Lenders successfully market offerings to investors

The situation
Grant Thornton LLP was retained by a leading originator of time-share loan-backed notes to assist in origination of $148.8 million of two classes of notes backed by over 11,000 time-share loans. The notes were offered by Bank of America Merrill Lynch, RBC Capital Markets and BB&T Capital Markets (together Joint Bookrunners), and were required to go through a risk-rating process that was provided by Fitch Ratings. As part of the rating process, the rating agency required that the confidential offering circular be audited by an independent auditor and that all the amounts/schedules illustrated in the offering circular be independently verified. The client sought help from Grant Thornton with providing agreed-upon procedures (AUP) services with regard to the origination.

What the team did
Grant Thornton provided AUP services, including but not limited to:
  1. Obtaining the preliminary confidential offering circular and comparing all loan characteristics to the source documents
  2. Obtaining the data file, using the information contained therein and the methodologies provided by Joint Bookrunners to recompute the assumed characteristics of the time-share loans, and comparing it to the information in the preliminary offering circular
  3. Using the cash flow assumptions and methodologies set forth in the offering circular, recomputing the percentage of initial note balance outstanding with respect to specific payment date and the corresponding weighted average life of the notes at each of the indicated scenarios (callable dates, conditional prepayment rates (CPR) and default rates), and comparing it to the information in the preliminary offering circular

Grant Thornton put together the best team of experienced professionals to accomplish the AUP in a timely manner. The team included professionals from the Audit Services and Structured Products Services groups.

The team worked closely with the lenders and the issuer to provide the following deliverables:
  1. Verification of the preliminary loan pool stratification and creation of the stratification model for the final loan pool — approximately 750 data points
  2. Development of a cash flow model that replicated the cash inflows and outflows under various scenarios, including various CPR, default rates and callable dates to verify the cash flow under the notes structure provided by the lenders
  3. Verification of the preliminary and final offering circulars

In order to accomplish their objectives of the engagement, the team had several touch points with the issuer and lender teams to resolve all the discrepancies and variances. In addition, while the issuer and Grant Thornton had expected only two iterations of the loan pool cuts, Grant Thornton accommodated four iterations of the loan pool cuts in order to get the rating agency comfortable.

The engagement team was to be able to verify the issuer’s offering circular without any discrepancies and allow the rating agencies to successfully rate the underlying notes being offered, which allowed the lenders to successfully market them to investors. The client was able to get a successful rating from Fitch Ratings and move ahead with the transaction. The engagement was delivered within the estimated budget, and the client was able to verify the required metrics within the deadlines.