November 18, 2004
Mail Stop 0409
Shabi S. Asghar
President and Co-Chief Executive Officer
ECC Capital Corporation
1833 Alton Parkway
Irvine, CA 92606
Re: ECC Capital Corporation
Amendment No. 1 to Registration Statement on Form S-11
Filed October 29, 2004
Registration No. 333-118253
Dear Mr. Asghar:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Page references below refer to the marked bound copy of the
S-11
you provided to us via mail.
General
1. We have reviewed your supporting materials submitted in
response
to our prior comment number 1 and have the following additional
comments:
* We are unable to confirm, based upon the supporting materials
you
have submitted that single-family residential mortgage market
originations totaled $3.8 trillion and that the 2004 projection
was
$2.5 trillion, as stated in the second sentence of the first full
paragraph on page 5. Please resubmit supporting materials that
are
clearly highlighted to show how this statement is supported.
* In support of your statement in the second paragraph on page 5
that
that the subprime residential mortgage market was $65 billion in
1995, you cite Inside B&C Lending. However, the source you have
provided for this statistic appears to be Mortgage Statistical
Annual. In addition, based upon the legend above the chart in
your
supporting materials, it appears that the number is actually $65
million, not $65 billion.
* We are unable to determine from your supporting materials that
prime mortgage originations declined 33% from the second quarter
of
2003 to the second quarter of 2004. The MBAA report only extends
through the 3rd quarter of 2003. Please advise.
* We are unable to confirm from your supporting materials that
subprime residential mortgage market origination volume increased
over 101%, as stated in the second paragraph on page 5. Please
advise.
2. We have reviewed your response to our prior comments numbered 3
and 4 and your introductory discussion regarding Guide 5. Please
note that although your status as a self advised REIT may affect
whether particular Items of Guide 5 disclosure are applicable, it
is
not determinative of whether Guide 5 applies as a whole. In
addition, we note your reliance on language from Release No. 34-
18161
as evidence that neither you nor any of your sponsors or their
affiliates have ever sponsored a "program" for which prior
performance disclosure could be provided. However, while you
indicate that none of the companies for which your senior
management
had previously worked could be considered a "program" under the
parameters set out in that release, you fail to indicate why they
would not be considered programs. Please revise your analysis to
provide additional details about why you believe prior performance
is
not required. Specifically, please provide us with additional
information about Sprint Funding, formerly known as Park Place
Capital.
3. We have reviewed your response to our prior comment number 5.
In
order to rely on the safe harbor from integration provided by Rule
152, you must show that the investors in the private placement
were
irrevocably bound to make the investment, subject only to
conditions
outside of the investors` control, prior to the filing of your
registration statement related to this public offering.
Accordingly,
please provide for our review an executed copy of the merger
agreement related to the private transaction with your next
amendment.
4. We note your response to our prior comment number 7. We
continue
to believe that a conflict may exist with respect to the interests
of
your shareholders in light of the fact that the fees you will
agree
to pay to your wholly-owned subsidiary for its services and for
loans
will not be negotiated at arms-length. We reissue our request
that
you supply the disclosure required by Item 5 of Industry Guide 5
and
Item 24(b) of Form S-11.
5. We have reviewed your response to our prior comment number 13
and
will reserve further comment until we have reviewed your directed
share program materials.
Prospectus Cover Page
6. As noted in our comment number 2 above, we continue to believe
that your offering constitutes a blind pool and therefore we
reissue
our prior comment number 17.
Summary, pages 1- 13
7. We have reviewed your response to our prior comment number 25
and
your revised summary. We continue to believe that there is a
great
deal of repetition between your summary and business sections that
could be eliminated. In particular, we note that your new
disclosure
on pages 1 - 4 under the headings "Our Business," "Change in Loan
Sale and Portfolio Strategy," "Our Business Strategy" and "Our
Competitive Advantages" is repeated in the Business section on
pages
81 - 86. Please revise your summary to eliminate repetition.
8. Since it appears that you will be using the net proceeds from
this
offering to invest in a pool of mortgage-backed securities, please
include a section in the summary that discusses the types of
investments you intend to purchase, the reasons for the purchases
(i.e. - REIT compliance) and how this portfolio will affect your
business model and revenue streams. In connection with this,
please
clarify whether the company has any experience purchasing MBSs.
