CALDERWOOD & HARKNESS LLP Attorneys at Law
601 Lexington Avenue New York, New York 10022
Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
September 12, 2022
Andrew Petrosian, Lead Analyst Brindoval Ratings Inc. 55 Water Street New York, New York 10041
Re: Engagement No. CR-SF-2022-08812
Monica Sung, Lead Analyst Pinnacle Rating Services LLC 7 World Trade Center New York, New York 10007
Re: Engagement No. PRS-2022-ABS-3347
Re: Quorum Receivables Funding 2022-1 LLC — $500,000,000 Insurance Premium Finance Asset-Backed Notes — Confirmation of Conditions to Preliminary Ratings
Dear Mr. Petrosian and Ms. Sung:
We write on behalf of our client, Quorum Insurance Holdings Corp. ("QIH"), a Delaware corporation (NYSE: QIHC), headquartered at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901, in connection with the proposed issuance by Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer"), a Delaware limited liability company and bankruptcy-remote special purpose entity, of asset-backed notes in an aggregate principal amount of $500,000,000 (the "Notes," and together with the related transactions described herein, the "Transaction"). The Notes will be offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and Regulation S under the Securities Act. Ridgeline Capital Markets LLC ("Ridgeline") is serving as structuring agent and lead bookrunner for the Transaction, and Calvoneth Trust Company, N.A. ("Calvoneth Trust" or the "Trustee") is serving as indenture trustee under the Indenture (as defined below).
The purpose of this letter is to confirm, on behalf of QIH and the Issuer, the satisfaction of the conditions identified by each of Brindoval Ratings Inc. ("Brindoval") and Pinnacle Rating Services LLC ("Pinnacle," and together with Brindoval, the "Rating Agencies") as prerequisites to their respective preliminary ratings of the Notes, and to formally request written confirmation from each Rating Agency that such conditions have been met and that the preliminary ratings remain in effect. This letter should be read in conjunction with the materials previously furnished to each of you, including the rating agency presentations delivered on August 8, 2022, the draft transaction documentation, and the collateral data files provided by the sponsor and verified by the third-party verification agent.
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the draft Offering Memorandum, dated September 2, 2022 (the "Offering Memorandum"), or in the draft Indenture, as applicable.
1. Background — Transaction Overview
The Transaction involves the securitization of insurance premium finance receivables (the "Receivables") originated by Quorum Premium Finance LLC ("QPF"), a Delaware limited liability company and wholly owned subsidiary of QIH. QPF originates premium finance loans to commercial policyholders across all 50 states, financing the payment of insurance premiums on a short-term basis. The Receivables are secured by the policyholders' unearned premium refund rights under the related insurance policies.
The Transaction employs a two-tier special purpose entity structure as follows:
(a) Originator to Depositor. QPF, as originator and initial servicer, will sell or contribute the Receivables to Quorum Receivables Holding LLC ("QRH"), a Delaware limited liability company organized as an intermediate bankruptcy-remote special purpose entity serving as the depositor for the Transaction. The transfer from QPF to QRH is intended to constitute a "true sale" for bankruptcy purposes.
(b) Depositor to Issuer. QRH, as depositor, will transfer the Receivables to QRF 2022-1, the Issuer, in exchange for the Notes and the Overcollateralization Interest (as defined below). The transfer from QRH to QRF 2022-1 is likewise intended to constitute a "true sale" for bankruptcy purposes.
(c) Issuance of Notes. QRF 2022-1 will issue the Notes pursuant to an Indenture (the "Indenture") between QRF 2022-1 and Calvoneth Trust, as indenture trustee, and will grant to Calvoneth Trust, for the benefit of the Noteholders, a first-priority perfected security interest in all of the assets of QRF 2022-1, including the Receivables, the Collection Account, and all related property.
The capital structure of the Transaction is as follows:
The Transaction features a revolving period of 24 months from the closing date (the "Revolving Period"), during which collections on the Receivables (net of required distributions on the Notes and other obligations) may be used by the Issuer to acquire additional eligible Receivables from QPF (through QRH). Following the expiration of the Revolving Period (or, if earlier, the occurrence of an Early Amortization Event), the Transaction will enter a controlled amortization period of 12 months (the "Amortization Period"), during which principal collections will be applied to the repayment of the Notes in accordance with the sequential payment waterfall described in Section 3 below. The legal final maturity date of all classes of Notes is 42 months from the closing date.
The Indenture and the other principal transaction documents will be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of laws principles (other than Section 5-1401 of the New York General Obligations Law).
As you are aware, preliminary rating agency presentations were delivered to each of Brindoval and Pinnacle on August 8, 2022. Following the Rating Agencies' respective reviews, preliminary ratings were assigned as follows: Brindoval issued its preliminary ratings on August 22, 2022, and Pinnacle issued its preliminary ratings on August 29, 2022. In each case, the preliminary ratings were subject to the satisfaction of certain enumerated conditions, which are addressed in detail in the succeeding sections of this letter.
