Exhibit 10.3

 

SECOND AMENDMENT TO SUBSTITUTE GUARANTY AGREEMENT

 

SECOND AMENDMENT TO SUBSTITUTE GUARANTY AGREEMENT, dated as of July 12, 2013
(this “Amendment”), by and among ARES COMMERCIAL REAL ESTATE CORPORATION, a
Maryland corporation, whose address is c/o Ares Management LLC, One North Wacker
Drive, 48th Floor, Chicago, IL 60606 (the “Guarantor”), and CITIBANK, N.A., a
national banking association, whose address is 388 Greenwich Street, New York,
New York 10013  (the “Lender”).

 

R E C I T A L S:

 

WHEREAS, ACRC Lender C LLC, a Delaware limited liability company (“Borrower”)
and the Lender entered into that certain Master Loan and Security Agreement
dated as of December 8, 2011, as amended by that certain First Amendment to
Master Loan and Security Agreement, dated as of April 16, 2012 and that certain
Second Amendment to Master Loan and Security Agreement, dated as of July 12,
2013 (as further amended, restated, supplemented or otherwise modified and in
effect from time to time, collectively, the “Loan Agreement”).

 

WHEREAS, in connection with the Loan Agreement, Guarantor executed and delivered
that certain Substitute Guaranty Agreement in favor of Lender, dated as of
May 1, 2012, as amended by that certain First Amendment to Substitute Guaranty
Agreement, dated as of April 29, 2013 (as further amended, restated,
supplemented or otherwise modified and in effect from time to time,
collectively, the “Guaranty Agreement”; capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in the Guaranty
Agreement).

 

WHEREAS, Guarantor and Lender desire to amend the Guaranty Agreement as more
specifically set forth herein.

 

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is acknowledged,
the parties hereto hereby covenant, agree, represent and warrant that the
Guaranty Agreement is hereby amended as follows, effective as of the date
hereof:

 

Section 1.              Amendment to Guaranty Agreement.

 

1.1          Section 11.7(b) of the Guaranty Agreement is hereby deleted in its
entirety and replaced with the following:

 

“(b)  Minimum Total Liquidity.  Guarantor’s Total Liquidity to be less than the
greater of (x) $5,000,000 and (y) 5% of Guarantor’s Recourse Indebtedness, not
to exceed $10,000,000; provided, that notwithstanding the foregoing or anything
herein to the contrary, in the event Guarantor’s Total Liquidity shall equal or
exceed $5,000,000 (such amount, the “Guarantor’s Actual Total Liquidity

 

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Amount”), then Guarantor may satisfy the difference between the minimum Total
Liquidity requirement and the Guarantor’s Actual Total Liquidity Amount with
Available Borrowing Capacity.”

 

1.2          The words “and thereafter on a quarterly basis” in the fourth line
of Section 11.7 of the Guaranty Agreement are hereby deleted in their entirety
and replaced with the following:  “and thereafter as of the end of each Test
Period”.

 

1.3          Section 11.7(c) of the Guaranty Agreement is hereby deleted in its
entirety and replaced with the following:

 

“(c)  Fixed Charge Coverage Ratio.  Guarantor’s Fixed Charge Coverage Ratio to
be less than 1.25 to 1.00.”

 

1.4          Section 1 of the Guaranty Agreement is hereby amended by
(1) deleting the defined terms “Consolidated Net Income”, “Dividend Payout
Ratio”, “Guarantor Dividend Distributions” and “REIT”, (2) adding the following
new defined terms in their appropriate alphabetical location, and (3) deleting
the defined term “Tangible Net Worth” and replacing it with the new definition
of “Tangible Net Worth”:

 

“Available Borrowing Capacity” means, with respect to any Person, on any date of
determination, the total unrestricted borrowing capacity which may be drawn
(taking into account required reserves and discounts) upon by such Person or its
Subsidiaries, at such Person’s or its Subsidiaries’ request based upon approved
but undrawn amounts, under committed credit facilities or repurchase agreements
which provide financing to such Person or its Subsidiaries.

 

“Debt Service” means, for any Test Period, the sum of (a) Interest Expense for
Guarantor determined on a consolidated basis for such period, and (b) all
regularly scheduled principal payments made with respect to Indebtedness of
Guarantor and its Subsidiaries during such period, other than (i) any voluntary
or involuntary prepayment or (ii) prepayment occasioned by the repayment of an
underlying asset, or any balloon, bullet, margin or similar principal payment
which repays such Indebtedness in part or in full.

