PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law
425 Lexington Avenue New York, New York 10017 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
May 3, 2024
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Board of Directors, Skybridge Fintech Ltd.
Arun Mehta, Chief Executive Officer & Co-Founder Danielle Prescott, Chief Financial Officer Tomás Reyes, General Counsel Marcus Yoon, Board Representative, Pinnacle Growth Equity Partners, LP
FROM: Linda Osei, Partner (Litigation — General) Theodore Langston, Partner (Capital Markets)
CC: Catherine Drexler, Managing Partner Pinnacle Growth Equity Partners, LP 399 Park Avenue, 28th Floor New York, New York 10022
RE: Recommendation to Terminate the SkyLend Receivables Trust 2024-1 Consumer-Receivables Securitization C&H Matter No. 1009-00005 Halcyon Deal Reference HLC-ABS-2024-017
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I. Executive Summary and Recommendation
Calderwood & Harkness LLP ("C&H" or "the Firm") respectfully submits this memorandum to the Board of Directors (the "Board") of Skybridge Fintech Ltd. ("SBF" or the "Company") to recommend that the Board authorize the immediate formal termination of the proposed $200,000,000 consumer-receivables securitization through SkyLend Receivables Trust 2024-1 (the "Transaction" or the "Offering"). This recommendation is the product of extensive analysis conducted by C&H's capital markets and litigation practice groups over the ten-day period since the initial discovery of the underlying data-integrity issues, and reflects our considered professional judgment that continued pursuit of the Transaction is neither commercially viable nor legally prudent.
Our recommendation is driven by four converging factors, each of which independently creates significant risk to the Transaction, and which, taken together, render termination the only reasonable course of action:
1. discovery of a Material Servicing-Data Discrepancy. On April 22, 2024, the independent third-party due diligence provider, Broadleaf Analytics Group LLC ("Broadleaf"), identified material discrepancies between the static-pool performance data contained in the Preliminary Offering Memorandum dated April 5, 2024 (the "Preliminary OM"), and the actual underlying loan-tape records. The discrepancies are attributable to a payment-waterfall coding error introduced during Clearview Loan Servicing, Inc.'s ("Clearview") system migration in June 2023. As detailed in Section III below, the error resulted in reported 30+ day delinquency rates of 3.21% versus actual rates of 5.47% — a relative understatement of 70.4% — and reported cumulative net losses of 4.12% versus actual losses of 6.89% — a relative understatement of 67.2%. These discrepancies affect approximately 14,600 loans, representing 63.2% of the proposed pool.
2. Withdrawal and Downgrade Watch of Preliminary Credit Ratings. On May 1, 2024, Meridian Credit Ratings, Inc. ("Meridian") formally withdrew its preliminary ratings (Aaa(sf) for the Class A Notes and A2(sf) for the Class B Notes). Two days earlier, on April 29, 2024, Carrollton Ratings Group LLC ("Carrollton") placed its expected ratings (AA+(sf) for the Class A Notes and A(sf) for the Class B Notes) on "developing" watch. Both actions render the Transaction incapable of pricing under current conditions and would require full re-engagement of both rating agencies before any future issuance.
3. Suspension of Marketing by the Lead Underwriter. On April 26, 2024, Halcyon Securities LLC ("Halcyon"), the lead underwriter and initial purchaser, formally notified SBF that it was suspending all marketing activities for the Transaction and delivered a force-majeure / material-change notice under the Preliminary Purchase Agreement (the "PPA"). Halcyon has indicated that it will not proceed to pricing absent a complete data remediation and refreshed rating-agency analysis.
4. Unviable Remediation Timeline. Halcyon has estimated that a full data remediation, pool reconstitution, renewed due diligence, and re-engagement of rating agencies would require a minimum of eight to twelve weeks. This timeline would push any potential pricing into the third quarter of 2024 at the earliest, well past the current favorable market window and into a period of substantial macroeconomic uncertainty.
The total estimated sunk transaction costs associated with the Transaction amount to $1,779,150, as detailed in Section VII below. While this figure is substantial, continued pursuit of the Transaction would expose SBF to additional costs, extended and potentially heightened securities-law risk arising from the outstanding Preliminary OM, and significant reputational harm within the institutional investor community and structured-finance markets — all without a reasonable prospect of timely execution or successful completion.
In light of the foregoing, C&H recommends that the Board authorize the following actions:
• Formal termination of the Transaction, including termination of the PPA and all ancillary transaction agreements;
• Transition to a post-termination wind-down phase, encompassing entity dissolution and service-provider notification;
• Pursuit of indemnification claims against Clearview under Section 9.02 of the Master Servicing Agreement dated October 1, 2022 (the "MSA"), seeking recovery of sunk transaction costs and related damages;
• Preparation of defenses against potential claims by Halcyon; and
• Proactive notification to all 28 institutional investors who received the Preliminary OM during the April 15–19 investor roadshow.
The balance of this memorandum provides the factual background, legal analysis, and detailed recommendations supporting this course of action.
II. Background of the Transaction
A. Transaction Overview
Skybridge Fintech Ltd. is a Delaware corporation headquartered at 1400 Market Street, Suite 1210, Wilmington, Delaware 19801 (EIN: 84-3291076). SBF is a consumer financial technology lender that develops, operates, and maintains the SkyLend direct-to-consumer digital lending platform. Through SkyLend, SBF originates unsecured consumer installment loans ranging in principal amount from $1,000 to $25,000 with terms of 12 to 60 months. SBF's origination activities are conducted across all 50 states and the District of Columbia, subject to applicable state-level licensing requirements.