2. Preliminary Ratings Received
As noted above, each Rating Agency has assigned preliminary ratings to the Notes. The preliminary ratings assigned to each class of Notes are summarized in the following table:
Preliminary CUSIP numbers have been assigned to the Notes as placeholders pending finalization prior to closing, as follows:
• Class A Notes: 74892TAA3
• Class B Notes: 74892TAB1
• Class C Notes: 74892TAC9
These CUSIP numbers are subject to finalization by the CUSIP Service Bureau in coordination with Ridgeline and the Trustee prior to the closing date and will be confirmed in the final Offering Memorandum supplement.
We acknowledge that the preliminary ratings assigned by each Rating Agency were expressly conditioned upon the satisfaction of certain enumerated conditions, including, without limitation, conditions relating to credit enhancement levels, collateral pool characteristics, eligible receivables criteria, concentration limits, early amortization triggers, bankruptcy remoteness and SPV structural requirements, security interest perfection, back-up servicing arrangements, liquidity support, performance guaranty provisions, risk retention compliance, and the delivery of legal opinions and other closing deliverables. The balance of this letter addresses each of these conditions in detail.
3. Confirmation of Satisfaction of Conditions — Credit Enhancement
We confirm that the credit enhancement levels provided by the Transaction structure meet or exceed the requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings.
Total Credit Enhancement by Class. The total credit enhancement available to each class of Notes is as follows:
(a) Class A Notes — Total Credit Enhancement: 25.0%. The Class A Notes benefit from credit enhancement in the aggregate amount of $125,000,000, comprising (i) subordination of the Class B Notes in the amount of $75,000,000 (15.0% of total issuance), (ii) subordination of the Class C Notes in the amount of $35,000,000 (7.0% of total issuance), and (iii) an overcollateralization amount of $15,000,000 (3.0% of total issuance), which serves as a first-loss position protecting the rated Notes.
(b) Class B Notes — Total Credit Enhancement: 10.0%. The Class B Notes benefit from credit enhancement in the aggregate amount of $50,000,000, comprising (i) subordination of the Class C Notes in the amount of $35,000,000 (7.0% of total issuance) and (ii) the overcollateralization amount of $15,000,000 (3.0% of total issuance).
(c) Class C Notes — Total Credit Enhancement: 3.0%. The Class C Notes benefit from credit enhancement provided solely by the overcollateralization amount of $15,000,000 (3.0% of total issuance).
Overcollateralization Amount. The overcollateralization amount of $15,000,000 represents the excess of the aggregate pool balance over the aggregate outstanding principal amount of the Notes and will be maintained as a first-loss position throughout the life of the Transaction. During the Revolving Period, the overcollateralization amount will be maintained at a target level equal to not less than 3.0% of the aggregate outstanding principal amount of the Notes. If the overcollateralization amount falls below this target level as a result of realized losses on the Receivables, excess collections (after payment of all higher-priority items in the payment waterfall) will be applied to replenish the overcollateralization amount to the required target level, as described below.
Sequential Payment Waterfall. Principal payments on the Notes will be made on a sequential basis, in order of seniority, with all amounts due on the Class A Notes being paid in full before any principal payments are made on the Class B Notes, and all amounts due on the Class B Notes being paid in full before any principal payments are made on the Class C Notes. The full payment waterfall under the Indenture, as reflected in the execution draft currently in preparation, provides for the application of Available Funds on each Payment Date in the following order of priority:
(1) Payment of the Trustee's fees, expenses, and indemnity amounts (including fees of the Trustee's counsel) due and payable on such Payment Date, subject to the Trustee Fee Cap;
(2) Payment of the Servicing Fee due and payable to QPF (or any successor servicer) on such Payment Date, at a rate of 1.00% per annum on the outstanding pool balance;
(3) Payment of accrued and unpaid interest on the Class A Notes;
(4) Payment of accrued and unpaid interest on the Class B Notes;
(5) Payment of accrued and unpaid interest on the Class C Notes;
(6) During the Amortization Period (or following the occurrence of an Early Amortization Event), payment of principal on the Class A Notes until the Class A Notes are paid in full;
(7) During the Amortization Period (or following the occurrence of an Early Amortization Event), payment of principal on the Class B Notes until the Class B Notes are paid in full (but only after the Class A Notes have been paid in full);
(8) During the Amortization Period (or following the occurrence of an Early Amortization Event), payment of principal on the Class C Notes until the Class C Notes are paid in full (but only after the Class A Notes and Class B Notes have been paid in full);
(9) Replenishment of the Overcollateralization Amount to the required target level (3.0% of the aggregate outstanding principal amount of the Notes); and
(10) Payment of any remaining amounts to the Issuer or the Issuer's designee (which may include the sponsor or its affiliates), as residual interest holder.
