May 9, 2001
KZH Soleil - 2 LLC
c/o The Chase Manhattan Bank
140 East 45th Street - 11th Floor
New York, NY 10017
Galaxy CLO 1999-1, Ltd.
c/o Chase Bank of Texas, National Association
600 Travis Street - 48th Floor, 48-CTH-304
Houston, TX 77002
Sun America Life Insurance Company
1 SunAmerica Center - 34th Floor
Century City
Los Angeles, CA 90067-6002
RE: Ugly Duckling Corporation Senior Secured Loan Agreement Dated as of
January 11, 2001
Dear Sirs:
With this letter we are requesting a waiver of the Minimum Other Interest
coverage ratio contained in Section 6.18 of the above referenced loan agreement
for the quarter ended March 31, 2001. We are in compliance with all other
covenants of the agreement.
The reason for the shortfall in this covenant in the quarter is due to a number
of changes we are making in the business to improve long term portfolio
performance. These changes include:
1. Enhancing underwriting criteria by increasing down payment requirements
beginning in January of 2001, resulting in slower sales, a smaller
portfolio than forecasted and lower interest income from the smaller
portfolio.
2. The moving of our 31 to 60 day collectors to the dealership, resulting in the
closure of two collection centers and an after-tax charge of $368,000 for
the quarter.
3. The increase of loan loss reserves to the balance sheet resulting from higher
than expected losses from older portfolios and a smaller base of originations
in the first quarter of 2001, as previously discussed.
In light of these changes and the impact to our profitability in the first four
months of 2001, the "B-piece" contracts securing your loan continue to perform
at historically high levels. Cash generated from these loans through April 2001
was $34.1 million or a 14% increase over last year. Overall in April of 2001,
the portfolio showed improvements versus year ago of 1.5% in the current bucket,
1.79% in the 1 to 30 day bucket and .02% in the 31 to 60 day bucket. The
portfolio declined .32% in the 61 to 90 day bucket. With the movement of
collectors to the dealerships we expect to see continued improvement in our
delinquencies throughout the year.
In addition to the improvements in the portfolio, we closed our nineteenth
receivables securitization at the end of March with a loan principal balance of
$117.7 million and Class A bonds issued of $83.6 million. In early April we also
entered into an agreement with Greenwich Capital Financial Products, Inc. to
provide up to $100 million in a warehouse receivables line of credit.
Thank you for your time and consideration. I have provided an area below for
your signature authorizing the waiver. Please call me with any further questions
at 602-852-6635.
Sincerely,
/s/ BOB FULTON
- -------------------------
Bob Fulton
Treasurer
Ugly Duckling Corporation
The undersigned hereby waive the covenant requested:
KZH Soleil - 2 LLC
By: /s/ KIMBERLEY ROWE
-------------------------
Name: KIMBERLEY ROWE
-------------------------
Title: Authorized Agent
-------------------------
Galaxy CLO 1999-1, Ltd.
By: SAI Investment Advisors, Inc.
its Collateral Manager
By: /s/ JOHN G. LAPHAM
-------------------------
Name: JOHN G. LAPHAM
-------------------------
Title: Authorized Agent
-------------------------
Sun America Life Insurance Company
By: /s/ JOHN G. LAPHAM
-------------------------
Name: JOHN G. LAPHAM
-------------------------
Title: Authorized Agent
-------------------------