For the fiscal year ended December 31, 2023, SBF achieved significant operational scale. Total origination volume for FY 2023 was approximately $1.4 billion, reflecting the Company's market position as a mid-market digital consumer lender. As of December 31, 2023, SBF maintained approximately 312,000 active borrower accounts across its portfolio. The Company reported FY 2023 revenue of $187.3 million, total assets of $1.02 billion, and a gross receivables portfolio of $876.5 million ($841.4 million net of allowance for credit losses).
SBF's principal institutional investor is Pinnacle Growth Equity Partners, LP ("Pinnacle"), which served as lead investor in the Company's Series C financing round, contributing $95 million in equity capital in 2021. Pinnacle currently holds 62.4% of SBF's fully diluted equity. Marcus Yoon, a partner at Pinnacle, serves as Pinnacle's designated representative on SBF's Board of Directors. Catherine Drexler, Pinnacle's Managing Partner, is included on the distribution list for this memorandum in her capacity as an observer and in connection with Pinnacle's governance rights under the Investors' Rights Agreement.
The Transaction was conceived as part of SBF's broader capital-markets strategy to diversify its funding sources beyond warehouse lending facilities and equity capital, establish a recurring presence in the asset-backed securities market, and optimize the cost of capital associated with its consumer-receivables portfolio. The Transaction, if completed, would have represented SBF's inaugural public-market securitization.
B. Transaction Structure
The Transaction was structured as a private placement of asset-backed notes under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and Regulation S promulgated thereunder, relying on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The notes were to be secured by a pool of unsecured consumer installment-loan receivables originated through the SkyLend platform.
The aggregate target deal size was $200,000,000. The proposed capital structure consisted of the following tranches:
The Subordinated Certificate and residual interest was to be retained by SBF through its wholly owned subsidiary, SkyLend Funding LLC, in accordance with applicable risk-retention requirements under Regulation RR (17 C.F.R. Part 246) promulgated pursuant to Section 15G of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Transaction incorporated the following credit-enhancement features:
• Initial Overcollateralization: 3.5% of the aggregate outstanding principal balance of the notes, equal to $7,000,000 at closing, intended to be built to a target level through application of excess spread;
• Reserve Account: A cash reserve account funded at closing in the amount of 1.00% of the initial pool balance, equal to $2,000,000, held by the indenture trustee for the benefit of the noteholders;
• Estimated Excess Spread: Approximately 2.85% per annum, calculated as the difference between the weighted-average coupon on the underlying receivables and the blended cost of the notes plus servicing fees and trustee expenses.
A CUSIP prefix of 87165Q had been allocated to the Transaction through the CUSIP Global Services bureau but had not been utilized in connection with any completed trade or settlement. The Transaction was to be governed by the laws of the State of New York, without regard to conflicts-of-law principles, as specified in the governing documents.
C. Key Parties
The Transaction involved the following principal parties and service providers:
Depositor: SkyLend Funding LLC, a Delaware single-member limited liability company whose sole member is SBF (EIN: 93-4187620). SkyLend Funding LLC was formed on January 30, 2024, for the sole purpose of acting as depositor in connection with the Transaction. Danielle Prescott, SBF's Chief Financial Officer, serves as Manager of SkyLend Funding LLC.
Issuing Trust: SkyLend Receivables Trust 2024-1, a Delaware statutory trust formed on February 14, 2024, under the Delaware Statutory Trust Act, 12 Del. C. §§ 3801–3826 (EIN: 93-4201855). The Trust was established pursuant to a trust agreement between SkyLend Funding LLC, as depositor, and Keymark Trust Company, N.A., as owner trustee. The Trust was organized for the sole purpose of acquiring the receivables pool from the depositor, issuing the notes, and engaging in related activities.
Owner Trustee: Keymark Trust Company, N.A., a nationally chartered trust company (principal contact: Elaine Marchetti, Vice President, Structured Finance). The owner trustee fee was set at $7,500 per annum, payable quarterly in arrears.
Indenture Trustee / Paying Agent / Custodian: Atlantic Fiduciary Services, Inc., a Delaware corporation and non-depository trust company (principal contact: David Moynihan, Director, Capital Markets Trustee Services). Atlantic's fees comprised a one-time acceptance fee of $15,000 (non-refundable) and an ongoing annual fee of $12,500, payable quarterly in arrears.
Lead Underwriter / Initial Purchaser: Halcyon Securities LLC, a Delaware limited liability company registered as a broker-dealer with the Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA). The deal team at Halcyon was led by Rebecca Thornton, Managing Director, ABS Origination, with senior oversight provided by Jonathan Kramer, Head of ABS Origination. The underwriting discount was 1.00% of the aggregate principal amount of notes sold, or $2,000,000 at the contemplated deal size of $200,000,000, payable solely upon closing. Halcyon's outside counsel for the Transaction is Whitfield, Drummond & Paige LLP (lead partner: Harrison Whitfield III; working associate: Priya Subramanian).
