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Note 17 MEZZANINE EQUITY

12 Months Ended

Dec. 31, 2012

NOTE 17

MEZZANINE EQUITY

Preferred Stock

On December 27, 2012, Ocwen issued 162,000 shares of Series A Perpetual Convertible Preferred Stock, having a par value of $0.01 per share as part of the consideration paid in the Homeward Acquisition. The following is a summary of the voting powers, preferences and relative, participating, optional and other special rights of the Preferred Shares:

	•	Ranking. The Preferred Shares shall, with respect to the payment of dividends, redemption and distributions upon the liquidation, winding up or dissolution of Ocwen rank senior to all classes of common stock.
	•	Dividends. Holders of the Preferred Shares are entitled to receive mandatory and cumulative dividends payable quarterly at the rate per share equal to the greater of (i) 3.75% per annum multiplied by $1,000 per share and (ii) in the event Ocwen pays a regular quarterly dividend on its common stock in such quarter, the rate per share payable in respect of such quarterly dividend on an as-converted basis. If Ocwen declares a special dividend on common stock, then any dividend shall be payable to the holders of the shares of common stock and the holders of the Preferred Shares on a pari passu, as-converted basis. Any such dividend may be paid either in cash or in Preferred Shares.
	•	Conversion. Each Preferred Share, together with any accrued and unpaid dividends, may be converted to common stock at the option of the holder at a conversion price equal to $31.79.
	•	Redemption. Ocwen may redeem the Preferred Shares commencing on December 27, 2014. The shares of Series A Preferred Stock are redeemable, at Ocwen’s option, in whole, or, from time to time, in part, at any time beginning on the second anniversary of the issue date of the Preferred Shares, payable through the issuance of shares of Common Stock. The redemption amount is any accrued and unpaid dividends plus: 103% of the liquidation preference of $1,000 for each Preferred Share plus from the second anniversary of the issue date and prior to the third anniversary; 102% of the liquidation preference from the third anniversary and prior to the fourth anniversary; 101% of the liquidation preference from the fourth anniversary and prior to the fifth anniversary; and the liquidation preference from the fifth anniversary.

	•	Voting. The holders of Preferred Shares shall be entitled to vote on all matters submitted to the stockholders for a vote, voting together with the holders of the common stock as a single class, with each share of common stock entitled to one vote per share and each Preferred Share entitled to one vote for each share of common stock issuable upon conversion of the Preferred Share as of the record date for such vote or, if no record date is specified, as of the date of such vote.
	•	Protective Provisions. So long as the Preferred Shares are outstanding, Ocwen will not, without obtaining the approval of the holders of a majority of the Preferred Shares (i) issue any preferred stock other than the Preferred Shares, any senior securities or any parity securities in excess of $325 million; (ii) amend or alter the Articles of Designation or Articles of Incorporation in any manner that under the Florida Business Corporation Act requires the prior vote as a separate class of the holders of the Preferred Shares; (iii) amend or otherwise alter the Articles of Designation or the Articles of Incorporation in any manner that would adversely affect the rights, privileges or preferences of the Preferred Shares; (iv) pay any dividend in cash to the common stock in respect of any quarterly dividend unless the dividend payable in respect of such quarter on the Preferred Shares is also paid in cash to the same extent; or (v) waive compliance with any provision of the Articles of Designation or take any actions intended to circumvent the provisions of the Articles of Designation.
	•	Change of Control; Liquidation Event.

	1.	Change of Control. In the case of any change in control of Ocwen, then, upon consummation of such transaction, each holder of Preferred Shares shall be entitled to receive in respect of such share the greater of (i) the liquidation preference of $1,000 plus accrued and unpaid dividends thereon, whether or not declared, if any, or (ii) the amount such holder would receive if such holder converted such Preferred Shares into the kind and amount of securities, cash or other assets receivable upon the consummation of the change in control by a holder of the number of shares of Common Stock into which such Preferred Shares might have been converted immediately prior to such change in control;
	2.	Liquidation Event. Upon any liquidation event, each holder of Preferred Shares will be entitled to payment out of Ocwen’s assets available for distribution, before any distribution or payment out of such assets may be made to the holders of any junior securities, and subject to the rights of the holders of any senior securities or parity securities upon liquidation and the rights of Ocwen’s creditors, of an amount equal to the liquidation preference of $1,000 plus accrued and unpaid dividends thereon, whether or not declared. After payment in full of the liquidation preference plus accrued and unpaid dividends thereon to which holders of Preferred Shares are entitled, such holders will not be entitled to any further participation in any distribution of Ocwen’s assets.

The holders of the Preferred Shares also received registration rights for the Preferred Shares and the shares of common stock issuable upon conversion.

We evaluated the Preferred Shares under ASC 480, Distinguishing Liabilities from Equity, and determined that the Preferred Shares should be accounted for as equity because the Preferred Shares are convertible at any time at the option of the holder into common stock and redemption of the shares by Ocwen is settled through the issuance of common stock. We also determined that the conversion feature of the Preferred Shares does not require separation from the host contract because the preponderance of the characteristics of the Preferred Shares indicates that the Preferred Shares are more akin to equity than debt and, therefore, are an equity host. Since an equity conversion option and an equity host are clearly and closely related, no further separation analysis is required under ASC 815, Derivatives and Hedging.

We also determined that the change of control provisions could result in a redemption not solely under Ocwen’s control. Therefore, classification of the Preferred Shares as “mezzanine” equity in the Consolidated Balance Sheets was more appropriate than classification as part of Stockholders’ equity.

We also determined that the conversion option of the Preferred Shares represented a Beneficial Conversion Feature (BCF) under ASC 470, Debt, because the conversion price of $31.79 was lower than the common stock price at the issue date of $33.495, determined using the average of the high and low prices for that date. The Preferred Shares are convertible into 5,095,942 shares of common stock. Therefore, the intrinsic value of the BCF — the difference between the price of common stock on the issue date and the conversion price multiplied by the number of shares of common stock into which the Preferred Shares can be converted — was $8,688 which we accounted for as a discount on the Preferred Shares with an offsetting increase in additional paid in capital. Because the Preferred Shares are optionally redeemable by Ocwen, we are amortizing the BCF through the second anniversary of the issued date, at which time Ocwen can first redeem the Preferred Shares.

For the period December 27, 2012 through December 31, 2012, we amortized $60 of the BCF discount on the Preferred Shares as a deemed dividend with an offsetting reduction in retained earnings. At December 31, 2012, we accrued the mandatory and cumulative dividends payable of $85 for the period.

The carrying value of our Preferred Shares reflects the following:

Initial issuance price on December 31, 2012	$	162,000
Discount for beneficial conversion feature		(8,688	)
Accretion of discount		60
Carrying value at December 31, 2012	$	153,372