The foregoing credit enhancement levels and payment waterfall provisions are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
4. Confirmation of Satisfaction of Conditions — Collateral Pool Characteristics
We confirm that the collateral pool underlying the Transaction satisfies the pool composition requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings. Set forth below is a summary of the key characteristics of the initial Receivables pool as of the statistical cut-off date of June 30, 2022 (the "Cut-Off Date").
Pool Summary Statistics:
Geographic Concentration. The three states with the largest concentrations of Receivables by outstanding principal balance are as follows:
• Texas: 14.2% of pool
• California: 11.8% of pool
• Florida: 9.6% of pool
• Aggregate of Top Three States: 35.6% of pool
No other individual state exceeds 7.5% of the outstanding pool balance as of the Cut-Off Date.
Third-Party Verification. We note that Veristead Analytics LLC ("Veristead"), an independent third-party verification agent, has been engaged to perform a comprehensive tape reconciliation and stratification of the Receivables pool. The engagement has been led by Katharine Drummond, Managing Director of Veristead. Veristead has completed its review and has confirmed the integrity of the pool data, including the reconciliation of the electronic loan tape provided by QPF against source documentation and the independent stratification of the pool by loan balance, APR, original term, remaining term, geographic location, insurance carrier, and obligor concentration. The findings of Veristead's review are consistent with the pool data presented to the Rating Agencies during the preliminary rating agency presentations on August 8, 2022.
Detailed pool stratification tables, reflecting Veristead's verified data as of the Cut-Off Date, will be included in the Offering Memorandum supplement to be distributed to prospective investors in connection with the investor roadshow.
The foregoing pool characteristics are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
5. Confirmation of Satisfaction of Conditions — Eligible Receivables Criteria
We confirm that all Receivables included in the initial pool as of the Cut-Off Date satisfy the eligible receivables criteria (the "Eligible Receivables Criteria") agreed upon with each Rating Agency as conditions to the assignment of their respective preliminary ratings. The Eligible Receivables Criteria, as reflected in the draft Receivables Purchase Agreement and the draft Indenture, require that each Receivable satisfy all of the following conditions at the time of its inclusion in the pool:
(i) the Receivable was originated by QPF in the ordinary course of QPF's business as a premium finance company, in accordance with QPF's underwriting policies and procedures then in effect;
(ii) the Receivable is denominated and payable in United States dollars;
(iii) the Receivable is secured by the obligor's right to any unearned premium refund from the insurance carrier under the related insurance policy (the "Unearned Premium Refund Right"), and QPF has obtained (or is entitled to obtain upon cancellation of the policy) a first-priority security interest in such Unearned Premium Refund Right;
(iv) the original term of the Receivable does not exceed 12 months from the date of origination;
(v) the obligor under the Receivable is a U.S. commercial policyholder (and not a natural person acting in a consumer capacity);
(vi) the Receivable is not in default, and no scheduled payment under the Receivable is more than 60 days past due as of the date of inclusion in the pool; and
(vii) the Receivable and the related premium finance agreement comply in all material respects with all applicable federal, state, and local laws, including, without limitation, applicable usury laws and premium finance licensing requirements.
In connection with the foregoing, we further confirm that QPF is duly licensed as a premium finance company in all 50 states of the United States and the District of Columbia, and maintains all licenses, permits, and authorizations necessary to originate, service, and collect on the Receivables in each such jurisdiction. QPF's licensing status has been independently confirmed by Calderwood & Harkness as part of our due diligence review, and a schedule of QPF's premium finance licenses by state will be available for review by the Rating Agencies upon request.
During the Revolving Period, the Eligible Receivables Criteria will be applied as conditions to the inclusion of any additional Receivables in the pool, and no new Receivable may be added to the pool unless it satisfies all of the Eligible Receivables Criteria as of the date of its acquisition by QRF 2022-1.
The foregoing Eligible Receivables Criteria are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
6. Confirmation of Satisfaction of Conditions — Concentration Limits
We confirm that the Receivables pool is within all agreed concentration limits (the "Concentration Limits") communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings. The applicable Concentration Limits and the pool's compliance with each such limit as of the Cut-Off Date are as follows:
*The single insurance carrier concentration has been reviewed on a counterparty-by-counterparty basis and confirmed to be within the 15.0% limit. A detailed breakdown of insurance carrier concentrations will be included in the Offering Memorandum supplement.
We further confirm that these Concentration Limits will be maintained as ongoing conditions to the addition of new Receivables to the pool during the 24-month Revolving Period. The Receivables Purchase Agreement and the Indenture will provide that no new Receivable may be added to the pool if such addition would cause any Concentration Limit to be exceeded, and the Trustee will be required to verify compliance with the Concentration Limits on each date on which new Receivables are proposed to be added to the pool. If any Concentration Limit is breached, no further additions to the pool will be permitted until the relevant concentration has been reduced to within the applicable limit.