Third-Party Servicer: Clearview Loan Servicing, Inc. ("Clearview"), a Delaware corporation headquartered in Scottsdale, Arizona. Clearview's chief executive officer is Warren Pettigrew; the Transaction's primary deal contact was Meredith Sloane, Vice President, Operations. Clearview has served as the third-party servicer for SBF's consumer receivables portfolio under a Master Servicing Agreement dated October 1, 2022 (the "MSA"). The annual servicing fee under the MSA is 0.50% of the outstanding principal balance of the serviced receivables, estimated at approximately $1,000,000 per annum for the Transaction pool. Clearview services approximately $640 million in SBF receivables under the servicing account designated CLS-SBF-2022-0041, as of December 31, 2023.
Due Diligence Provider: Broadleaf Analytics Group LLC ("Broadleaf"), a structured-finance analytics and due diligence firm (managing director: Sanjay Rajan). Broadleaf was engaged by Halcyon, on behalf of the Transaction, on March 25, 2024, to perform loan-level due diligence, including re-underwriting and data verification of the receivables pool.
Rating Agencies: Meridian Credit Ratings, Inc. ("Meridian") (lead analyst: Gregory Fontaine; engagement fee: $185,000, non-refundable) and Carrollton Ratings Group LLC ("Carrollton") (lead analyst: Teresa Kobayashi; engagement fee: $160,000, non-refundable). Both agencies were engaged pursuant to engagement letters dated February 28, 2024.
Independent Auditor: Rowland & Cross LLP ("Rowland & Cross") (engagement partner: Nathan Delacroix). Rowland & Cross was engaged to provide agreed-upon procedures ("AUP") and a comfort letter in connection with the Transaction, at a total engagement fee of $275,000.
Printer / EDGAR Filing Agent: Donnovan Press LLC ("Donnovan Press"), engaged for printing of the Preliminary OM and related distribution materials, as well as any future EDGAR filing preparation that might have been required.
Issuer's Counsel: Calderwood & Harkness LLP (partners: Linda Osei (Litigation — General), Theodore Langston (Capital Markets); associates: Patrick Gallagher, Simone Laroche).
D. Transaction Timeline Through Data discovery
The following timeline summarizes the principal milestones and events in the Transaction from engagement through the discovery of the servicing-data discrepancy:
As the timeline reflects, the Transaction progressed through each major structuring and marketing milestone on schedule prior to the discovery of the servicing-data discrepancy. The investor roadshow had been completed, preliminary ratings had been assigned, and the Transaction was approaching the pricing stage when Broadleaf's findings brought the process to an abrupt halt.
E. Receivables Pool Characteristics (Cut-Off Date: March 31, 2024)
The receivables pool, as of the cut-off date of March 31, 2024, had the following characteristics:
• Number of Loans: Approximately 23,100 individual consumer installment loans
• Aggregate Outstanding Principal Balance: $213,750,000 (gross, before application of haircuts, concentration limits, and final pool selection criteria); the final pool target was $200,000,000, reflecting the contemplated deal size
• Weighted-Average Coupon (WAC): 14.82%
• Weighted-Average Remaining Term: 38.4 months
• Weighted-Average FICO at Origination: 698
• Maximum Single-Obligor Concentration: 0.15% of the aggregate pool balance ($300,000 at a $200,000,000 pool size)
• Geographic Concentration Limit: No single state was to represent more than 20% of the aggregate pool balance
The pool was selected from a broader universe of eligible receivables on the SkyLend platform, with eligibility criteria designed to meet the rating agencies' credit-enhancement requirements and to produce a pool with appropriate credit quality, vintage diversification, and geographic dispersion. These pool characteristics were reflected in the Preliminary OM and formed the basis for the rating agencies' preliminary credit analysis.
III. The Servicing-Data Discrepancy
A. Discovery
On April 22, 2024, Broadleaf Analytics Group LLC, the independent third-party due diligence provider engaged by Halcyon pursuant to customary market practice for asset-backed securities transactions, identified material discrepancies between the static-pool performance data provided in the Preliminary Offering Memorandum and the actual underlying loan-tape records. The discrepancies were uncovered during Broadleaf's loan-level re-underwriting process, which involved a detailed examination of individual borrower files, payment histories, and delinquency and default status for a representative sample of the receivables pool.
Broadleaf's due diligence methodology employed a stratified random sampling approach. The sample covered 1,500 individual loans, representing approximately 6.5% of the pool by loan count (1,500 of approximately 23,100 total loans). The sample was stratified by origination vintage, FICO band at origination, loan amount, geographic region, and current payment status to ensure representativeness across the pool's key risk dimensions.
During the re-underwriting process, Broadleaf's analysts identified systematic discrepancies between the delinquency and default status reflected in Clearview's monthly servicing tapes and the actual payment histories as evidenced by the underlying loan-level records. These discrepancies were not isolated or random; rather, they exhibited a consistent directional bias toward understating borrower delinquency and default rates, suggesting a systematic rather than idiosyncratic cause.
On April 23, 2024, Halcyon formally notified SBF, through C&H as issuer's counsel, of the Broadleaf findings. The notification was accompanied by a preliminary summary report from Broadleaf outlining the nature and scope of the identified discrepancies. C&H immediately convened a call with SBF management (Arun Mehta, Danielle Prescott, and Tomás Reyes) to discuss the findings and determine next steps.
