PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, New York 10017
April 23, 2024
MEMORANDUM
TO:
Skybridge Fintech Ltd. 1400 Market Street, Suite 1210 Wilmington, Delaware 19801
Attention: Tomás Reyes, General Counsel
Danielle Prescott, Chief Financial Officer Arun Mehta, Chief Executive Officer & Co-Founder
FROM:
Theodore Langston, Partner Linda Osei, Partner Patrick Gallagher, Associate
Calderwood & Harkness LLP
RE:
SkyLend Receivables Trust 2024-1 — Material Servicing-Data Discrepancy Identified by Broadleaf Analytics Group LLC
Matter No.: 1009-00005
Halcyon Deal Reference: HLC-ABS-2024-017
I. Executive Summary
The purpose of this memorandum is to alert Skybridge Fintech Ltd. ("SBF") leadership to a material servicing-data discrepancy discovered on April 22, 2024, by Broadleaf Analytics Group LLC ("Broadleaf") during independent loan-level re-underwriting of the receivables pool proposed for the $200,000,000 securitization through SkyLend Receivables Trust 2024-1 (the "Trust" or "SRT 2024-1"). This memorandum has been prepared on an expedited basis in light of the urgency of the matter and the need for immediate coordinated action across multiple workstreams.
Broadleaf was engaged by Halcyon Securities LLC ("Halcyon"), the sole bookrunning manager and initial purchaser for the proposed offering, on March 25, 2024, to perform independent loan-level due diligence on a stratified random sample of 1,500 loans drawn from the proposed pool. This sample represents approximately 6.5% of the proposed pool of approximately 23,100 loans. Broadleaf commenced its loan-tape sampling and re-underwriting process on April 10, 2024.
During the course of its re-underwriting, Broadleaf identified that the monthly servicing tapes provided by Clearview Loan Servicing, Inc. ("Clearview"), the third-party servicer under Servicing Account No. CLS-SBF-2022-0041, contain material misstatements of delinquency and loss performance data. Specifically, Broadleaf determined that reported 30+ days past due delinquency as of the March 31, 2024 cut-off date was 3.21%, whereas the actual figure, when payments are applied in accordance with the contractual waterfall, is 5.47% — a discrepancy of 2.26 percentage points representing a 70.4% relative increase. Similarly, cumulative net losses for the 2022 origination vintage were reported at 4.12%, whereas the actual figure is 6.89% — a discrepancy of 2.77 percentage points representing a 67.2% relative increase. Approximately 14,600 loans, or 63.2% of the proposed pool, are affected by the error.
The discrepancy stems from an error in Clearview's payment-application waterfall logic introduced during a software platform migration in June 2023, when Clearview transitioned from its legacy "LoanTrax" servicing system to its new "ClearCore" platform. Under the contractual waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022 (the "MSA"), partial payments are to be applied in the order of interest, then fees, then principal. Following the ClearCore migration, partial payments were instead applied in the reverse order — principal first, then interest, then fees — causing delinquency flags to be delayed and loss severity calculations to be understated.
The incorrect data was incorporated into the static-pool performance tables in the Preliminary Offering Memorandum dated April 5, 2024 (the "Preliminary OM"), which was distributed to 28 institutional investors during the investor roadshow conducted from April 15 through April 19, 2024. No securities have been sold and the offering has not been priced.
Calderwood & Harkness LLP ("C&H") was notified of the Broadleaf findings on the morning of April 23, 2024, via a telephone call and follow-up email from Rebecca Thornton, Managing Director at Halcyon, and Harrison Whitfield III, Partner at Whitfield, Drummond & Paige LLP ("WDP"), underwriter's counsel, to Theodore Langston and Patrick Gallagher at C&H. Tomás Reyes was copied on the email communication.
This memorandum summarizes the Broadleaf findings, analyzes the preliminary root cause, assesses the potential impact on the transaction across multiple dimensions — including the offering, the rating-agency process, credit-enhancement adequacy, the underwriter relationship, and potential securities-law exposure — and sets forth immediate action items that SBF should undertake as a matter of urgency. As discussed more fully in Section VI below, these action items include data preservation, formal engagement with Clearview, coordination of notification obligations, initiation of an internal investigation, and a comprehensive assessment of the transaction's status.
II. Background
A. Transaction Overview
SkyLend Receivables Trust 2024-1 is a proposed securitization structured as a Rule 144A / Regulation S private placement of asset-backed notes secured by a pool of unsecured consumer installment-loan receivables originated by Skybridge Fintech Ltd. through the SkyLend digital lending platform. The aggregate deal value is $200,000,000, representing SBF's inaugural term securitization and a foundational element of SBF's capital-markets strategy for 2024 and beyond.
The capital structure of the proposed offering is as follows:
The Subordinated Certificate is to be retained by SBF through SkyLend Funding LLC as an economic residual interest and to satisfy applicable risk-retention requirements.
The key transaction parties and their roles are as follows:
Issuing Entity: SkyLend Receivables Trust 2024-1, a Delaware statutory trust formed on February 14, 2024 (Employer Identification Number: 93-4201855). The Trust was established pursuant to a trust agreement with Keymark Trust Company, N.A. as owner trustee.
Depositor: SkyLend Funding LLC, a Delaware limited liability company formed on January 30, 2024 (Employer Identification Number: 93-4187620). SkyLend Funding LLC is wholly owned by Skybridge Fintech Ltd. and is managed by Danielle Prescott in her capacity as the designated manager of the entity. SkyLend Funding LLC serves as the intermediary through which the receivables are transferred to the Trust, establishing the true-sale chain necessary for bankruptcy-remoteness.
Owner Trustee: Keymark Trust Company, N.A. Elaine Marchetti serves as the designated Trust Officer for this engagement.
Indenture Trustee / Paying Agent / Custodian: Atlantic Fiduciary Services, Inc. ("AFS"). David Moynihan, Corporate Trust Officer, is the primary contact at AFS for this transaction.