The foregoing Concentration Limits and the pool's compliance therewith are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
7. Confirmation of Satisfaction of Conditions — Early Amortization Triggers
We confirm that the Indenture (execution draft v4, currently in preparation and expected to be dated on or about October 12, 2022) will include the following early amortization events (each, an "Early Amortization Event"), the occurrence of any of which will cause the Revolving Period to terminate and the Amortization Period to commence:
(a) Net Loss Rate Trigger. The three-month average net loss rate (calculated as the aggregate net losses on the Receivables during the preceding three calendar months, divided by the average pool balance during such period, annualized) exceeds 2.00%.
(b) Delinquency Trigger. The 60+ day delinquency rate (calculated as the aggregate outstanding principal balance of Receivables that are 60 or more days past due, divided by the aggregate outstanding pool balance) exceeds 3.50% as of the last day of any calendar month.
(c) Available Funds Cap Deficit. An Available Funds Cap Deficit (as defined in the Indenture) exists for two consecutive Payment Dates, meaning that the interest collected on the Receivables during the related collection period, together with other Available Funds, is insufficient to pay the aggregate interest due on all classes of Notes on such Payment Date.
(d) Servicer Default or Servicer Rating Downgrade. A Servicer Default (as defined in the Indenture) has occurred and is continuing, or the long-term unsecured debt rating or issuer credit rating of QPF's parent, QIH, has been downgraded below BB(cr) by Brindoval or below Ba2(p) by Pinnacle.
(e) Minimum Pool Balance Trigger. The outstanding aggregate principal balance of the Receivables in the pool falls below the minimum required amount of $450,000,000 at any time during the Revolving Period.
We confirm that the foregoing Early Amortization Events are consistent in all material respects with the early amortization trigger conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings. The specific definitions and calculation methodologies for each Early Amortization Event will be set forth in the Indenture and will be subject to review by each Rating Agency prior to the assignment of final ratings.
Upon the occurrence of an Early Amortization Event, all principal collections on the Receivables will be applied to the repayment of the Notes in accordance with the sequential payment waterfall described in Section 3 above, and no further additions of Receivables to the pool will be permitted.
8. Confirmation of Satisfaction of Conditions — Bankruptcy Remoteness and SPV Structure
We confirm that the Issuer and the depositor have been structured as bankruptcy-remote special purpose entities in accordance with the structural requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings.
Formation and Organizational Details. The following entities have been formed and are in good standing under the laws of the State of Delaware:
(a) QRF 2022-1 (Issuer). Quorum Receivables Funding 2022-1 LLC was formed as a Delaware limited liability company on August 3, 2022, and its Certificate of Formation was filed with the Delaware Secretary of State under File No. 7894231. The sole member of QRF 2022-1 is Quorum Receivables Holding LLC.
(b) QRH (Depositor). Quorum Receivables Holding LLC was formed as a Delaware limited liability company on August 3, 2022, and its Certificate of Formation was filed with the Delaware Secretary of State under File No. 7894228. The sole member of QRH is Quorum Premium Finance LLC.
Bankruptcy Remoteness Features. Each of QRF 2022-1 and QRH has been structured to include the following bankruptcy remoteness features in its limited liability company agreement (each, an "LLC Agreement"):
(i) Independent Managers. Each entity has engaged Fortbridge Corporate Services LLC ("Fortbridge") to provide an independent manager whose affirmative consent is required for any voluntary filing of a bankruptcy, insolvency, reorganization, or similar proceeding. The independent manager for QRF 2022-1 is Timothy R. Callan, and the independent manager for QRH is Eleanor M. Vasquez. Each independent manager satisfies the independence criteria set forth in each Rating Agency's applicable guidelines, including the requirement that such person (A) is not, and has not been during the preceding five years, an employee, officer, director, member, manager, partner, equity holder, or affiliate of the sponsor, the originator, the depositor, or any of their respective affiliates, (B) has no material financial interest in, or business relationship with, any such entity (other than serving as independent manager of SPEs in similar transactions), and (C) has been selected and compensated by Fortbridge in accordance with Fortbridge's standard procedures.
(ii) Separateness Covenants. Each LLC Agreement contains separateness covenants obligating the entity to, among other things, (A) maintain its own books and records separate from those of any other entity, (B) maintain its own bank accounts, (C) conduct its business in its own name and hold itself out to the public as a legal entity separate and apart from any other entity, (D) maintain adequate capitalization in light of its contemplated business purpose, (E) pay its own liabilities and expenses from its own assets, (F) observe all limited liability company formalities, (G) not commingle its assets with those of any other entity, and (H) maintain arm's-length relationships with its affiliates.
(iii) Non-Petition Covenants. Each LLC Agreement and each related transaction document to which QRF 2022-1 or QRH is a party contains a non-petition covenant pursuant to which each party to such document agrees not to institute, or join in instituting, any involuntary bankruptcy, insolvency, reorganization, or similar proceeding against QRF 2022-1 or QRH, as applicable, for a period of one year and one day (or, if longer, the applicable preference period plus one day) after the latest maturing Note has been paid in full.