B. Nature of the Discrepancy
Upon detailed examination, the root cause of the discrepancy was determined to reside in Clearview's payment-application methodology. Specifically, Clearview's monthly servicing tapes reported delinquency, default, and loss data using a payment-application waterfall that differed materially from the contractual waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022, between SBF and Clearview.
Under Section 4.03 of the MSA, the contractually specified payment-application waterfall requires that partial payments received from borrowers be applied in the following order:
(i) first, to accrued and unpaid interest;
(ii) second, to outstanding late charges, fees, and other assessments;
(iii) third, to outstanding principal.
Contrary to this contractual requirement, Clearview's servicing system applied partial payments to principal before interest. This deviation from the contractual waterfall had a direct and material effect on the reported delinquency and loss statistics for the portfolio, because by applying partial payments to principal first, Clearview's system classified borrowers as current (or less delinquent) than they actually were under the proper waterfall methodology. Specifically, loans that should have been reported as delinquent — because interest remained unpaid — were instead reported as current or at a lower stage of delinquency, because the principal balance had been reduced.
This payment-application error systematically understated the true level of borrower distress in the portfolio and resulted in reported delinquency, default, and loss metrics that were materially more favorable than the actual performance of the underlying receivables.
C. Quantification of the Discrepancy
Broadleaf's re-underwriting analysis produced the following key findings, which have been independently confirmed by SBF's internal investigation (see Section IV.C below):
30+ Day Delinquency Rate:
• Reported rate (per Clearview/SBF data, as reflected in the Preliminary OM): 3.21%
• Actual rate (per Broadleaf re-underwriting using correct contractual waterfall): 5.47%
• Difference: 2.26 percentage points
• Relative increase: 70.4% (calculated as 2.26 ÷ 3.21)
Cumulative Net Losses (2022 Vintage Static Pool):
• Reported rate (per Clearview data, as reflected in the Preliminary OM): 4.12%
• Actual rate (per Broadleaf re-underwriting): 6.89%
• Difference: 2.77 percentage points
• Relative increase: 67.2% (calculated as 2.77 ÷ 4.12)
Scope of Affected Loans:
• Approximately 14,600 loans in the proposed pool were affected by the payment-waterfall error
• This represents 63.2% of the total proposed pool of approximately 23,100 loans (calculated as 14,600 ÷ 23,100)
• The affected loans correspond to receivables that were boarded onto Clearview's ClearCore system following the June 2023 migration; loans that were originated and fully paid prior to the migration, or that were not migrated for other operational reasons, were not affected
The magnitude of these discrepancies is significant by any applicable materiality standard. In the context of structured-finance credit analysis, a 70.4% relative increase in reported delinquency rates and a 67.2% relative increase in reported cumulative net loss rates would fundamentally alter the credit analysis of the receivables pool. These discrepancies would affect subordination levels, overcollateralization requirements, reserve-account sizing, excess-spread projections, and, ultimately, the credit ratings assigned to each tranche of notes.
D. Root Cause
Through a combination of Broadleaf's external findings, SBF's internal investigation, and preliminary information provided by Clearview, the root cause of the payment-waterfall error has been identified as follows:
In June 2023, Clearview undertook a comprehensive system migration from its legacy loan-servicing platform, known internally as "LoanTrax," to a new servicing platform designated "ClearCore." The ClearCore platform was developed in-house by Clearview's technology team and was intended to replace LoanTrax across all of Clearview's servicing operations, including its servicing of SBF receivables.
During the ClearCore migration, the payment-waterfall logic for SBF receivables was incorrectly coded. Specifically, the ClearCore system was programmed to apply partial payments to principal before interest, reversing the contractually required order of application. C&H understands from Clearview's preliminary response that the error may have resulted from the incorrect assignment of a default payment-waterfall template during the migration process, rather than the custom waterfall template that had been configured for SBF receivables under the MSA. However, Clearview has not yet provided a definitive root-cause analysis, and C&H's assessment of Clearview's internal processes is necessarily preliminary at this stage.
Critically, the error was not detected by Clearview's post-migration validation procedures. Clearview has represented that it conducted a series of validation checks following the ClearCore migration, but these checks evidently did not include a loan-level reconciliation of payment-waterfall application against the contractual requirements of individual servicing agreements, or, if such checks were performed, they failed to identify the discrepancy for SBF receivables.
Additionally, the error was not caught by SBF's own quarterly data-reconciliation process. Under Section 5.06 of the MSA, SBF is required to perform a quarterly reconciliation of servicing data provided by Clearview against SBF's own origination and performance records. SBF's management has indicated that its quarterly reconciliation focused primarily on aggregate portfolio metrics (total outstanding balance, total collections, total charge-offs) rather than loan-level payment-waterfall application. While this reconciliation methodology was consistent with SBF's prior practice, it was insufficient to detect a systematic error in the payment-application waterfall that affected individual loan-level delinquency and default classifications.
Clearview provided a preliminary response to SBF's inquiry regarding the Broadleaf findings on April 24, 2024. In its preliminary response, Clearview acknowledged the system-migration issue and confirmed that an error in the ClearCore payment-waterfall logic had been identified. However, Clearview did not accept responsibility for all resulting consequences, including losses or damages that may have been incurred by SBF or other parties in connection with the Transaction. SBF's internal investigation, which commenced on April 24, 2024, under the direction of Tomás Reyes, General Counsel, has independently confirmed the Broadleaf findings regarding the nature and scope of the payment-waterfall error.