If
not, please include this in the risk factor section as well.
Our Business, pages 1 - 2
9. Refer to the fifth sentence of the first paragraph under this
heading. We note your statement that subprime loans are those
loans
that are not typically eligible for sale based upon either credit
scoring criteria or other factors, such as limited income
documentation, high debt-to-income ratios or high loan-to-value
ratios. If you choose to retain this characterization of
subprime,
please clarify what percentage of the loans you intend to hold in
your portfolio you anticipate will fall within each category. In
addition, please disclose what percentage of Encore`s loan
originations have historically fallen within each category.
Please
make similar revisions to your disclosure in the first paragraph
on
page 81.
Change in Loan Sale and Portfolio Strategy, page 2
10. Please provide disclosure regarding the fact that, in order to
qualify as a REIT, you must enact the changes discussed under this
heading. In addition, please disclose that taxable REIT
subsidiaries
may only conduct a limited portion of your business activities
without threatening your REIT qualification.
Our Business Strategy, pages 2 - 3
11. We note your response to our prior comment number 30. We
continue to believe that a statement of your historical leverage
amounts would be useful to investors in the summary section,
especially in light of the fact that your goal to leverage your
equity 10 to 14 times is merely a goal and not an absolute limit.
Please revise.
12. We have reviewed your new disclosure in response to our prior
comment number 34. Please expand your discussion in the fifth
paragraph on page 3 to indicate how you intend to strengthen your
cash position.
Our Competitive Advantages, page 3
13. Please provide basis for your statement that your "teams are
among the most productive in the industry." Is this based on the
amount of loan originations per agent or some other measurement?
Please revise or advise.
Risk Factors, pages 14 - 41
14. Please include a risk factor describing the internal control
deficiencies identified by your auditors, as described in the
first 2
paragraphs on page 55.
15. We have reviewed your response to Comment No. 51 from our
prior
comment letter in which you indicate that, since you have
historically sold your loans soon after originating them, you do
not
have historical default rates for the subprime loans you have
originated. Please add a risk factor that discusses the fact that
you do not have historical information that would allow you to
predict the portion of your loan portfolio that will likely
default.
Risks Related to Our Business Activities, pages 14 - 34
If we do not obtain and maintain the appropriate state licenses
for
ECC Capital, we will not be allowed to originate, purchase and
table
fund mortgage loans in some states, which could adversely affect
our
operations, pages 13 - 14
16. We have reviewed your response to our prior comment number 46.
Please revise your risk factor text to eliminate discussions of
the
licenses you do have and focus exclusively on the licenses you do
not
have.
Our reorganization will require us to provide notification to
state
licensing authorities and, in some cases, will require us to
obtain
new lending licenses. The failure to provide these notices or
obtain
new licenses could prevent us from being able to originate loans
in
the affected states and could materially harm our operations, page
15
17. Please delete the final sentence under this risk factor
heading
as it tends to mitigate the risk presented. You may also consider
removing this risk factor if the risk described no longer exists.
Our success will depend on our ability to obtain financing to
leverage our equity. Our inability to realize gains on our
investments and through our leverage strategy could reduce our net
income and the amount available for distributions and cause us to
suffer substantial losses, page 18
18. Please revise your risk factor to disclose your current
leverage
ratio.
Our business requires a significant amount of cash, and if it is
not
available, our business and financial performance will be
significantly harmed, page 19
19. Please disclose the amount of borrowings that were repaid
under
the RFC credit facility when it was terminated on November 5,
2004.
In addition, to the extent applicable, discuss whether this was
made
using existing cash or some other form.
In a period of rising interest rates, our interest expense could
increase faster than the interest we earn on our assets due to our
strategy of financing longer-term assets with shorter-term
liabilities, page 21
20. Please revise your disclosure to include a discussion of
interest
rate activity during the last several months. We note, for
example,
that interest rates have risen and that the expectation is that
they
will continue to rise.