(iv) Limitations on Activities and Indebtedness. Each LLC Agreement restricts the activities of the entity to those activities that are necessary or incidental to the consummation of the Transaction, and prohibits the entity from incurring any indebtedness other than the Notes (in the case of QRF 2022-1) or as otherwise expressly permitted by the transaction documents.
Registered Agent. The registered agent for each of QRF 2022-1 and QRH in the State of Delaware is Ashgrove Services Inc., 28 Liberty Street, New York, New York 10005.
Legal Opinions — Non-Consolidation and True Sale. Calderwood & Harkness will deliver at closing the following opinions in support of the bankruptcy remoteness of the Transaction structure:
(a) Non-Consolidation Opinions. Calderwood & Harkness will deliver two non-consolidation opinions (one for each of QRF 2022-1 and QRH), opining that, in a properly presented case, a court applying applicable law would not order the substantive consolidation of the assets and liabilities of QRF 2022-1 or QRH, as applicable, with those of any of its affiliates (including QIH, QPF, or the other SPV) in a bankruptcy, insolvency, or similar proceeding. These opinions are currently in draft form and will be finalized prior to closing.
(b) True Sale Opinions. Calderwood & Harkness will deliver two true sale opinions, opining that (i) the transfer of Receivables from QPF to QRH constitutes a true sale of such Receivables and not a mere pledge or secured financing, and (ii) the transfer of Receivables from QRH to QRF 2022-1 likewise constitutes a true sale and not a mere pledge or secured financing. These opinions are currently in draft form and will be finalized prior to closing.
The two-tier SPV structure (originator → depositor → issuer), together with the bankruptcy remoteness features described above, is consistent with the structural requirements communicated by each of Brindoval and Pinnacle as conditions to their respective preliminary ratings.
9. Confirmation of Satisfaction of Conditions — Security Interest Perfection
We confirm that the Transaction will include the following security interest perfection arrangements, consistent with the requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings:
UCC Financing Statements. UCC-1 financing statements will be filed with the Secretary of State of the State of Delaware for each level of transfer in the Transaction, as follows:
(a) A UCC-1 financing statement naming QPF as debtor and QRH as secured party, covering the Receivables sold or contributed by QPF to QRH (filed as a precautionary measure to the extent the transfer from QPF to QRH is recharacterized as a secured financing rather than a true sale);
(b) A UCC-1 financing statement naming QRH as debtor and QRF 2022-1 as secured party, covering the Receivables sold or contributed by QRH to QRF 2022-1 (filed as a precautionary measure to the extent the transfer from QRH to QRF 2022-1 is recharacterized as a secured financing rather than a true sale); and
(c) A UCC-1 financing statement naming QRF 2022-1 as debtor and Calvoneth Trust Company, N.A. as secured party, covering all assets of QRF 2022-1, including the Receivables, all collections thereon, all accounts and deposit accounts maintained by or on behalf of QRF 2022-1, and all proceeds of the foregoing.
Each such UCC-1 financing statement will be filed prior to or simultaneously with the closing of the Transaction, and Calderwood & Harkness will conduct customary lien searches against QPF, QRH, and QRF 2022-1 in Delaware to confirm the absence of prior filings.
Security Interest Perfection Opinion. Calderwood & Harkness will deliver at closing an opinion on the perfection and first-priority status of the security interests granted by QRF 2022-1 to Calvoneth Trust under UCC Article 9, covering the Receivables, collections, and all related property.
Account Control Agreement. QRF 2022-1 and Calvoneth Trust will enter into an Account Control Agreement (the "Account Control Agreement") pursuant to which Calvoneth Trust, acting as securities intermediary, will maintain control (within the meaning of Sections 8-106 and 9-106 of the Uniform Commercial Code) over the following accounts maintained in the name of QRF 2022-1:
(i) the Collection Account, into which all collections on the Receivables will be deposited;
(ii) the Payment Account, from which distributions on the Notes will be made on each Payment Date;
(iii) the Reserve Account, which will hold any required cash reserves; and
(iv) the Liquidity Reserve Account, which will hold proceeds drawn under the Liquidity Facility (described in Section 10 below) pending application in accordance with the payment waterfall.
Calvoneth Trust will have the exclusive right to direct the disposition of funds in each such account in accordance with the Indenture and the Account Control Agreement. The Account Control Agreement will establish that Calvoneth Trust's security interest in the accounts and the financial assets credited thereto has been perfected by control and that such security interest is first in priority.
The foregoing security interest perfection arrangements are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
10. Confirmation of Satisfaction of Conditions — Back-Up Servicing and Liquidity
We confirm that the Transaction will include back-up servicing and liquidity support arrangements consistent with the requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings.