E. Impact on the Transaction
The impact of the servicing-data discrepancy on the Transaction is severe and multifaceted.
First and most directly, the Preliminary Offering Memorandum dated April 5, 2024, contains static-pool performance tables — including delinquency rates, default rates, cumulative net loss curves, and related metrics — that are based on the incorrect servicing data provided by Clearview. These static-pool performance tables constitute a central element of the credit-quality disclosures in the Preliminary OM and are among the most critical data points relied upon by investors in evaluating the expected performance and credit quality of the receivables pool. The discrepancies between the reported and actual performance data are material to any reasonable investor's assessment of the Transaction.
Second, the Preliminary OM containing these materially inaccurate data was distributed to 28 institutional investors during the investor roadshow conducted from April 15 through April 19, 2024. The roadshow was held in New York, Boston, and Chicago, and included one-on-one meetings, group presentations, and distribution of printed and electronic copies of the Preliminary OM together with supplemental marketing materials incorporating the static-pool performance tables. While the Preliminary OM was clearly marked as "preliminary" and subject to completion, correction, and amendment, the fact that materially inaccurate data was communicated to a significant number of institutional investors creates both legal and reputational considerations that are addressed in detail in Section VI below.
Third, the discrepancies undermine the foundation upon which the rating agencies' preliminary credit analysis was constructed. Both Meridian and Carrollton based their preliminary and expected ratings on the static-pool performance data as reported by Clearview and incorporated into the rating-agency presentation materials. The corrected data, reflecting significantly higher delinquency and loss rates, would necessitate a complete re-evaluation of credit enhancement levels, subordination, and tranche sizing, and could result in materially different — and less favorable — credit ratings for the Transaction.
IV. Post-discovery Events
A. Halcyon's Response
On April 26, 2024, three business days after receiving the Broadleaf findings, Halcyon Securities LLC formally notified SBF and C&H in writing that it was suspending all marketing activities for the Transaction. Concurrently, Halcyon delivered a force-majeure / material-change notice under Article V of the Preliminary Purchase Agreement, citing the servicing-data discrepancy as a material adverse change in the condition of the receivables pool that materially and adversely affected the Transaction and Halcyon's ability to market and sell the notes to investors.
In its notice, Halcyon stated unequivocally that it would not proceed to pricing or closing of the Transaction absent a full and complete remediation of the servicing data, including a re-taping of all affected loan records using the correct contractual payment-application waterfall, reconstitution of the receivables pool with updated selection criteria, and a refreshed, independent credit analysis by both rating agencies resulting in new preliminary or expected ratings. Halcyon further indicated its preliminary assessment that such remediation would require a minimum of eight to twelve weeks to complete, a timeline that Halcyon noted would extend the Transaction well past the current favorable market window for consumer ABS issuance.
Halcyon also indicated, through its counsel Whitfield, Drummond & Paige LLP, that it reserved all rights under the PPA, including any rights to expense reimbursement, indemnification, and other remedies that may be available.
SBF, through C&H, responded to Halcyon's force-majeure / material-change notice by letter dated April 28, 2024. In that response, SBF acknowledged the servicing-data discrepancy and the material nature of the Broadleaf findings, while expressly reserving SBF's rights under the PPA, including all rights with respect to liability for the data discrepancy, the scope of Halcyon's contractual remedies, and any potential counterclaims.
B. Rating-Agency Actions
The rating agencies' responses to the servicing-data discrepancy were swift and decisive, and each independently took action that renders the Transaction incapable of pricing under current conditions:
Carrollton Ratings Group LLC: On April 29, 2024, Carrollton placed its expected ratings for the Transaction on "developing" watch. Specifically, Carrollton placed the expected AA+(sf) rating for the Class A Notes and the expected A(sf) rating for the Class B Notes on its "Rating Watch Developing" list, indicating that the direction of any future rating action was uncertain and would depend on the outcome of the data-remediation process and updated credit analysis. Teresa Kobayashi, Carrollton's lead analyst for the Transaction, communicated this action to C&H by email on the same date.
Meridian Credit Ratings, Inc.: On May 1, 2024, Meridian took the more definitive action of formally withdrawing its preliminary ratings for the Transaction in their entirety. Meridian withdrew the preliminary Aaa(sf) rating for the Class A Notes and the preliminary A2(sf) rating for the Class B Notes, citing the material nature of the servicing-data discrepancy and the resulting uncertainty regarding the credit quality of the receivables pool. Gregory Fontaine, Meridian's lead analyst, confirmed the withdrawal by formal letter to C&H and SBF management.
Both rating-agency actions have profound consequences for the Transaction. In practical terms, a securitization cannot price without confirmed credit ratings from at least one nationally recognized statistical rating organization (NRSRO). Meridian's outright withdrawal and Carrollton's placement on "developing" watch eliminate the possibility of pricing under the current Transaction structure. Any future issuance would require a complete re-engagement of one or both rating agencies, submission of corrected and validated data, a new rating-committee process, and issuance of new preliminary ratings — a process that each agency has indicated would require a minimum of four to six weeks following submission of corrected data, and potentially longer given the need for enhanced scrutiny.