Lead Underwriter / Initial Purchaser: Halcyon Securities LLC. Jonathan Kramer, Head of ABS Origination, oversees the engagement at the institutional level, while Rebecca Thornton, Managing Director, serves as the day-to-day deal lead responsible for syndication, investor communication, and due-diligence oversight.
Underwriter's Counsel: Whitfield, Drummond & Paige LLP. Harrison Whitfield III, partner, and Priya Subramanian, associate, serve as counsel to Halcyon in connection with the offering.
Third-Party Servicer: Clearview Loan Servicing, Inc. Warren Pettigrew serves as Chief Executive Officer, and Meredith Sloane, Vice President of Operations, is the designated deal contact.
Rating Agencies: Meridian Credit Ratings, Inc. (Gregory Fontaine, lead analyst) serves as the primary rating agency. Carrollton Ratings Group LLC (Teresa Kobayashi, lead analyst) serves as the secondary rating agency. Rating-agency engagement letters for both agencies were executed on February 28, 2024.
Independent Auditor: Rowland & Cross LLP. Nathan Delacroix serves as the engagement partner and is responsible for the agreed-upon procedures report and comfort letter.
CUSIP Prefix: 87165Q. The CUSIP prefix has been allocated by CUSIP Global Services but remains unused pending pricing.
Issuer's Counsel: Calderwood & Harkness LLP. Theodore Langston (Capital Markets), Linda Osei (Litigation), and Patrick Gallagher (associate) serve as counsel to SBF and the Trust in connection with the offering.
B. The Receivables Pool
The receivables pool proposed for the securitization consists of unsecured consumer installment-loan receivables originated through SBF's SkyLend platform. The pool is defined with reference to a cut-off date of March 31, 2024, and has the following key characteristics:
• Loan Count: Approximately 23,100 loans.
• Aggregate Outstanding Principal Balance: Approximately $213,750,000 (gross, before application of credit and eligibility screening criteria). The final pool is targeted at $200,000,000 following the application of eligibility criteria and removal of ineligible receivables.
• 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 pool balance ($300,000).
• Geographic Concentration Limit: No single state may represent more than 20% of the aggregate pool balance.
• Overcollateralization Target: 3.5% of the initial note balance ($7,000,000).
• Reserve Account: 1.00% of the initial note balance ($2,000,000), to be funded on the closing date.
• Estimated Excess Spread: 2.85% per annum.
• Expected Weighted Average Life: 2.1 years (Class A Notes); 3.4 years (Class B Notes).
The pool is intended to represent a diversified cross-section of SBF's SkyLend origination portfolio, with loans drawn from multiple origination vintages (primarily Q4 2022 through Q1 2024), FICO bands, geographic regions, and loan-balance tiers. The eligibility criteria, as set forth in Section 2.05 of the Sale and Servicing Agreement, include requirements related to loan seasoning, payment status, borrower location, and compliance with applicable consumer-lending laws.
C. Clearview Loan Servicing Relationship
SBF's relationship with Clearview as a third-party loan servicer is governed by the Master Servicing Agreement dated October 1, 2022, between Skybridge Fintech Ltd. and Clearview Loan Servicing, Inc. (the "MSA"). Clearview has serviced SBF's securitized and warehouse loan portfolios since the third quarter of 2022. As of December 31, 2023, Clearview had approximately $640 million in SBF receivables under management, encompassing both the warehouse facility portfolio and any previously securitized pools.
The servicing fee payable to Clearview under the MSA is 0.50% per annum of the outstanding pool balance, calculated and paid monthly. Based on the initial pool balance of $200,000,000, the estimated first-year servicing fee for the Trust pool would be approximately $1,000,000.
In connection with the proposed securitization, SBF and Clearview executed Amendment No. 1 to the MSA on March 18, 2024. This amendment adapted Clearview's servicing obligations to the specific requirements of the Trust structure and confirmed, among other things, the contractual payment-application waterfall to be applied to borrower payments received with respect to the Trust receivables. Specifically, Section 4.03 of the MSA, as confirmed by Amendment No. 1, specifies the following order of application for all borrower payments: first, to accrued and unpaid interest; second, to fees (including late charges and other borrower-borne fees); and third, to outstanding principal balance. This waterfall is a critical element of the servicing arrangement, as it directly affects the calculation of delinquency status, loss severity, and cash-flow distribution to noteholders.
The MSA also contains data-accuracy representations by Clearview (Section 5.01), quarterly reporting obligations (Section 6.01), and an indemnification provision (Section 9.02), each of which is relevant to the present discrepancy and is discussed further below.
D. Broadleaf Analytics Engagement
Broadleaf Analytics Group LLC ("Broadleaf"), an independent third-party due-diligence firm, was engaged by Halcyon Securities LLC on March 25, 2024, to perform independent loan-level due diligence and re-underwriting on the receivables pool proposed for inclusion in the Trust. Broadleaf's principal office is located at 110 William Street, 14th Floor, New York, New York 10038. Sanjay Rajan, Managing Director, leads the Broadleaf engagement.
The scope of Broadleaf's engagement encompasses the re-underwriting of 1,500 loans selected via stratified random sample from the proposed pool of approximately 23,100 loans, representing approximately 6.5% of the pool by loan count (1,500 ÷ 23,100 ≈ 6.5%). The sample was designed to be representative of the pool across multiple dimensions, including origination vintage, FICO band at origination, geographic region, and loan-balance tier. Broadleaf commenced its loan-tape sampling on April 10, 2024. The engagement is consistent with standard market practice for ABS due diligence, whereby the underwriter retains an independent firm to verify the accuracy of origination and servicing data prior to pricing.