Back-Up Servicing Agreement. QRF 2022-1 (through QIH as administrator) has entered into a Back-Up Servicing Agreement (the "Back-Up Servicing Agreement") with Northvane Bank, N.A. ("Northvane"), a national banking association, pursuant to which Northvane will serve as warm standby back-up servicer for the Receivables. The Back-Up Servicing Agreement has been negotiated under the direction of Diane Coletti, Managing Director at Northvane's structured finance servicing group, and provides for the following:
(a) Annual Fee. Northvane will receive an annual back-up servicing fee of $50,000, payable in equal quarterly installments of $12,500 each, from the Collection Account as an operating expense of the Issuer, senior to distributions on the Notes.
(b) Data Transfer and System Mapping. QPF, as initial servicer, will provide Northvane with periodic data files (at least monthly) in agreed electronic formats, including loan-level data on all Receivables in the pool, collection histories, and delinquency information. Northvane will maintain a shadow servicing system capable of accepting and processing such data files on an ongoing basis, and will perform periodic reconciliation testing to verify the integrity of the data transfer process.
(c) Transition Procedures. Upon the occurrence of a Servicer Default (as defined in the Indenture) and the appointment of a successor servicer, Northvane will assume servicing responsibilities for the Receivables within a period not to exceed 30 business days from the date of its receipt of notice of the succession event. The Back-Up Servicing Agreement sets forth detailed transition procedures, including the transfer of borrower records, collection account information, insurance carrier contact data, and all other information necessary for Northvane to service the Receivables on a going-forward basis.
Liquidity Facility. Northvane has also agreed to provide a liquidity facility (the "Liquidity Facility") in an aggregate commitment amount of $25,000,000, available to QRF 2022-1 to cover temporary shortfalls in collections on the Receivables. The principal terms of the Liquidity Facility are as follows:
(a) Commitment Fee. Northvane will receive a commitment fee of 0.25% per annum on the undrawn portion of the Liquidity Facility, equal to $62,500 per year (assuming no amounts are drawn), payable quarterly from the Collection Account.
(b) Drawn Rate. Amounts drawn under the Liquidity Facility will bear interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 150 basis points per annum, calculated on the basis of actual days elapsed over a 360-day year.
(c) Purpose. The Liquidity Facility is designed to provide short-term liquidity to the Issuer to cover temporary shortfalls in collections that may arise as a result of timing mismatches between the receipt of collections on the Receivables and the payment of amounts due on the Notes and other obligations of the Issuer. Draws on the Liquidity Facility will be repaid from subsequent collections on the Receivables in accordance with the payment waterfall.
Servicer Capability. QPF's capability and experience as servicer of the Receivables is supported by its management of an aggregate total receivables portfolio of approximately $2.1 billion, comprising premium finance receivables originated across all 50 states. QPF has serviced premium finance receivables for over 15 years and maintains a dedicated servicing platform with experienced personnel, robust collection procedures, and established relationships with insurance carriers for the processing of policy cancellations and unearned premium refund claims.
The foregoing back-up servicing and liquidity support arrangements are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
11. Confirmation of Satisfaction of Conditions — Performance Guaranty and Servicing
We confirm that the Transaction will include the following performance guaranty and servicing arrangements, consistent with the requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings.
Performance Guaranty. QIH will execute and deliver at closing a Performance Guaranty (the "Performance Guaranty") in favor of Calvoneth Trust Company, N.A., as indenture trustee for the benefit of the Noteholders, pursuant to which QIH will unconditionally guarantee certain obligations of QPF in its capacities as servicer and seller under the Servicing Agreement and the Receivables Purchase Agreement, respectively. The Performance Guaranty will cover, among other things, QPF's obligation to service the Receivables in accordance with the Servicing Standard (as defined in the Servicing Agreement), QPF's obligation to remit collections to the Collection Account within the time periods specified in the Servicing Agreement, and QPF's indemnification obligations with respect to breaches of representations and warranties regarding the Receivables.
QIH Credit Ratings. QIH's current unsecured credit ratings are as follows:
• Brindoval Ratings Inc.: BBB (stable outlook)
• Pinnacle Rating Services LLC: Baa2 (stable outlook)
These ratings reflect QIH's financial strength and its ability to support the Performance Guaranty.
Servicing Fee. QPF, as initial servicer, will receive a servicing fee equal to 1.00% per annum on the outstanding aggregate principal balance of the Receivables, payable monthly from collections on the Receivables in accordance with the payment waterfall described in Section 3 above. The servicing fee is intended to compensate QPF for its direct and indirect costs of servicing the Receivables, including personnel costs, technology and systems costs, insurance carrier interface costs, and collection and recovery costs.
Administration Agreement. QIH will serve as administrator of QRF 2022-1 under an Administration Agreement (the "Administration Agreement") to be entered into at closing among QIH, QRF 2022-1, and Calvoneth Trust. In its capacity as administrator, QIH will perform certain administrative functions on behalf of QRF 2022-1, including the preparation and filing of tax returns, the maintenance of books and records, the preparation of investor reports, and the coordination of communications with the Rating Agencies, the Trustee, and the Noteholders.