C. SBF Internal Investigation
SBF's internal investigation into the servicing-data discrepancy commenced on April 24, 2024, under the direction of Tomás Reyes, General Counsel. The investigation was conducted with the assistance of SBF's internal data-analytics team and in coordination with C&H. The investigation's findings are consistent with and corroborative of the Broadleaf findings, as follows:
• The payment-waterfall error in ClearCore was confirmed through a direct comparison of the ClearCore payment-application logic against the waterfall specification set forth in Section 4.03 of the MSA;
• The scope of affected loans was consistent with Broadleaf's estimate of approximately 14,600 loans, or 63.2% of the proposed pool;
• The delinquency and loss-rate discrepancies identified by Broadleaf were confirmed to be representative of the broader portfolio when extrapolated from the sample to the full population of affected loans; and
• SBF's own quarterly reconciliation process was determined to have been insufficient to detect the waterfall error, as it relied on aggregate rather than loan-level data reconciliation.
Clearview's preliminary response, received on April 24, 2024, acknowledged the system-migration issue but carefully qualified its acceptance of responsibility. Clearview acknowledged that the ClearCore migration introduced a change in the payment-application waterfall for SBF receivables and that the resulting servicing data may have contained discrepancies from what would have been produced under the contractual waterfall. However, Clearview did not accept responsibility for all resulting consequences, and its response suggested potential reliance on defenses relating to SBF's own data-reconciliation obligations under the MSA. A more detailed analysis of Clearview's potential defenses is addressed in Section VIII.A below and in the separate C&H internal litigation memorandum dated April 30, 2024 (Appendix B).
V. Analysis of Alternatives to Termination
C&H has evaluated three principal alternatives available to the Board in responding to the current situation. Each alternative is analyzed below in terms of feasibility, cost, timeline, and risk profile.
A. Option 1: Full Remediation and Re-Launch
Under this option, SBF would undertake a comprehensive remediation of the servicing data, reconstitute the receivables pool, and re-launch the Transaction with a new Preliminary OM, refreshed due diligence, new credit ratings, and a new investor roadshow.
Estimated Timeline. Based on Halcyon's assessment and C&H's independent evaluation, a full remediation and re-launch would require a minimum of eight to twelve weeks from the date on which corrective action commences. This estimate is based on the following sequential steps:
• Weeks 1–3: Clearview re-tapes all affected servicing records using the correct contractual payment-application waterfall; SBF performs loan-level validation of corrected data.
• Weeks 3–5: New cut-off date selected; reconstituted receivables pool assembled; new pool statistics generated.
• Week 5: Broadleaf re-engaged for refreshed due diligence on the reconstituted pool (minimum two-week engagement).
• Weeks 5–7: Broadleaf completes refreshed loan-level re-underwriting.
• Weeks 6–8: Rating agencies re-engaged; corrected data and updated structural analysis submitted; rating-committee process commences.
• Weeks 8–10: New preliminary ratings issued (subject to each agency's internal timeline).
• Weeks 9–11: Revised Preliminary OM prepared, reviewed, and finalized; new investor roadshow scheduled and conducted.
• Weeks 10–12: Pricing and closing.
Additional Estimated Costs. Remediation and re-launch would entail significant additional costs beyond the $1,779,150 in sunk costs already incurred, including:
• Re-engagement of Meridian and Carrollton (new or supplemental rating fees, estimated at $100,000–$185,000 per agency);
• Additional Broadleaf due diligence fees (estimated at $150,000–$200,000);
• Supplemental Rowland & Cross work (completion of AUP and revised comfort letter, estimated at $100,000–$137,500);
• Additional C&H fees for revised documentation, disclosure review, and re-launch support (estimated at $200,000–$350,000);
• Additional Donnovan Press fees for revised Preliminary OM printing and distribution (estimated at $25,000–$35,000);
• Additional roadshow and marketing expenses.
Risk Assessment. Beyond cost and timeline, a remediation and re-launch carries several material risks:
• Market Risk: An eight-to-twelve-week delay would push the Transaction into the third quarter of 2024, a period characterized by significant macroeconomic uncertainty, potential Federal Reserve rate actions, and seasonal illiquidity in consumer ABS markets. The favorable pricing environment that existed in April 2024 may not persist.
• Underwriter Risk: There is no assurance that Halcyon would agree to resume its underwriting mandate following a remediation. Halcyon's force-majeure notice and its counsel's reservation-of-rights communications suggest that Halcyon may elect to terminate its engagement, requiring SBF to identify and engage a new lead underwriter (see Option 2 below).
• Investor Reception Risk: Disclosure of the prior data issues to the 28 investors who received the Preliminary OM, and to any new investors approached during a re-launch, would be required. There is a material risk that the disclosure of a significant data-integrity failure would adversely affect investor appetite and pricing, potentially resulting in wider spreads, reduced demand, or both.
• Execution Uncertainty: The cumulative effect of the above risks means that there is no assurance that a remediated Transaction would ultimately close, even after the expenditure of substantial additional time and resources.
Assessment: C&H does not recommend Option 1 under current circumstances. The combination of significant incremental cost, extended timeline, execution risk, and potential market deterioration does not justify continued pursuit of the Transaction. However, as noted in Section XI below, SBF's ability to pursue a future securitization — once the servicing-data issues are fully remediated and market confidence is restored — is preserved by a termination of the current Transaction.
