.
• The company's use of securitization and repurchase agreements is a standard practice in the industry, but the terms and conditions of these facilities can differ significantly.
• The company's financial covenants in its credit agreement are typical for leveraged financial institutions, but the specific metrics and thresholds may vary based on the company's risk profile and business strategy.
• The company's management fee structure is similar to other externally managed REITs, but the specific terms and incentive fee calculations may differ.

Management Changes

Corporate Governance

Related Party Transactions

• The company has a management agreement with Thetis Asset Management LLC, an affiliated company.
• The company has a servicing agreement with Gregory Funding LLC, an affiliated company.
• The company owns a 19.8% equity interest in its Manager and a 9.5% equity interest in the parent company of its Servicer through GA-TRS.
• The company has entered into a credit agreement with NIC RMBS LLC, an affiliate of Rithm Capital.
• The company has entered into a securities purchase agreement with Rithm Capital.
• The company has entered into exchange agreements with holders of its preferred stock and warrants, some of whom are related parties.

Stakeholder Impact

• Shareholders may experience volatility in the stock price due to the strategic transaction and market conditions.
• Employees of the Manager and Servicer may be affected by the management changes.
• Customers (borrowers) may experience changes in servicing due to the potential transition to a new servicer.
• Creditors may be impacted by the company's new credit agreement and debt repayment plans.

Next Steps

• The company will seek stockholder approval for the transactions with Rithm.
• The company will enter into a new management agreement with RCM GA Manager LLC.
• The company will reconstitute its board of directors.
• The company will prepare and file a shelf registration statement with the SEC to register for resale the Shares and the Warrant Shares.
• The company will use the net proceeds from the private placement towards repayment of any amounts borrowed under the Facility and/or repayment of the 2024 Notes.

Key Dates

Keywords

Rithm Capital, strategic transaction, credit agreement, management change, board restructuring, warrant issuance, securities purchase, preferred stock exchange, capital raise, mortgage loans, REIT, financial covenants