E. Transaction Timeline Leading to discovery
The following timeline sets forth the key events leading to the discovery of the servicing-data discrepancy:
• April 5, 2024: The Preliminary Offering Memorandum was finalized and distributed to Halcyon for use in the marketing process. The Preliminary OM contains static-pool performance tables (Appendix C) presenting historical delinquency and loss data for SBF's SkyLend origination vintages, derived from the monthly servicing tapes provided by Clearview.
• April 8, 2024: Rating-agency presentations were delivered to Meridian Credit Ratings, Inc. (Gregory Fontaine, lead analyst) and Carrollton Ratings Group LLC (Teresa Kobayashi, lead analyst). The presentations included legal and structural overview slides prepared by C&H, cash-flow modeling assumptions prepared by Halcyon, and pool performance data — including the static-pool tables — based on the Clearview servicing data. Both agencies issued preliminary rating indications on the basis of this data.
• April 10, 2024: Broadleaf commenced its loan-tape sampling and re-underwriting process, beginning with the extraction and normalization of individual loan-level payment records from Clearview's ClearCore platform.
• April 15–19, 2024: The investor roadshow was conducted. The Preliminary OM, together with the investor presentation incorporating the static-pool performance data, was distributed to 28 institutional investors. Meetings and calls were held with prospective investors during this period.
• April 22, 2024: Broadleaf identified the servicing-data discrepancy during the course of its re-underwriting. Broadleaf notified Halcyon's deal team (Rebecca Thornton, Managing Director) and delivered a preliminary written summary of its findings to Halcyon on the same date. Sanjay Rajan, Managing Director of Broadleaf, authored the summary.
• April 23, 2024: Halcyon notified SBF of the Broadleaf findings. This notification was communicated via a telephone call and follow-up email from Rebecca Thornton (Halcyon) and Harrison Whitfield III (WDP) to Theodore Langston and Patrick Gallagher at C&H, with a copy to Tomás Reyes.
III. Summary of Broadleaf Findings
A. Nature of the Discrepancy
Broadleaf's re-underwriting of its 1,500-loan stratified random sample identified that the monthly servicing tapes provided by Clearview to SBF, Halcyon, and the rating agencies reported delinquency, default, and loss data using a payment-application waterfall that differs materially from the contractual waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022, as confirmed by Amendment No. 1 dated March 18, 2024.
Specifically, Clearview applied partial payments received from borrowers to principal before interest, rather than in the contractually mandated order of interest → fees → principal. This reversal in application priority had a cascading effect on the calculation of delinquency status and loss metrics. Because partial payments were being credited first to principal reduction, the outstanding principal balance of partially paying borrowers was reduced prematurely, which in turn caused the interest component of those accounts to remain partially or fully unpaid without triggering the appropriate delinquency flags. The net effect was that borrower accounts that were in fact delinquent on their interest and fee obligations appeared current or less delinquent than they actually were under the contractual payment-application methodology.
This misapplication caused two principal categories of misstatement:
(a) Delinquency Understatement: Reported delinquencies appeared systematically lower than actual delinquencies. Accounts that should have been classified as 30+, 60+, or 90+ days past due under the contractual waterfall were instead classified as current or in a lesser delinquency bucket.
(b) Loss Understatement: Reported cumulative net losses appeared lower than actual cumulative net losses. Because the premature principal reduction delayed the recognition of default and reduced the apparent loss severity upon charge-off, the aggregate loss figures reported in the servicing tapes were materially understated.
B. Quantification of Discrepancy — Delinquency
The magnitude of the delinquency discrepancy as of the March 31, 2024 cut-off date is as follows:
30+ Days Past Due (DPD) as of Cut-Off Date (March 31, 2024):
A 2.26-percentage-point absolute discrepancy, representing a 70.4% relative increase in the reported delinquency rate, is material by any standard measure applicable to asset-backed securities. For context, rating-agency sensitivity analyses for consumer ABS transactions of this type typically model delinquency stress scenarios in the range of 1.5x to 2.0x the base case. The actual delinquency rate of 5.47% exceeds even the reported figure stressed at 1.5x (which would be 4.82%). This discrepancy therefore has direct and significant implications for the sufficiency of credit enhancement, the validity of the cash-flow modeling, and the appropriateness of the preliminary rating indications.
C. Quantification of Discrepancy — Cumulative Net Losses
The magnitude of the cumulative net loss discrepancy for the 2022 origination vintage static pool is as follows:
Cumulative Net Losses for 2022 Origination Vintage Static Pool:
The 2022 origination vintage is the most seasoned vintage in the proposed pool and serves as the primary benchmark for projected lifetime loss performance. The 2.77-percentage-point absolute discrepancy, representing a 67.2% relative increase, fundamentally alters the loss-curve trajectory that underpins the transaction's structural assumptions. The static-pool loss table for the 2022 vintage was prominently featured in both the Preliminary OM (Appendix C, Table C-3) and the rating-agency presentations.
D. Scope of Affected Loans
The payment-waterfall error affected approximately 14,600 loans in the proposed pool, representing 63.2% of the total pool (14,600 ÷ 23,100 ≈ 63.2%). The reason the error did not affect all loans in the pool is that the ClearCore misapplication is triggered only when a partial payment is received. Loans where borrowers consistently paid the full scheduled monthly payment amount — or where no partial payment was processed during the affected period — were not impacted by the reversed waterfall logic. Nonetheless, the proportion of affected loans is substantial, spanning a majority of the pool and cutting across all origination vintages, FICO bands, and geographic regions represented in the sample.
It should be noted that the 63.2% figure represents the proportion of loans in the pool where at least one partial payment was processed through the incorrect ClearCore waterfall during the period from June 2023 (the date of the platform migration) through the March 31, 2024 cut-off date. This is a preliminary estimate based on Broadleaf's sample extrapolation; a full-pool remediation by Clearview will be necessary to determine the precise scope.
E. Broadleaf's Methodology
Broadleaf selected its 1,500-loan sample via a stratified random sampling methodology designed to ensure representativeness across multiple pool dimensions, including origination vintage, FICO band at origination, geographic region, and loan-balance tier. The stratification framework was consistent with standard market practice for ABS due-diligence engagements and was reviewed by Halcyon's deal team prior to implementation.