B. Option 2: Seek Alternative Underwriter
Under this option, SBF would seek to engage an alternative lead underwriter to replace Halcyon and proceed with a modified version of the Transaction.
Feasibility. This option would require SBF to identify and engage a new lead underwriter willing to assume the Transaction notwithstanding the data-integrity history. C&H's assessment is that any potential replacement underwriter would require, at a minimum:
• Full disclosure of the servicing-data discrepancy and its root cause;
• Independent verification that the data issues have been fully remediated;
• A fresh due diligence engagement, potentially with a new due diligence provider;
• A new underwriting agreement and, likely, renegotiated pricing terms reflecting the perceived incremental risk; and
• Engagement of its own outside counsel for transaction review.
Timeline. The timeline for Option 2 would exceed that of Option 1 by a substantial margin. In addition to the eight-to-twelve-week remediation period, SBF would need to allocate additional time for underwriter identification, engagement negotiations, new counsel engagement, and the new underwriter's own internal credit and risk-committee processes. A realistic estimate would be sixteen to twenty-four weeks or more from the present date.
Reputational Considerations. The circumstances surrounding the Transaction termination and the underlying data issues would become known within the structured-finance market, as such information is generally disseminated among market participants through informal channels. This awareness could affect both the willingness of alternative underwriters to engage and the pricing terms they would demand.
Assessment: Option 2 is not viable in the near term. The extended timeline, uncertain outcome, and reputational considerations render this option impractical as a response to the current situation.
C. Option 3: Terminate the Transaction (Recommended)
Under this option, which C&H recommends, the Board would authorize the immediate formal termination of the Transaction, including termination of the PPA with Halcyon, notification to all service providers, and commencement of post-termination wind-down procedures.
Benefits. Termination of the Transaction under current circumstances provides the following benefits:
• Cost Containment: Immediate termination limits the accrual of additional transaction costs. Each week of continued pursuit of the Transaction generates additional legal, advisory, and administrative costs with no assurance of a successful outcome.
• Indemnification Recovery: Termination allows SBF to focus its resources on pursuit of indemnification claims against Clearview under the MSA, seeking recovery of sunk transaction costs and related damages (see Section VIII.A below).
• Securities-Law Risk Mitigation: Termination, coupled with proactive notification to the 28 roadshow investors, substantially mitigates the securities-law exposure arising from the distribution of the Preliminary OM containing materially inaccurate data (see Section VI below).
• Future Optionality: Termination of the current Transaction does not preclude SBF from pursuing a future securitization once the servicing-data issues are fully remediated, Clearview's systems are validated, and SBF has established a credible track record of corrected data. Indeed, a clean termination with proactive investor notification may better position SBF for a future issuance than a prolonged and ultimately unsuccessful attempt to salvage the current Transaction.
• Reputational Management: A prompt and transparent termination, accompanied by a clear explanation of the data issue and SBF's remedial actions, is more likely to preserve SBF's reputation in the structured-finance market than an extended period of uncertainty.
PPA Provisions. Termination by the issuer is permitted under the terms of the PPA, subject to the expense-reimbursement obligation set forth in Section 7(b) of the PPA ($387,500, as discussed in Section VII below). No break-up fee provision exists in the PPA.
Assessment: C&H recommends Option 3 — termination of the Transaction — as the most prudent course of action. The Board is requested to authorize termination effective May 8, 2024, as set forth in Section IX below.
VI. Securities-Law Exposure Analysis
A. Overview
As noted throughout this memorandum, the Preliminary Offering Memorandum dated April 5, 2024, containing materially inaccurate static-pool performance data, was distributed to 28 institutional investors during the investor roadshow conducted from April 15 through April 19, 2024. Although no securities were sold in connection with the Transaction — the Transaction was in its pre-pricing phase at the time the servicing-data discrepancy was discovered — the distribution of the Preliminary OM containing materially inaccurate data raises potential liability issues under federal securities law that require careful analysis and proactive mitigation.
C&H has prepared a detailed Securities-Law Exposure Memorandum dated May 2, 2024, which is referenced as Appendix C to this memorandum. The following discussion summarizes the key elements of that analysis.
B. Applicable Statutory Provisions
The following federal securities-law provisions are potentially relevant to the current situation:
Rule 10b-5 under the Securities Exchange Act of 1934. Rule 10b-5 prohibits, in connection with the purchase or sale of any security, the making of any untrue statement of a material fact or the omission of a material fact necessary to make the statements made not misleading. A private right of action under Rule 10b-5 requires, among other elements, a showing of scienter — that is, an intent to deceive, manipulate, or defraud, or severe recklessness. The applicability of Rule 10b-5 to the present circumstances must be assessed in light of the "in connection with the purchase or sale" requirement. Because no securities were actually purchased or sold, the availability of a private Rule 10b-5 claim by any of the 28 roadshow investors is uncertain, as standing under Rule 10b-5 generally requires that the plaintiff be a purchaser or seller of securities (Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). However, an SEC enforcement action under Rule 10b-5 is not subject to the purchaser-seller standing requirement. Moreover, the scienter element would be difficult for any plaintiff or enforcement authority to establish given that SBF did not have actual knowledge of the data error at the time the Preliminary OM was distributed; the error originated with Clearview's system migration and was not detected by SBF's existing reconciliation procedures.
