Emergence from the WIMC Reorganization Proceedings

On November 30, 2017, Walter Investment Management Corp. (Predecessor) filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case and changed its name to Ditech Holding Corporation (Successor) and on February 12, 2018, our newly issued common stock commenced trading on the NYSE under the symbol DHCP. From and after effectiveness of the WIMC Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.

Reorganization Items and Fresh Start Accounting Adjustments

The Company's reorganization items and fresh start accounting adjustments consist of the following (in thousands):



	Successor			Predecessor
	For the Period From February 10, 2018 Through December 31, 2018			For the Period From January 1, 2018 Through February 9, 2018		For the Year Ended December 31, 2017
Gain on cancellation of corporate debt	$	—		$	556,937	$	—
Less: issuance of new equity to Convertible and Senior Noteholders	—			153,764		—
Net gain on cancellation of corporate debt	—			403,173		—
Less:
Legal and professional fees⁽¹⁾	2,123			12,461		3,098
Write-off deferred debt issuance costs and discounts	—			—		34,406
Other expenses	603			3,378		141
Total expenses	2,726			15,839		37,645
Total reorganization items	(2,726		)	387,334		(37,645		)
Fresh start accounting adjustments	—			77,229		—
Reorganization items and fresh start accounting adjustments	$	(2,726	)	$	464,563	$	(37,645	)

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(1)	Professional fees are directly related to the WIMC Reorganization.

The Company made cash payments for reorganization items of $11.8 million and $5.7 million during the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. There were no payments made for the year ended December 31, 2017.

Liabilities Subject to Compromise

Liabilities subject to compromise included unsecured or under-secured liabilities incurred prior to the WIMC Effective Date. These liabilities represented the amounts expected to be allowed on known or potential claims to be resolved through the WIMC Chapter 11 Case and subject to future adjustments based on negotiated settlements with claimants, actions of the Bankruptcy Court, rejection of executory contracts, proofs of claims or other events. Generally, actions to enforce or otherwise effect payment of prepetition liabilities are subject to the automatic stay or an approved motion of the Bankruptcy Court.

Liabilities subject to compromise consist of the following (in thousands):



	Predecessor
	December 31, 2017
Senior Notes	$	538,662
Convertible Notes	242,468
Accrued interest⁽¹⁾	25,807
Total liabilities subject to compromise	$	806,937

__________

(1)

Represents accrued interest on the Senior Notes and Convertible Notes as of November 30, 2017, the date the Company filed the WIMC Bankruptcy Petition. As interest on the Senior Notes and Convertible Notes subsequent to November 30, 2017 was not expected to be an allowed claim, this amount excludes interest that would have been accrued subsequent to November 30, 2017. Interest expense reported on the consolidated statements of comprehensive income (loss) for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017 excludes $5.9 million and $4.4 million, respectively, of interest on the Senior Notes and Convertible Notes that otherwise would have been accrued for the periods.

On the WIMC Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants, as applicable. Refer to Note 25 for additional information.

Fresh Start Accounting

The Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The actual impact at emergence on February 9, 2018 is shown below. The financial statements as of February 10, 2018 and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the Company's financial position and results of operations post-emergence and is not comparable to prior periods.

Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the consolidated balance sheets in the Successor periods as goodwill.

The Company, with the assistance of external valuation specialists, estimated the enterprise value of the Company upon emergence from the WIMC Chapter 11 Case to be approximately $1.4 billion to $1.5 billion. Enterprise value is defined as the total invested capital, which includes cash and cash equivalents. The estimate is based on the aggregate fair value of total equity of the Company as approved by the Bankruptcy Court and the aggregate fair value of total debt of the Company. The equity of the Company consists of its publicly-traded common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and Series B Warrants. The debt of the Company consists of a 2018 Credit Agreement and Second Lien Notes Indenture.