For each sampled loan, Broadleaf undertook the following analytical steps:
(a) Extracted the individual loan-level payment history from Clearview's ClearCore servicing platform, including all payment postings, adjustments, and reversals from origination through the March 31, 2024 cut-off date.
(b) Compared the Clearview servicing tape entries for each loan against the individual loan-level payment records to verify consistency.
(c) Independently reapplied all borrower payments using the contractual waterfall specified in Section 4.03 of the MSA (interest → fees → principal) and recalculated the delinquency status, outstanding principal balance, and loss metrics for each loan as of the cut-off date.
(d) Compared the recalculated metrics against the Clearview-reported metrics to identify and quantify discrepancies at the individual loan level.
(e) Aggregated the loan-level discrepancies to produce pool-level delinquency and loss statistics based on the corrected payment-application methodology.
The discrepancy identified by Broadleaf was statistically significant and consistent across all strata of the sample, indicating a systemic error in Clearview's payment-application logic rather than an isolated data-entry or processing error affecting a limited subset of accounts. The consistency of the discrepancy across strata strongly suggests that the root cause is a global configuration error in the ClearCore platform, as discussed further in Section IV below.
Broadleaf reported its findings to Halcyon's deal team on April 22, 2024. Sanjay Rajan, Managing Director of Broadleaf, delivered a preliminary written summary of the findings to Rebecca Thornton at Halcyon on the same date, with a follow-up call to discuss the implications and next steps. We understand that Broadleaf's full due-diligence report, incorporating the discrepancy findings and a complete re-underwriting analysis, is in preparation and is expected to be finalized within approximately one week.
IV. Root Cause Analysis (Preliminary)
A. Clearview ClearCore Platform Migration
Based on the information available to us as of the date of this memorandum — including the Broadleaf preliminary summary, SBF's internal records regarding the Clearview servicing relationship, and the communications from Halcyon and WDP — the root cause of the servicing-data discrepancy appears to be an error in the payment-application waterfall logic introduced during Clearview's migration from its legacy loan-servicing platform to a new platform.
Specifically, in June 2023, Clearview undertook a migration of its loan-servicing operations from its legacy system, known internally as "LoanTrax," to a new, proprietary servicing platform called "ClearCore." The LoanTrax system had been in use at Clearview for a number of years and, based on the Broadleaf analysis, correctly applied partial payments in the contractually mandated order: interest first, then fees, then principal.
Following the migration to ClearCore, partial payments were erroneously applied in the reverse order: principal first, then interest, then fees. This reversal appears to have been introduced as a configuration error during the platform migration — either through an incorrect mapping of the waterfall logic from LoanTrax to ClearCore, or through a default configuration setting in the ClearCore platform that was not overridden to reflect the contractual requirements of the SBF servicing arrangement.
The practical effect of this reversal was significant. When a borrower remitted a partial payment — i.e., a payment that was less than the full scheduled monthly installment — the ClearCore system applied the payment first to reduce the outstanding principal balance, rather than first to satisfy accrued and unpaid interest. This premature principal reduction had several cascading consequences:
(a) The outstanding principal balance of partially paying borrowers was reduced more quickly than it should have been, creating a misleading impression of amortization performance.
(b) The interest component of those accounts remained partially or fully unpaid, but because the principal balance had been credited, the account was not flagged as delinquent (or was flagged at a lower delinquency bucket) under the ClearCore system's reporting logic.
(c) Upon eventual default and charge-off, the loss severity calculated by ClearCore was lower than the true economic loss, because the outstanding principal balance at the time of charge-off had been artificially reduced by the premature principal application.
The net effect was a systematic understatement of both delinquency rates and cumulative net losses across the SBF portfolio — precisely the pattern identified by Broadleaf in its re-underwriting analysis.
B. Failure of Post-Migration Validation
A critical contributing factor in the perpetuation of this error was the apparent failure of Clearview's post-migration validation process to detect the waterfall misconfiguration. Standard industry practice for a servicing-platform migration of this nature would include, at a minimum, parallel processing of a representative sample of accounts on both the old and new systems for a sufficient period to verify that the new system produces results consistent with the legacy system, and a detailed reconciliation of payment-application logic against the contractual waterfall provisions of each servicing agreement.
Based on the information available to us, it appears that Clearview's post-migration validation process did not include a full reconciliation of the ClearCore payment-application logic against the contractual waterfall specified in Section 4.03 of the MSA. Whether this omission resulted from an inadequate validation protocol, a failure to execute an otherwise adequate protocol, or an affirmative decision to abbreviate or truncate the validation process is not yet known. This question is among those that SBF should address in its formal demand to Clearview, as discussed in Section VI.B below.
The error went undetected from June 2023 through April 2024 — a period of approximately ten months. During this period, Clearview generated and delivered monthly servicing tapes to SBF that incorporated the incorrect payment-application methodology. These tapes formed the basis for SBF's internal risk-management reporting, board-level portfolio performance updates, and — critically — the static-pool performance data included in the Preliminary OM and the rating-agency presentations for the SRT 2024-1 transaction.
C. Failure of SBF's Quarterly Data Reconciliation
We note that SBF itself bears certain obligations under the MSA with respect to the verification of Clearview's servicing data. Specifically, the MSA contemplates that SBF will perform quarterly data reconciliation of Clearview's servicing reports against SBF's origination records and internal data sources. This obligation is set forth in Section 6.03 of the MSA and is intended to provide an additional layer of quality assurance over the servicing data.
Based on our preliminary understanding, SBF's quarterly data-reconciliation process focused primarily on aggregate-level metrics — including total outstanding principal balance, total loan count, aggregate collections, and high-level delinquency bucket distributions — but did not independently verify the correctness of the payment-application waterfall logic at the individual loan level. In other words, SBF's reconciliation procedures were designed to catch discrepancies in totals and counts, but not to detect a systemic error in the methodology by which individual payments were being applied to individual loan accounts.