The foregoing performance guaranty and servicing arrangements are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
12. Confirmation of Satisfaction of Conditions — Risk Retention
We confirm that the Transaction has been structured to comply with the risk retention requirements of Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (codified at 15 U.S.C. § 78o-11) and the implementing rules promulgated thereunder (the "Risk Retention Rules").
QIH, as the "sponsor" of the securitization transaction within the meaning of the Risk Retention Rules, will retain a "horizontal risk retention interest" in QRF 2022-1, in accordance with Section __.4 of the Risk Retention Rules. The horizontal risk retention interest will be effected through QIH's retention (through QRH, as its wholly owned subsidiary and depositor) of the overcollateralization / unrated retained interest in QRF 2022-1 in an initial amount of $15,000,000, representing 3.0% of the total issuance amount of the Notes. To the extent additional retention is required to satisfy the minimum 5.0% horizontal interest requirement under the Risk Retention Rules (based on the fair value calculation methodology prescribed therein), QIH will retain additional interests in QRF 2022-1 through the retention of additional eligible horizontal residual interests, the specific form and amount of which will be determined and disclosed in the Offering Memorandum prior to closing.
QIH will not hedge or transfer its risk retention interest for the duration of the risk retention holding period prescribed by the Risk Retention Rules, except as otherwise permitted thereunder. The Offering Memorandum will contain the disclosures required by the Risk Retention Rules regarding the form, amount, and nature of the retained interest.
The foregoing risk retention arrangements are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
13. Confirmation of Satisfaction of Conditions — Legal Opinions and Deliverables
We confirm that the following legal opinions and deliverables will be provided at or prior to the closing of the Transaction, consistent with the requirements communicated by each Rating Agency as conditions to the assignment of their respective preliminary ratings. All opinions listed below are currently in draft form and will be finalized prior to closing.
Calderwood & Harkness Opinions. Calderwood & Harkness LLP will deliver the following opinions at closing:
(a) True Sale Opinions (Two). Opinions that (i) the transfer of Receivables from QPF to QRH constitutes a true sale and not a secured financing, and (ii) the transfer of Receivables from QRH to QRF 2022-1 constitutes a true sale and not a secured financing, in each case under applicable Delaware and New York law.
(b) Non-Consolidation Opinions (Two). Opinions that, in a properly presented case, a court would not order the substantive consolidation of the assets and liabilities of QRF 2022-1 or QRH, as applicable, with those of any of their respective affiliates.
(c) Enforceability Opinion. An opinion that the Indenture and the Notes constitute legal, valid, and binding obligations of QRF 2022-1, enforceable against QRF 2022-1 in accordance with their respective terms, subject to customary qualifications and exceptions (including bankruptcy, insolvency, and similar laws of general applicability affecting creditors' rights and general principles of equity).
(d) Security Interest Perfection Opinion. An opinion that the security interests granted by QRF 2022-1 to Calvoneth Trust under the Indenture in the Receivables, collections, accounts, and related property have been properly perfected under UCC Article 9 and are first in priority (subject to liens that are senior as a matter of law).
(e) Tax Characterization Opinion. An opinion, to be delivered by Sylvia Hartwell, Tax Partner at Calderwood & Harkness, addressing (i) the federal income tax treatment of the Notes as indebtedness for federal income tax purposes and not as equity interests in QRF 2022-1, and (ii) the status of QRF 2022-1 as a disregarded entity for federal income tax purposes under Treasury Regulations Section 301.7701-3.
(f) No Registration Required Opinion. An opinion that the offer and sale of the Notes in accordance with the terms of the Purchase Agreement (as defined in the Offering Memorandum) do not require registration under the Securities Act, based on the exemptions provided by Section 4(a)(2) thereof, Rule 144A, and Regulation S.
(g) Delaware LLC Valid Formation and Authorization Opinions (Two). Opinions that each of QRF 2022-1 and QRH has been duly formed and is validly existing as a limited liability company in good standing under the laws of the State of Delaware, and that each entity has the limited liability company power and authority to execute, deliver, and perform its obligations under the transaction documents to which it is a party.
Auditor Deliverables. Meridian Ledger LLP ("Meridian Ledger"), an independent public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and the independent auditors of QIH, will provide the following deliverables at closing. The engagement is led by Robert Falcone, Engagement Partner at Meridian Ledger:
(a) An agreed-upon procedures letter covering certain financial and statistical data relating to the Receivables pool and the Transaction; and
(b) A comfort letter in customary form addressed to Ridgeline, as structuring agent and lead bookrunner, with respect to certain financial information contained in the Offering Memorandum.
Underwriter's Counsel Opinions. Calloway & Brandt LLP ("Calloway & Brandt"), counsel to Ridgeline Capital Markets LLC, will deliver customary opinions of underwriter's counsel at closing, including a 10b-5 negative assurance letter with respect to the Offering Memorandum. The Calloway & Brandt engagement is led by Harrison Collier, Partner.
The foregoing legal opinions and deliverables are consistent with the conditions communicated by each of Brindoval and Pinnacle as prerequisites to their respective preliminary ratings.
14. Confirmation of Satisfaction of Conditions — Auditor and Verification
As referenced in Sections 4 and 13 above, two independent third-party reviews have been conducted in connection with the Transaction, each of which supports the integrity of the data and financial information provided to the Rating Agencies.
Independent Auditors. Meridian Ledger LLP, a PCAOB-registered independent public accounting firm, serves as the independent auditors of QIH and its consolidated subsidiaries, including QPF. Meridian Ledger has audited QIH's consolidated financial statements for the fiscal years ended December 31, 2019, 2020, and 2021, and has reviewed QIH's interim financial statements for the six months ended June 30, 2022. Meridian Ledger will deliver the agreed-upon procedures letter and comfort letter described in Section 13 above at closing.
Third-Party Verification Agent. Veristead Analytics LLC, under the direction of Katharine Drummond, Managing Director, has completed a comprehensive independent review of the Receivables pool as of the Cut-Off Date. Veristead's review included the following procedures:
(a) Reconciliation of the electronic loan tape provided by QPF against QPF's servicing system records and source documentation for a statistically significant sample of loans;
(b) Independent stratification of the Receivables pool by key characteristics, including loan balance, APR, original term, remaining term, geographic distribution, insurance carrier, and obligor concentration; and
(c) Verification of the accuracy and completeness of the pool-level summary statistics presented to the Rating Agencies during the preliminary rating agency presentations on August 8, 2022.
Veristead's findings are consistent with the pool data presented to the Rating Agencies, and Veristead has confirmed the integrity of the data underlying the Receivables pool. A summary of Veristead's findings will be available for review by the Rating Agencies upon request, and the detailed pool stratification tables based on Veristead's verified data will be included in the Offering Memorandum supplement.
15. Request for Written Confirmation
Based on the foregoing, we respectfully request that each of Brindoval Ratings Inc. and Pinnacle Rating Services LLC provide written confirmation that:
(a) The conditions to their respective preliminary ratings, as communicated to Calderwood & Harkness and to the sponsor in connection with the delivery of such preliminary ratings, have been satisfied based on the information provided in this letter and the materials previously furnished to each Rating Agency;
(b) Their respective preliminary ratings remain in full force and effect as follows:
(c) The written confirmation should be directed to:
Douglas Carmichael, Partner Calderwood & Harkness LLP 601 Lexington Avenue New York, New York 10022
Email: dcarmichael@calderwoodharkness.com
and
Nolan Whitford, General Counsel Quorum Insurance Holdings Corp. 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901
Email: nwhitford@quoruminsurance.com
We acknowledge and understand that the final ratings to be assigned to the Notes will be subject to the receipt of final executed transaction documentation and the satisfaction of all remaining closing conditions, including the delivery of the legal opinions and other deliverables described herein. The written confirmation of the satisfaction of the conditions to the preliminary ratings requested herein is not a request for the assignment of final ratings, which will be requested separately in connection with the closing of the Transaction.
16. Continuing Obligations and Reservations
QIH and QPF will continue to provide any additional information reasonably requested by the Rating Agencies in connection with their ongoing review of the Transaction, including updated pool data, financial information, and draft or executed transaction documentation, as and when available. QIH and QPF recognize that each Rating Agency may require additional information or clarification prior to the assignment of final ratings, and they are committed to responding to any such requests on a timely basis.
We note, however, that the structure and documentation of the Transaction remain subject to finalization, and Calderwood & Harkness and the sponsor expressly reserve the right to make modifications to the Transaction structure, the terms of the Notes, the Indenture, and the other transaction documents prior to closing. Any material changes to the Transaction structure or documentation will be communicated to the Rating Agencies promptly upon determination, and we understand that any such changes may require further review by the Rating Agencies and may affect the preliminary or final ratings.
For planning purposes, we note that the current transaction timeline contemplates the following key milestones:
• Near-final documentation: on or about October 12, 2022
• Investor roadshow: commencing on or about October 24, 2022
• Pricing: targeted for on or about November 7, 2022
• Closing and settlement: targeted for on or about November 14, 2022
These dates are subject to change based on market conditions, documentation progress, and other factors, and we will keep the Rating Agencies apprised of any material changes to the timeline.
17. Contact Information
We request that any questions, requests for additional information, or other communications relating to this letter or the Transaction be directed to the following persons:
Calderwood & Harkness LLP (Issuer's Counsel)
Douglas Carmichael, Partner (Responsible Partner) 601 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4112
Email: dcarmichael@calderwoodharkness.com
Yuki Nakamura, Associate (Lead Associate) 601 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4387
Email: ynakamura@calderwoodharkness.com
Quorum Insurance Holdings Corp. (Sponsor)
Nolan Whitford, General Counsel 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901 Telephone: (203) 967-4450
Email: nwhitford@quoruminsurance.com
Sandra Ling-Hwang, Treasurer 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901 Telephone: (203) 967-4462
Email: slinghwang@quoruminsurance.com