In determining the value of total equity, the Company relied on the publicly-traded common stock price as of the time of emergence and the following 30 days, which was considered a level one input, and used a Monte-Carlo simulation to solve for the aggregate equity value across all classes of equity. A Monte-Carlo simulation is an analytical method used to estimate value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes from these trial runs. With the Monte-Carlo simulation, the Company was able to consider the rights and features of each of the equity classes and estimate a total equity value, which resulted in a common stock price equivalent to the publicly-traded price as of the time of emergence. The primary assumptions used in the simulation were risk-free rate, volatility, and terms consistent with the rights and features of the various equity classes.

In estimating the fair value of total debt, a synthetic credit rating analysis was performed based on the underlying financial metrics of the Company to estimate the nonperformance risk and determine appropriate market spreads for each debt security. With the resulting credit rating, market yields were observed for various indices with similar credit ratings, as well as consideration of similar rated bonds, with similar maturity dates. The range of implied credit spreads considered in the valuations were 6.0% to 8.0% and the range of implied yields considered in the valuations were 13.5% to 15.5%.

Pursuant to fresh start accounting, the Company allocated the determined reorganization value to the Successor Company’s assets at emergence as follows (in thousands):



	Successor
	February 10, 2018
Enterprise value	$	1,464,795
Plus: fair value of liabilities	12,137,344
Reorganization value	13,602,139
Less:
Fair value of tangible assets	13,508,179
Fair value of developed technology	41,000
Fair value of identifiable intangible assets	44,000
Goodwill	$	8,960

Upon the adoption of fresh start accounting, the Successor adopted the majority of the significant accounting policies of the Predecessor. The most significant change in accounting policy relates to the accounting for the Residual Trusts, which were formerly recorded at amortized cost and are now adjusted to fair value on a recurring basis. The adjustments set forth in the following table at February 9, 2018 reflect the effect of the consummation of the transactions contemplated by the WIMC Prepackaged Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”) (in thousands).



	Predecessor			Reorganization Adjustments				Fresh Start Accounting Adjustments				Successor
ASSETS
Cash and cash equivalents	$	182,462		$	(39,039	)	(a)	$	—			$	143,423
Restricted cash and cash equivalents	105,041			—				—				105,041
Residential loans at amortized cost, net	787,860			—				(317,189		)	(c)	470,671
Residential loans at fair value	10,423,633			—				304,051			(c)	10,727,684
Receivables, net	151,892			—				(1,740		)	(d)	150,152
Servicer and protective advances, net	748,952			—				(24,367		)	(e)	724,585
Servicing rights, net	744,724			—				5,432			(f)	750,156
Goodwill	47,747			—				(38,787		)	(g)	8,960
Intangible assets, net	8,532			—				35,468			(h)	44,000
Premises and equipment, net	46,873			—				33,739			(i)	80,612
Deferred tax assets, net	1,273			44			(b)	—				1,317
Other assets	392,205			—				3,333			(j)	395,538
Total assets	$	13,641,194		$	(38,995	)		$	(60	)		$	13,602,139

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables and accrued liabilities	$	993,805		$	(1,540	)	(a)	$	(7,444	)	(k)	$	984,821
Servicer payables	109,404			—				—				109,404
Servicing advance liabilities	387,813			—				—				387,813
Warehouse borrowings	1,007,310			—				—				1,007,310
Corporate debt	1,142,941			212,500			(a)(b)	(75,034		)	(l)	1,280,407
Mortgage-backed debt	727,909			—				6,246			(m)	734,155
HMBS related obligations at fair value	8,913,052			—				—				8,913,052
Deferred tax liabilities, net	866			(77		)	(b)	—				789
Total liabilities not subject to compromise	13,283,100			210,883				(76,232		)		13,417,751
Liabilities subject to compromise	806,937			(806,937		)	(b)	—				—
Total liabilities	14,090,037			(596,054		)		(76,232		)		13,417,751

Preferred stock	—			1			(b)	—				1
Common stock	374			(331		)	(b)	—				43
Additional paid-in capital	598,731			(414,387		)	(b)	—				184,344
Accumulated deficit	(1,049,005		)	971,776			(b)	77,229			(b)	—
Accumulated other comprehensive income	1,057			—				(1,057		)	(n)	—
Total stockholders' equity (deficit)	(448,843		)	557,059				76,172				184,388
Total liabilities and stockholders' equity (deficit)	$	13,641,194		$	(38,995	)		$	(60	)		$	13,602,139

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Reorganization Adjustments:

(a)		Represents WIMC Effective Date term loan payment, inclusive of payment of interest accrued.

(b)		On the WIMC Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants. Accordingly: (i) new Second Lien Notes and Warrants were recorded, (ii) liabilities subject to compromise was eliminated, (iii) Predecessor common stock, additional paid in capital, accumulated deficit, and accumulated other comprehensive income were set to zero, and (iv) Successor common stock, additional paid in capital, and preferred stock were recorded. The resulting total stockholders' equity balance of the Successor of $184.4 million represents the estimated fair value of total stockholders' equity at the WIMC Effective Date as determined with the assistance of an independent valuation specialist. The estimated fair values on a per share/unit basis on the WIMC Effective Date of the common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and Series B Warrants were $10.25, $1,231.70, $1.68 and $0.94, respectively.

Fresh Start Accounting Adjustments:

(c)		A successor emerging entity applying fresh start accounting upon emergence from bankruptcy may select new accounting policies upon emergence from bankruptcy protection. Prior to the WIMC Effective Date, loans of Residual Trusts were carried at amortized cost. In connection with fresh start reporting, the Company made an election to record loans of the Residual Trusts at fair value on a recurring basis. Accordingly, adjustments to residential loans carried at amortized cost, net and residential loans at fair value represent: (i) reclassification of $317.2 million loans of the Residual Trusts from residential loans carried at amortized cost, net to residential loans at fair value and (ii) a $13.1 million reduction of residential loans at fair value to record such Residual Trusts to fair value.

(d)		Represents adjustment to decrease the carrying value of holdback receivables carried at amortized cost by $1.7 million to reflect the estimated fair value based on the net present value of expected cash flows. Other remaining receivables, net are short-term in nature and, as a result, carrying value approximates fair value.

(e)		Represents adjustment to reflect estimated fair value based on the net present value of expected cash flows.

(f)		Represents adjustment to increase the carrying value of servicing rights carried at amortized cost to reflect estimated fair value.

(g)		The goodwill of the Predecessor has been eliminated and the fair market value of the assets in excess of the reorganization value has been allocated to assets and liabilities as shown above.

(h)		Represents adjustment to record intangible assets. The fair value of intangible assets was estimated under the relief-from-royalty and lost profits methods. Resulting intangible assets at the WIMC Effective Date are comprised of institutional and customer relationships of $24.0 million and trade names of $20.0 million. Refer to Note 14 for additional information.

(i)		Represents adjustment to increase the carrying value of premises and equipment, net to estimated fair value, reflecting the implied value of internally developed technology. The fair value of internally developed technology was estimated using the relief-from-royalty approach.

(j)		Represents adjustment to (i) increase the carrying value of real estate owned, net carried at the lower of cost or net realizable value by $5.6 million to estimated fair value and to (ii) eliminate previously existing unamortized deferred debt issuance costs of $2.3 million associated with servicing advance liabilities with line-of-credit arrangements and the 2013 Revolver. The Company had previously elected and disclosed that deferred debt issuance costs associated with revolving facilities were recorded in other assets on the consolidated balance sheets.

(k)		Represents adjustment to remove liabilities not intended to cash settle, primarily related to liabilities in connection with lease obligations.

(l)		Represents adjustment to decrease the carrying value of the 2013 Term Loan from amortized cost, net to estimated fair value. The reduction includes the elimination of previous unamortized issuance discounts and unamortized debt issuance costs prior to recording the 2013 Term Loan at estimated fair value. Additionally, represents adjustment of $60.5 million to decrease the carrying value of the Second Lien Notes issued at par value in connection with the WIMC Prepackaged Plan to estimated fair value.

(m)		Represents adjustment to increase the carrying value of mortgage back debt associated with the Residual Trusts, carried at amortized cost, net of discounts and deferred debt issuance costs to estimated fair value.

(n)		Represents elimination of other comprehensive income on available for sale investments and other post-retirement benefits at the WIMC Effective Date.