This potential gap in SBF's own internal controls is significant for at least two reasons:
(a) Indemnification Proceedings Against Clearview: In any indemnification proceeding under Section 9.02 of the MSA, Clearview may assert a contributory-negligence defense, arguing that SBF's failure to detect the error through its own quarterly reconciliation process contributed to the scope and duration of the harm. While we believe such a defense has significant weaknesses — most notably, the MSA places primary responsibility for data accuracy on Clearview, and the payment-waterfall error is a servicing-level configuration issue that SBF could not reasonably have been expected to detect through aggregate-level reconciliation — SBF should be aware of this potential line of defense and should preserve all records relating to its reconciliation procedures for use in any future proceedings.
(b) Representations to Rating Agencies and Investors: To the extent that SBF made representations (whether express or implied) to the rating agencies and investors regarding the reliability and accuracy of the static-pool performance data, SBF's own failure to detect the error may be relevant to the assessment of SBF's state of mind and the degree of diligence exercised. We address this further in Section V.E below.
We emphasize that the root-cause analysis set forth in this section is preliminary and based on the information available as of the date of this memorandum. A more definitive analysis will require, at a minimum, Clearview's formal response to SBF's written demand (see Section VI.B), a detailed review of Clearview's migration documentation and validation protocols, and potentially a forensic examination of the ClearCore platform configuration.
V. Impact on the Transaction
A. Preliminary Offering Memorandum
The Preliminary Offering Memorandum dated April 5, 2024, contains static-pool performance tables (Appendix C) that are based directly on the incorrect Clearview servicing data. These tables present historical delinquency and loss data for SBF's SkyLend origination vintages, broken down by vintage quarter, and are a central component of the disclosure provided to prospective investors in connection with the offering. The tables were prepared by SBF's analytics team using data extracted from Clearview's monthly servicing tapes and were included in the Preliminary OM following review by C&H, Halcyon, WDP, and both rating agencies.
As a result of the Clearview error, the static-pool tables in the Preliminary OM show, among other things, 30+ DPD at 3.21% and 2022-vintage cumulative net losses at 4.12% — both of which are materially understated relative to the actual figures of 5.47% and 6.89%, respectively. These understated figures appear throughout the Preliminary OM, including in the "Risk Factors" section, the "Static-Pool Performance" section, and the cash-flow modeling assumptions set forth in the appendices.
The Preliminary OM was distributed to 28 institutional investors during the April 15–19, 2024 roadshow. Halcyon has provided us with a distribution list, which we understand includes major institutional asset managers, insurance companies, and other qualified institutional buyers. As noted above, no securities have been sold and the offering has not been priced. The significance of this timing is discussed further in Section V.E below.
The Preliminary OM cannot be used for pricing or any further marketing activity until the static-pool data has been corrected and the affected sections of the document have been revised. Depending on the outcome of the remediation process and the decision regarding whether to proceed with the transaction, a supplemented Preliminary OM or a new Preliminary OM incorporating corrected data would need to be prepared and distributed.
B. Rating-Agency Presentations
The rating-agency presentations delivered to Meridian Credit Ratings, Inc. (Gregory Fontaine, lead analyst) and Carrollton Ratings Group LLC (Teresa Kobayashi, lead analyst) on April 8, 2024, included the same incorrect performance data that appears in the Preliminary OM. Both agencies received comprehensive analytical packages that incorporated the static-pool tables, the cash-flow modeling assumptions derived from the Clearview data, and the credit-enhancement structure calibrated to the reported (incorrect) loss and delinquency experience.
On the basis of the data and analysis presented on April 8, both agencies issued preliminary rating indications for the Class A and Class B Notes. Meridian indicated expected ratings of Aaa(sf) for the Class A Notes and A2(sf) for the Class B Notes. Carrollton indicated expected ratings of AA+(sf) for the Class A Notes and A(sf) for the Class B Notes. These preliminary indications were referenced in the Preliminary OM and in investor communications during the roadshow.
The disclosure to the rating agencies that the underlying performance data was materially incorrect will necessitate a re-evaluation by both agencies. The potential outcomes include:
(a) Downward revision of expected ratings, reflecting the higher-than-reported delinquency and loss experience of the pool. Depending on the magnitude of the revision, the expected ratings could be reduced by one or more notches, which would affect both investor demand and the economics of the offering (i.e., the coupon rates that the market would require).
(b) Withdrawal of preliminary ratings, if either agency determines that the corrected data fundamentally alters its view of the credit quality of the pool or the adequacy of the credit-enhancement structure.
(c) A request by either or both agencies for additional information, corrected data, revised cash-flow models, and/or enhanced credit enhancement before confirming or revising the preliminary ratings.
Any of these outcomes would have a significant impact on the timeline and economics of the transaction, as discussed further in Section VI.E below.
C. Credit Enhancement Adequacy
The transaction's credit-enhancement structure was designed to provide noteholders with protection against expected and stressed levels of pool losses and delinquency. The key credit-enhancement features are:
(a) Overcollateralization: A target overcollateralization level of 3.5% of the initial note balance, or $7,000,000, representing the excess of the pool's aggregate outstanding principal balance over the aggregate principal amount of the Class A and Class B Notes.
(b) Reserve Account: A reserve account funded on the closing date in an amount equal to 1.00% of the initial note balance, or $2,000,000, to be maintained by the Indenture Trustee and available to cover shortfalls in interest or principal payments to the noteholders.
(c) Excess Spread: An estimated excess spread of 2.85% per annum, representing the difference between the weighted average coupon on the pool receivables (14.82%) and the aggregate cost of the Notes (weighted average coupon plus servicing fees, trustee fees, and other transaction expenses).
(d) Subordination: The Class B Notes provide credit support to the Class A Notes through structural subordination. The Subordinated Certificate / Residual Interest, retained by SBF through SkyLend Funding LLC, provides first-loss protection to both the Class A and Class B Notes.
All of these credit-enhancement features were calibrated to the reported (incorrect) delinquency and loss experience of the pool. With actual delinquency at 5.47% (rather than the reported 3.21%) and actual cumulative net losses at 6.89% (rather than the reported 4.12%), the adequacy of the existing credit-enhancement levels is in serious question. The overcollateralization target of 3.5% and the reserve account of 1.00%, which total 4.5% of the initial note balance ($9,000,000), may be insufficient to absorb the higher levels of losses implied by the corrected data, particularly under stress scenarios.
The cash-flow models and stress scenarios set forth in the Preliminary OM and provided to the rating agencies must be re-run using the corrected delinquency and loss data. It is likely that enhanced credit enhancement — in the form of higher overcollateralization, a larger reserve account, or a restructured capital stack with greater subordination — would be required to achieve the same expected ratings under the corrected data. This in turn would reduce the proceeds available to SBF from the offering and could affect the economic viability of the transaction.
D. Underwriter Response
As of the date of this memorandum, Halcyon Securities has not yet formally suspended marketing of the offering, nor has it invoked any termination right under the Preliminary Purchase Agreement (the "PPA"). However, verbal communications from Rebecca Thornton, Managing Director at Halcyon, indicate that Halcyon is actively considering its options and has paused all investor outreach pending resolution of the data issue. Halcyon has also indicated that it may require a significantly enhanced due-diligence process, including a larger re-underwriting sample and a full-pool data remediation by Clearview, before it would be willing to resume marketing.
The PPA contains a material-change / force-majeure termination provision that would permit Halcyon to terminate its commitment to purchase the Notes upon the occurrence of, among other things, a material adverse change in the condition of the receivables pool, a material inaccuracy in any representation or warranty made by SBF or the Depositor, or the discovery of information that, in Halcyon's reasonable judgment, renders the Preliminary OM materially misleading. It is our preliminary assessment that the servicing-data discrepancy would likely constitute a trigger event under one or more of these provisions, and that Halcyon would be within its contractual rights to terminate the PPA if it elected to do so.
In the event of termination, Section 7(b) of the PPA provides for reimbursement of Halcyon's out-of-pocket expenses, including legal fees, due-diligence costs, travel, and other deal-related expenditures. The estimated expense reimbursement under Section 7(b) is $387,500. This obligation would be triggered upon termination by SBF or upon termination by Halcyon for cause.
We understand from the communications received from Rebecca Thornton and Harrison Whitfield III that Halcyon is not at this time seeking to terminate the transaction, but rather is reserving its rights while awaiting SBF's response and a detailed remediation plan. Halcyon has indicated informally that if the data can be corrected and the transaction restructured, it would be willing to consider proceeding on a revised timeline. However, Halcyon has also made clear that its continued participation is contingent on (i) a full and satisfactory data remediation by Clearview, (ii) a refreshed rating-agency process with corrected data, (iii) preparation and distribution of a supplemented or re-issued Preliminary OM, and (iv) SBF's full cooperation and transparency throughout the process.
E. Potential Securities-Law Implications (Preliminary)
Although the offering is structured as a Rule 144A / Regulation S private placement under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and no securities have been sold or committed for purchase by any investor, the distribution of the Preliminary OM containing materially incorrect static-pool data to 28 institutional investors during the April 15–19, 2024 roadshow raises potential legal exposure that must be carefully evaluated. We set forth below a preliminary overview of the relevant legal provisions; a more detailed securities-law exposure analysis will be provided in a separate memorandum, as discussed in Section VII below.
Rule 10b-5 under the Securities Exchange Act of 1934. Rule 10b-5 makes it unlawful, in connection with the purchase or sale of any security, to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. While no purchase or sale of the Notes has occurred, the distribution of the Preliminary OM to prospective investors in connection with a pending offering may constitute activity "in connection with" the purchase or sale of a security. The static-pool performance data contained in the Preliminary OM is plainly material to an investor's decision whether to purchase the Notes. If the incorrect data were left uncorrected and the offering were to proceed, the risk of Rule 10b-5 liability would be substantial. Even in the current posture — where the error has been discovered before pricing and before any investor commitment — the fact that materially incorrect information was disseminated creates a heightened obligation to correct the record promptly.
Section 17(a) of the Securities Act. Section 17(a) prohibits fraudulent practices in connection with the offer or sale of securities. Unlike Rule 10b-5, Section 17(a)(2) does not require scienter; negligent conduct is sufficient to establish liability. The distribution of the Preliminary OM containing incorrect data may constitute an "offer" of the Notes for purposes of Section 17(a), even though no sale has occurred.
Section 12(a)(2) of the Securities Act. Section 12(a)(2) provides a cause of action for purchasers of securities offered by means of a prospectus or oral communication that contains a material misstatement or omission. The applicability of Section 12(a)(2) in the Rule 144A context is limited and has been the subject of divergent judicial authority, particularly in light of the Supreme Court's decision in Gustafson v. Alloyd Co., 513 U.S. 561 (1995), which restricted the term "prospectus" to public offerings. We will address this question in greater detail in the forthcoming securities-law exposure memorandum.
It is important to note — and this is a significant mitigating factor — that the offering was in the pre-pricing stage at the time the discrepancy was discovered, and no Notes have been sold. No investor has made a binding commitment to purchase Notes, and no investor has suffered an actual financial loss as a result of the incorrect data. This posture substantially reduces the risk of private civil liability under the securities laws, although it does not eliminate the risk entirely, particularly with respect to potential SEC enforcement interest or reputational harm. Prompt and comprehensive corrective action — including notification to affected investors and correction of the Preliminary OM — will be essential to mitigating any residual exposure.