Section 12(a)(2) of the Securities Act. Section 12(a)(2) provides a cause of action for material misstatements or omissions in a "prospectus or oral communication" made in connection with an offering of securities, available to any person who purchases a security from the offeror. The remedy under Section 12(a)(2) is rescission — return of the purchase price — which necessarily requires that a sale have occurred. Since no securities were actually sold in connection with the Transaction, Section 12(a)(2) exposure is substantially limited. However, the provision has been interpreted by some courts to apply to preliminary offering documents distributed in connection with an offering that is later abandoned, particularly where the documents were used to solicit investment interest. C&H's assessment is that this risk is low but not zero, and warrants monitoring.
Section 17(a) of the Securities Act. Section 17(a) is a broader anti-fraud provision that prohibits fraud in the "offer or sale" of securities. Unlike Rule 10b-5, Section 17(a)(2) and (3) do not require scienter and can be established through a showing of negligence. Importantly, Section 17(a) applies to "offers" as well as sales, meaning that the distribution of the Preliminary OM during the roadshow could potentially constitute an "offer" triggering Section 17(a). There is no private right of action under Section 17(a); however, the SEC may bring enforcement actions under this provision. The absence of scienter on SBF's part is a mitigating factor, but the negligence standard applicable to certain subsections of Section 17(a) requires analysis of whether SBF's failure to detect the data error through its quarterly reconciliation process could be characterized as negligent.
C. Mitigating Factors
Several significant mitigating factors reduce SBF's overall securities-law exposure:
• Private Placement Structure: The offering was structured as a Rule 144A / Regulation S private placement under Section 4(a)(2) of the Securities Act, limiting the universe of offerees to qualified institutional buyers ("QIBs") as defined in Rule 144A and non-U.S. persons as defined in Regulation S. These are sophisticated institutional investors with substantial experience in evaluating structured-finance products. The limited investor universe and the sophistication of the offerees significantly reduce the risk of claims.
• Preliminary Nature of the OM: The Preliminary OM was clearly and prominently marked as "preliminary" and "subject to completion, correction, and amendment." Standard disclaimers were included stating that the information contained therein was subject to change and that the Preliminary OM did not constitute an offer to sell or a solicitation of an offer to buy. These disclaimers, while not dispositive, are relevant to any analysis of reasonable reliance.
• No Sale or Commitment: No securities were sold, no investor committed capital, and no investor suffered any monetary loss as a result of the data discrepancy. The absence of actual economic harm substantially reduces both the incentive for private litigation and the magnitude of any potential enforcement action.
• Pre-Pricing discovery: The discrepancy was identified and disclosed prior to pricing, which means that the Transaction was terminated before any securities were issued. This fact distinguishes the current situation from cases involving post-issuance discovery of data errors, where investor losses have already occurred.
• Absence of Scienter: SBF did not have actual knowledge of the data error at the time the Preliminary OM was distributed. The error originated with Clearview's ClearCore system migration, and Clearview's incorrect servicing data was transmitted to SBF and incorporated into the Preliminary OM without SBF's awareness of the inaccuracy. While SBF's quarterly reconciliation process may be subject to criticism for its failure to detect the error, C&H's preliminary assessment is that this failure falls short of the severe recklessness required to establish scienter for Rule 10b-5 purposes.
D. Recommended Remediation Steps
Notwithstanding the mitigating factors described above, C&H recommends the following proactive remediation steps to further reduce securities-law exposure:
1. Formal Investor Notification. C&H will prepare and deliver, on behalf of SBF, a formal written notification to all 28 institutional investors who received the Preliminary OM during the April 15–19 roadshow. The notification will inform investors of the servicing-data discrepancy, describe its nature and magnitude, disclose that the Transaction has been terminated, and request that investors return or destroy all copies of the Preliminary OM in their possession. This proactive notification demonstrates good faith and transparency, and is consistent with best practices for managing data-integrity issues in the structured-finance market.
2. Document Preservation. SBF must implement a comprehensive litigation hold requiring the preservation and retention of all communications with investors, rating agencies, Clearview, Halcyon, and other Transaction parties, as well as all drafts, work papers, servicing data, loan tapes, Broadleaf due diligence reports, and rating-agency correspondence. The litigation hold should cover all SBF personnel involved in the Transaction as well as all relevant electronic and physical repositories. C&H will provide a detailed litigation-hold memorandum to SBF for immediate implementation.
3. Evaluation of Proactive SEC Engagement. C&H will continue to evaluate whether proactive engagement with SEC staff — either through the Division of Corporation Finance or the Division of Enforcement — is advisable under the circumstances. A proactive approach may be warranted if there is any indication that the SEC has become aware of the data discrepancy through other channels (e.g., rating-agency notifications, investor inquiries, or Halcyon's regulatory obligations). This evaluation will be conducted on an ongoing basis and will be the subject of a supplemental memorandum to the Board if circumstances warrant.
VII. Financial Exposure: Sunk Transaction Costs
A. Itemized Cost Reconciliation
The following table sets forth the estimated total sunk transaction costs incurred in connection with the Transaction through the date of this memorandum: