November 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
I 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 and
the EBITDA to Interest Expense coverage ratios contained in Section 6.18 of the
above referenced loan agreement for the quarter ended September 30, 2001 and the
quarter ending December 3 1, 2001. As agreed upon, in return for the waiver of
these covenants we will wire you $55,000 or 25 basis points of the current
outstanding principal balance less funds held in the cash collateral account. We
are in compliance with all other covenants of the agreement.
As we shared with you in the second quarter of this year, the reason for the
shortfall in these covenants 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 through the implementation of credit
scoring and increasing down payment requirements, resulting in slower
sales, a smaller portfolio than forecasted and lower interest income
from the smaller portfolio.
2. 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 quarter, as previously discussed.
In addition to the above, we are also making provision for the impact of a
recession in the economy. Although we are making many improvements in our
business model arid we are confident we are underwriting better loans, we do not
have the history to accurately assess the impact of a recession on our customer
base. We have chosen to assume the portfolio in 2001 will not perform better
than the portfolio of 2000 and adjusted the provision accordingly.
As we have discussed with you we expect to take an additional charge to earnings
in the fourth quarter of approximately $6 million pre-tax. Based on this charge
we would expect the EBITDA to Interest coverage and the Minimum Interest
coverage to be 0.75 and 0.00 respectively in the fourth quarter and request you
waive these covenants to these levels for that period.
In light of these changes and the impact to our profitability in the first nine
months of 2001, the "B-piece" contracts securing your loan continue to perform
at consistently high levels. Cash generated from these loans through September
2001 was $66.9 million, which is approximately $12.0 million greater than the
first nine months of last year.
In addition to the improvements in the portfolio, we closed our twenty-first
receivables securitization on October 18th with a loan principal balance $145.9
million and Class A bonds issued of $103.6 million. This securitization included
a prefunding mechanism allowing us to borrow an additional $25.9 million against
loans to be originated in the next 90 days following the close of the deal. The
coupon on the A bonds issued in the securitization was 3.44% with an initial
funding of 2.25%, down from 6.80% and 6.00% respectively from the securitization
we completed last year at this time.
We have also recently completed a revolving loan with Automotive Finance
Corporation to provide the company with a $36 million inventory line of credit,
which is a $10 million larger facility than the GE loan we are replacing. We
have now completely replaced the GE lending relationship and do not have any
loan facilities maturing for the remainder of 2001.
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,
Bob Fulton
Treasurer
Ugly Duckling Corporation
The undersigned hereby waive the covenants requested:
KZH Soleil - 2 LLC
By: /s/ Susan Lee
------------------------------------------
Name: Susan Lee
Title: Authorized Agent
Galaxy CLO 1999-1, Ltd.
By: SAl Investment Advisors, Inc.
its Collateral Manager
By: /s/ John Lapham
------------------------------------------
Name: John Lapham
Sun America Life Insurance Company
By: /s/ John Lapham
------------------------------------------
Name: John Lapham
Title: Authorized Agent