VI. Immediate Action Items
In light of the foregoing, we recommend that SBF undertake the following action items immediately. Each of these items is urgent and should be commenced no later than April 24, 2024.
A. Data Preservation
Preservation of all relevant data and communications is the threshold obligation in any matter that may give rise to litigation, regulatory inquiry, or indemnification proceedings. SBF should take the following steps immediately:
1. SBF Internal Records. SBF should immediately institute a litigation hold — also referred to as a legal hold or document preservation notice — on all data, documents, communications (including emails, text messages, instant messages, and voicemails), and records relating to the following subjects:
(i) The Clearview servicing relationship, including the Master Servicing Agreement, Amendment No. 1, all monthly servicing tapes received from Clearview, all correspondence with Clearview, and all internal SBF analyses or reports based on Clearview data.
(ii) The ClearCore platform migration, including any communications between SBF and Clearview regarding the migration, any notifications received from Clearview regarding the transition, and any internal SBF assessments of the migration's potential impact on servicing data quality.
(iii) SBF's quarterly data-reconciliation processes, including all reconciliation workpapers, procedures documentation, and internal communications regarding reconciliation results or exceptions.
(iv) The receivables pool for SkyLend Receivables Trust 2024-1, including all pool-selection criteria, eligibility screening records, and data used in the preparation of the Preliminary OM and the rating-agency presentations.
The litigation hold should be communicated to all relevant SBF personnel, including but not limited to the analytics/data team, the finance team, the legal team, and any personnel involved in the Clearview relationship or the SRT 2024-1 transaction. C&H is prepared to assist in drafting and issuing the litigation-hold notice.
2. Clearview Data. SBF should promptly send a formal data-preservation notice to Clearview Loan Servicing, Inc. (attention: Meredith Sloane, Vice President of Operations, and Warren Pettigrew, Chief Executive Officer) demanding that Clearview preserve all records relating to the LoanTrax-to-ClearCore migration, including but not limited to migration planning documents, configuration specifications, validation testing protocols and results, parallel-processing logs, payment-application waterfall configuration files (for both LoanTrax and ClearCore), and all internal and external communications regarding the migration. C&H will prepare this notice for SBF's review and issuance.
3. Broadleaf Work Papers. SBF should request, through Halcyon and/or directly, that Broadleaf Analytics Group LLC preserve its complete re-underwriting work papers, sample-selection methodology documentation, loan-level analysis files, and all communications with Halcyon regarding the discrepancy findings. While Broadleaf is engaged by Halcyon (not SBF), it is in all parties' interest to ensure complete preservation. We will coordinate with WDP regarding Halcyon's willingness to direct Broadleaf accordingly.
B. Engagement with Clearview Loan Servicing
SBF's relationship with Clearview is governed by the MSA, and the discrepancy at issue represents a potential breach of Clearview's obligations thereunder. The following steps should be taken promptly:
1. Demand for Explanation. C&H will prepare a formal written demand to Clearview Loan Servicing, Inc. (Warren Pettigrew, Chief Executive Officer, and Meredith Sloane, Vice President of Operations; address: 8800 Brecksville Road, Suite 300, Cleveland, Ohio 44141), requesting a detailed written explanation of the following matters:
(a) The precise cause of the payment-waterfall error in the ClearCore platform, including the specific configuration, coding, or mapping error that resulted in the reversal of the waterfall sequence.
(b) The scope of the error — specifically, whether the payment-waterfall error affects only the proposed SRT 2024-1 securitization pool, or whether it extends to the entire $640 million of SBF receivables under Clearview management (and, if so, whether it extends to receivables serviced by Clearview for other clients).
(c) The post-migration validation procedures that were conducted following the LoanTrax-to-ClearCore transition, including a description of the validation protocol, the scope and duration of parallel-processing (if any), and the reasons why the waterfall error was not detected during validation.
(d) Clearview's proposed timeline for remediation, including the reprocessing of all affected accounts using the correct contractual waterfall and the provision of corrected servicing tapes for all affected periods (June 2023 through March 2024).
2. Indemnification Notice. C&H will prepare a formal indemnification notice for delivery to Clearview under Section 9.02 of the MSA, notifying Clearview that SBF intends to assert indemnification claims for all losses, costs, expenses, and damages arising from Clearview's breach of its data-accuracy representations under Section 5.01 of the MSA and its servicing obligations under Section 4.03 of the MSA. The notice will reserve all of SBF's rights under the MSA without limitation.
3. Assessment of Broader Portfolio Impact. In addition to the SRT 2024-1 pool, SBF must determine whether the payment-waterfall error affects the entire $640 million of SBF receivables under Clearview management, including receivables held in SBF's warehouse facility and any other portfolios. If the error is systemic across the ClearCore platform, the implications extend well beyond the current transaction and may affect SBF's warehouse-facility compliance, internal risk-management reporting, and board-level financial reporting.
C. Notification Obligations
The discrepancy triggers a series of notification obligations — some contractual, some regulatory, and some prudential — that must be coordinated carefully to protect SBF's interests while fulfilling SBF's legal and ethical obligations. Each notification must be drafted with care to avoid unnecessary admissions or characterizations that could prejudice SBF's position in future proceedings.
1. Halcyon Securities. C&H will prepare a formal written response to Halcyon Securities LLC (and WDP as underwriter's counsel) acknowledging the discrepancy and outlining the corrective steps that SBF is undertaking. This response must be coordinated carefully to provide sufficient transparency to maintain Halcyon's confidence and engagement while avoiding admissions or characterizations that could be used against SBF in the event that Halcyon invokes its termination rights or seeks damages. The target date for delivery of this response is April 28, 2024.
2. Rating Agencies. SBF should notify both Meridian Credit Ratings, Inc. (Gregory Fontaine, lead analyst) and Carrollton Ratings Group LLC (Teresa Kobayashi, lead analyst) that the static-pool performance data provided in the April 8, 2024 rating-agency presentations contained errors attributable to a third-party servicer data issue, and that corrected data will be supplied once Clearview completes its remediation. The timing and messaging of this notification should be coordinated with Halcyon and WDP to ensure consistency and to avoid any appearance of selective or delayed disclosure.