New legislation and regulations directed at curbing predatory
lending
practices could restrict our ability to originate, purchase or
price
subprime residential mortgage loans, which could adversely impact
our
earnings, page 26
21. Please revise to delete the fifth sentence in the first
paragraph
under this risk factor heading as it tends to mitigate the risk
presented.
Messrs. Holder and Asghar will own approximately __% of our
outstanding common stock after this offering and the merger, and
there maybe circumstances under which the interests of Messrs.
Holder
and Asghar and the interests of the holders of the remainder of
our
common stock will not be aligned, page 37
22. To the extent Messrs. Holder and Asghar own over 50 percent of
your outstanding common stock following the completion of the
offering and the merger, please revise to indicate that they will
have the ability to control certain matters that come before the
board, not just exert substantial influence.
Use of Proceeds, page 44
23. We have reviewed you response to our prior comment number 61.
We
continue to believe that your disclosure should include an
estimate
of the amount of proceeds you intend to use in furtherance of
expanding your wholesale mortgage operations and a summary of the
steps you will need to take in furtherance of this expansion.
Your
disclosure should explain whether this expansion will entail
transferring proceeds to your taxable REIT subsidiaries. In
addition,
please clarify whether any of the net proceeds will initially go
to
these purposes or whether they will be used exclusively to
purchase a
portfolio of MBSs. We note your statement that the "remaining"
proceeds will be used to purchase MBSs, but it`s not clear for
what
other purposes the proceeds will initially be used. Please revise
or
advise.
Selected Historical Consolidated Financial Data, pages 52 - 53
24. We note your response to our prior comment number 66.
However,
your reference to footnote (1) in the first row of the chart
appears
to be incorrect. The correct reference appears to be footnote
(2).
Please revise or advise.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, pages 54 - 80
25. Please revise your period-to-period discussions of results of
operations to take into account the fact that interest rates have
increased over the last few months. To the extent applicable,
please
also discuss whether you believe this is a trend that investors
should be aware of.
Internal Controls, page 55
26. Please advise us, and disclose in the next amendment, if the
material weaknesses relate solely to the thee-month period ended
June
30, 2004.
27. Please provide to us supplementally specifics of each material
weakness that resulted from the inability of the finance and
accounting staff to monitor financial accounting standards, and
the
staffs` inability to interpret and implement new financial
accounting
standards. Include a discussion of the effect on individual line
items in your financial statements, and your financial statements
as
a whole.
28. Please supplementally advise us, in detail, of the facts and
circumstances that occurred in this interim period that resulted
in
identification of significant deficiencies that constituted
material
weaknesses, but that were not present in prior periods. For
example,
what types of complex transactions did you engage in that you did
not
previously engage in, and how material were these complex
transactions to your results of operations and financial condition
for the period in question? Also, it appears that the growth from
2002 to 2003 was more significant than the growth experienced in
the
interim period. Please explain to us why you were able to
process,
record, etc. the increased volume in the prior periods and not
this
interim period.
29. While we note that you have hired or intend to hire certain
individuals, please advise us in detail, and disclose in the next
amendment, of the steps you have taken (or plan to take), and of
the
procedures you implemented (or plan to implement) to correct each
material weakness.
30. Please provide us with a schedule of the adjustments made to
close the books, or adjustments recorded in connection with or as
a
result of the review by the independent accountants. Clearly
explain
the reason for each adjustment. For each adjustment, show us the
impact on pre-tax net loss. Quantify the net effect of all
adjustments on pre-tax net income (loss). Also, tell us why none
of
the adjustments relate to prior periods. Explain in detail why
you
believe the timing of each adjustment is appropriate.
Stock-Based Compensation, page 56
31. We note your response to comment 68 and the related revisions
to
your disclosure. In the next amendment, please disclose the
significant assumptions used to value your stock.
Contractual Obligations and Commercial Commitments, page 68
32. We note your response to comment 75 and the related changes to
your disclosure. Please note that you should supplement the
tabular
disclosure of contractual obligations with information that is
material to an understanding of your cash requirements, such as
your
cash requirements related to interest, etc. Refer to footnote 46
of
SEC Release No. 33-8350. Please revise to include a disclosure of
interest costs, or include this disclosure elsewhere in your MD&A.
33. Your reference to an independent valuation specialist that was
engaged to complete a determination of the fair value of your
stock
requires that you obtain consent from the third party who provided
the valuation. Please file a consent of experts as required by
Rule
601 of Regulation S-K with your next amendment.
34. We have reviewed your response to our prior comment number 79.
Supplementally advise us whether you have a contingency plan in
the
event that you are unable to obtain the requisite consents to the
merger. In addition, please consider including a risk factor
discussing the risk that you will not obtain all of the proper
consents in order to complete the merger or tell us why you do not
believe that this risk is material.
35. We note your response to our prior comment number 80 and your
new
disclosure in the second full paragraph on page 69. Your
disclosure
focuses on your belief of what lenders would typically do but does
not appear to be based on any actual conversations or negotiations
with your lender. In light of the fact that your intended
business
plan will change following the offering and will involve primarily
holding subprime loans on your books rather than selling them,
please
address whether you expect this may affect your lenders`
willingness
to increase your borrowing capacity. To the extent you have
received
any indication from your lenders that they intend to increase your
ability to borrow funds, please disclose this.
Business, pages 81 - 104
36. We note that you have removed disclosure from your summary
related to LTV ratios in response to our prior comment number 32.
However, we continue to believe that a definition of low and high
LTV
ratios would be useful elsewhere in your disclosure, such as in
the
second paragraph on page 87, where you discuss exceptions for
loans
with a lower than maximum LTV ratio. Please revise or advise.
Management, pages 105 - 110
37. We note your statement that you "expect" that four of your
seven
directors will be considered to be independent pursuant to the
NYSE
listing standards and SEC rules. Please revise your disclosure to
indicate, if true, that the board of directors has made a
determination that each of the four directors is independent
pursuant
to the above listing standards and rules. In addition, when
known,
please disclose which directors will be assigned to the audit,
compensation and nominating and corporate governance committees.
Executive Compensation, page 111
38. We have reviewed your response to Comment No. 100 from our
prior
comment letter but we are unable to locate disclosure that
indicates
that the bonuses paid out during the first half of 2004 to certain
executives reflects amounts earned but unpaid during 2002 and
2003.
Please revise or advise.
Certain Relationships and Related Transactions, pages 116 - 117
39. Please revise your disclosure on page 116 to describe the
title
of and duties performed for Encore Credit by the spouses of Mr.
Asghar and Mr. Holder.
40. We refer to the litigation referenced in the final paragraph
on
page 116. Please clarify whether the matter is related to ECC.
In
addition, please briefly characterize the nature of the
litigation
and why ECC has agreed to pay all legal expenses incurred in
connection with the legal proceeding.
Federal Income Tax Considerations, page 133
41. Please revise the disclosure to clarify that Latham & Watkins
has
delivered its tax opinion to you. The current disclosure
indicates
that Latham & Watkins are required, as a condition to closing, to
deliver its opinion.
Underwriting, pages 154 - 160
42. We note your response to Comment No. 112 from our prior
comment
letter in which you state that, "An electronic prospectus is
available on the internet website maintained by FBR." This
appears
to indicate that the prospectus is currently on FBR`s website.
Please clarify whether this is the case or whether FBR will
maintain
the red herring on its website once the company begins its selling
efforts.
Financial Statements - General
43. We note your response to comment 131. It appears that the
accountants` consent on the audit reports on your financial
statements still originate from Los Angeles while the reports
themselves originate from Irvine. Please advise or revise.
44. We note your disclosure in "Internal Controls" on page 55 that
the interim financial statements were reviewed by Grant Thornton.
In
the next amendment, please include the independent accountants`
review report on the interim financial statements. Refer to Rule
10-
01(d) of Regulation S-X, and Exhibit 15 of Item 601 of Regulation
S-
K.
Financial Statements - Encore Credit Corp., pages F-1 through F-30
45. In the next amendment, please update your financial statements
pursuant to Rule 3-12 of Regulation S-X.
Consolidated Balance Sheets, page F-3
46. In the next amendment, please include a pro forma column that
includes pro forma adjustments related to your proposed
recapitalization transaction.
Note A - Summary of Significant Organization and Accounting
Policies,
page F-8
General
47. Please disclose that the interim financial statements reflect
all
adjustments that are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented,
or
advise us. Also, disclose if all such adjustments are of a normal
recurring nature, or furnish information describing the nature and
amount of any adjustments other than normal recurring adjustments.
Refer to Rule 10-01(b)(8) of Regulation S-X.
Note I - Transactions with Affiliates and Related Parties, pages
F-21
to F-22
48. In the next amendment, please disclose the information
included
under "Conflicts of Interest" on page 116 related to the
employment
of Messrs. Holder`s and Asghar`s spouses, the related periods of
employment, the services they performed, and the compensation each
received. Also, disclose the information related to the legal
action
in which Encore is a co-plaintiff.
Note N - Stock Options, page F-27
49. We note your response to comment 129. With respect to the
equity
instruments granted during the 12 months prior to the date of the
most recent balance sheet included in your filing, please disclose
for each grant date, the number of options or shares granted, the
exercise price, the fair value of the common stock, and the
intrinsic
value, if any, per option.
Note Q - Subsequent Event, page F-30
50. Please revise your disclosure, and provide the information to
us
supplementally, to clearly explain the termination transaction.
For
example, we note you expensed $7.5 million as part of the
transaction. What expenses did you incur, and where will you
report
those expenses in the financial statements?
51. Please provide to us, and disclose in the next amendment, a
schedule of all consideration exchanged between you and RFC upon
termination of the agreement, including cash, stock, warrants,
etc.,
and clearly explain how you accounted for each.
52. We note that you cancelled the warrants issued to RFC that
were
originally valued at $12 million. Please advise us of the
consideration issued to RFC to cancel the warrants, if so, and how
you accounted for it.
Exhibits
53. We note that you have filed very few of the exhibits listed in
your exhibit index. We further note that many of these exhibits
are
executed agreements which should be available to be filed. Please
be
aware that we will need time to review these exhibits when they
are
filed. To the extent possible, please file these exhibits with
your
next amendment.
Legal Opinion
54. We have reviewed the draft legal opinion. We note that
counsel
relied upon a certificate executed by an officer of the company as
stated in paragraph number 6, on page 2 of the opinion. Please
provide a revised form of legal opinion that confirms that each
representation from the officer`s certificate upon which counsel
relied in rendering its opinion is a factual representation, not a
legal one.
55. We refer to assumption 5 on page 2 of the draft opinion which
assumes that the total number of common shares issued and
outstanding
after the offering will not exceed the total number of shares that
the company is authorized to issue under the charter. Since
counsel
has represented that it has examined the charter and the
registration
statement, it is not clear why it is unable to opine on this
matter.
In addition, this assumption goes to the heart of whether the
securities are legally issued and is inappropriate. Please have
counsel remove the assumption.
Tax Opinion
56. We note that counsel`s REIT opinion states that the company
"will
be" organized in conformity with the requirements for
qualification
as a REIT. The disclosure on page 133 indicates, however, that
Latham & Watkins has opined that you "have been organized and have
operated in conformity" with the REIT rules. Please have counsel
revise its tax opinion so that it is consistent with this
disclosure
and opines as to whether the company is organized in conformity
with
the REIT rules.
57. We note counsel`s statement that this opinion may not be
relied
upon by any other person except that investors who purchase
securities in this offering may rely on the opinion. Please have
counsel remove this qualification or expand it to include
investors
who make subsequent purchases of the shares being sold in this
offering.
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
You may contact Robert Telewicz, Staff Accountant, at (202)
824-
5356 or Deborah Wilson, Senior Accountant, at (202) 942-2956 if
you
have questions regarding comments on the financial statements and
related matters. Please contact Amanda McManus, Attorney-Advisor,
at
(202) 942-7184 or me at (202) 942-1972 with any other questions.
Sincerely,
Owen Pinkerton
Senior Counsel
cc: William J. Cernius, Esq. (via facsimile)
Jeevan B. Gore, Esq. (via facsimile)
Latham & Watkins LLP
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ECC Capital Corporation
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