3. Investors. The question of whether and when to notify the 28 institutional investors who received the Preliminary OM during the April 15–19, 2024 roadshow requires careful analysis. On one hand, investors received materially incorrect performance data, and a failure to correct the record promptly could give rise to liability exposure. On the other hand, the offering has not been priced, no Notes have been sold, and the Preliminary OM by its terms is subject to revision. We will address the investor-notification question more fully in the forthcoming securities-law exposure memorandum targeted for May 2, 2024.
4. Board and Pinnacle. SBF should brief Marcus Yoon (Pinnacle Capital Partners board representative) and Catherine Drexler (Pinnacle Managing Partner) on the servicing-data discrepancy and its potential impact on the transaction timeline, costs, and SBF's market reputation. This briefing should be conducted orally and followed up with a written summary prepared or reviewed by C&H to ensure appropriate privilege protections. The briefing should cover the nature and scope of the discrepancy, the potential range of outcomes for the transaction, the estimated cost exposure (see Section VI.E below), and the steps being taken to address the situation.
D. Internal Investigation
SBF should immediately convene an internal investigation team to conduct a thorough review of SBF's own role in the matters giving rise to the discrepancy. The investigation team should be led by Tomás Reyes (General Counsel) and should include Danielle Prescott (CFO) and SBF's data/analytics lead. C&H is available to supervise the investigation as outside counsel to ensure that the investigation is conducted under privilege to the greatest extent possible. The investigation should encompass the following:
1. Quarterly Data-Reconciliation Procedures. A comprehensive review of SBF's quarterly data-reconciliation procedures to determine (i) the scope and methodology of the reconciliation process as actually performed (as opposed to the process as contemplated by the MSA), (ii) the specific reconciliation steps and checks conducted during each quarterly cycle from Q3 2022 through Q1 2024, (iii) the reasons why the payment-waterfall error was not detected through SBF's reconciliation process, and (iv) any recommendations for enhancement of the reconciliation procedures going forward.
2. Reliability of Other Clearview-Derived Data. An assessment of the reliability of all other data and metrics derived from Clearview servicing tapes that are currently in use for SBF's internal risk management, board reporting, investor communications, warehouse-facility covenant compliance, and any other regulatory or contractual purposes. If the payment-waterfall error extends beyond the SRT 2024-1 pool, the implications for SBF's reported portfolio performance, risk metrics, and financial statements could be significant and may require disclosure to SBF's warehouse lender, board of directors, and auditors.
3. Documentation of Findings. All findings of the internal investigation should be documented in a memorandum prepared under the supervision of C&H and addressed to SBF's General Counsel, to preserve attorney-client privilege and work-product protection. The documented findings will be essential in any future indemnification proceedings against Clearview, as they will establish the scope of SBF's own diligence and the reasonableness of SBF's reliance on Clearview's servicing data.
E. Transaction-Status Assessment
A comprehensive assessment of the transaction's status and the available paths forward should be undertaken promptly and presented to SBF's leadership and board of directors for decision.
1. Halcyon Engagement. SBF should evaluate, in consultation with C&H and in dialogue with Halcyon, whether the transaction can proceed on a revised timeline incorporating corrected data, a refreshed rating-agency analysis, and a supplemented or re-issued Offering Memorandum, or whether termination of the transaction is the more prudent course of action. The key factors to be weighed include:
(a) The feasibility and timeline for a full data remediation by Clearview.
(b) The expected outcome of the refreshed rating-agency process — including the risk of materially lower ratings or rating withdrawal.
(c) The potential need for enhanced credit enhancement, and the impact on deal economics.
(d) The willingness of Halcyon to continue its engagement and to re-market the offering.
(e) Market conditions, including the general ABS market environment and investor appetite for consumer-loan ABS.
(f) Reputational considerations, including the potential impact on SBF's ability to access the capital markets in future transactions.
2. Estimated Remediation Timeline. Halcyon has indicated informally that a full data remediation and refreshed rating-agency process would require approximately 8 to 12 weeks from the date that corrected servicing data is received from Clearview. This estimate assumes that Clearview can provide corrected data within 3 to 4 weeks, followed by a Broadleaf verification process of 2 to 3 weeks and a rating-agency re-evaluation process of 3 to 5 weeks. This timeline must be weighed against market conditions, the cost of delay, and the reputational considerations noted above.
3. Cost Exposure. SBF should begin compiling a comprehensive accounting of sunk transaction costs to date for board-level reporting and for potential inclusion in any indemnification claim against Clearview. Based on information available to us as of the date of this memorandum, the key cost items are as follows:
These figures are preliminary estimates and may be revised as additional cost information becomes available. The total estimated sunk costs of approximately $1.78 million represent a significant financial exposure for SBF, a substantial portion of which may be recoverable through an indemnification claim against Clearview, subject to the terms of the MSA and the analysis discussed in Section VII below.
F. Privilege and Confidentiality Considerations
Given the sensitivity of the matters discussed in this memorandum and the potential for litigation, regulatory inquiry, and third-party claims, strict adherence to privilege and confidentiality protocols is essential.
1. All communications relating to the servicing-data discrepancy and its legal implications should be channeled through Calderwood & Harkness LLP to preserve attorney-client privilege and work-product protection to the fullest extent possible. SBF personnel should not engage in substantive written or oral communications with Clearview, Halcyon, the rating agencies, investors, or any other third party regarding the discrepancy except as specifically coordinated through C&H and Tomás Reyes.
2. SBF personnel should be instructed that internal discussions and analyses regarding the discrepancy and its implications should be conducted under the supervision of, or at the direction of, C&H and/or Tomás Reyes, and should be clearly marked as privileged and confidential attorney-client communications when reduced to writing.