 

“EBITDA” means, with respect to any Person and for any Test Period, an amount
equal to the sum of (a) Net Income (or loss) of such Person (prior to any impact
from minority or non-controlling interests or joint venture net income and
before deduction of any dividends on preferred stock of such Person), plus the
following (but only to the extent actually included in determination of such Net
Income (or loss)): (i) depreciation and amortization expense (other than those
related to capital expenditures that have not been included in the calculation
of Fixed Charges as defined in the Guarantee Agreement), (ii) Interest Expense,
(iii) income tax expense, (iv) extraordinary or non-recurring gains, losses and
expenses including but not limited to transaction expenses relating to business
combinations, other acquisitions and unconsummated transactions, (v) unrealized
loan loss reserves,  impairments and other similar charges including but not

 

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limited to reserves for loss sharing arrangement associated with mortgage
servicing rights, (vi) realized losses on loans and loss sharing arrangements
associated with mortgage servicing rights and (vii) unrealized gains, losses and
expenses associated with (A) derivative liabilities including but not limited to
convertible note issuances and (B) mortgage servicing rights (other than the
initial revenue recognition of recording an asset), plus (b) such Person’s
proportionate share of Net Income (prior to any impact from minority or
non-controlling interests or joint venture net income and before deduction of
any dividends on preferred stock of such Person) of the joint venture
investments and unconsolidated Affiliates of such Person, all with respect to
such period.

 

“Fixed Charge Coverage Ratio” means, with respect to Guarantor, the EBITDA (as
determined in accordance with GAAP) for the immediately preceding twelve (12)
month period ending on the last date of the applicable Test Period, divided by
the Fixed Charges for the immediately preceding twelve (12) month period ending
on the last date of the applicable Test Period.

 

“Fixed Charges” means, with respect to Guarantor at any time, the sum of
(a) Debt Service, (b) all preferred dividends that Guarantor is required,
pursuant to the terms of the certificate of designation or other similar
document governing the rights of preferred shareholders, to pay and is not
permitted to defer, (c) Capital Lease Obligations paid or accrued during such
period, and (d) any amounts payable under any Ground Lease.

 

“Interest Expense” means, with respect to any Person and for any Test Period,
the amount of total interest expense incurred by such Person, including
capitalized or accruing interest (but excluding interest funded under a
construction loan and the amortization of financing costs), plus such Person’s
proportionate share of interest expense from the joint venture investments and
unconsolidated Affiliates of such Person, all with respect to such period.

 

“Net Income” means, with respect to any Person for any period, the net income of
such Person for such period as determined in accordance with GAAP.

 

“Recourse Indebtedness” means, with respect to any Person, on any date of
determination, the amount of (x) Indebtedness for which such Person has recourse
liability in part or in whole (such as through a guarantee agreement), exclusive
of any such Indebtedness for which such recourse liability is limited to
obligations relating to or under agreements containing customary nonrecourse
carve-outs or (y) Indebtedness which contains “mark-to-market” provisions
entitling the lender to such Person to require repayments based upon changes in
asset values from time to time, whether due to price or credit movements.

 

“Tangible Net Worth” means, with respect to any Person and any date, (i) all
amounts which would be included under capital or shareholder’s equity (or any
like caption) on a consolidated balance sheet of such Person and its
consolidated Subsidiaries, as determined in accordance with GAAP, plus, without
duplication,

 

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(ii) all Qualified Capital Commitments plus origination fees, net of deferred
origination costs, minus (a) intangible assets included in the foregoing and
(b) prepaid taxes and/or expenses, all on or as of such date. For sake of
clarity, mortgage servicing rights shall not be deemed to be intangible assets.

 

“Test Period” means the time period from the first day of each calendar quarter,
through and including the last day of such calendar quarter.

 

Section 2.              Covenants, Representations and Warranties of Borrower.

 

2.1          The Guarantor hereby ratifies, confirms and reaffirms, as of the
date hereof, that all of the terms, covenants, indemnifications and provisions
of the Guaranty Agreement are and shall remain in full force and effect without
change except as otherwise expressly and specifically modified by this
Amendment.

 

2.2          The Guarantor hereby represents and warrants that this Amendment
has been duly executed and delivered by the Guarantor.  This Amendment is the
legal, valid and binding obligation of the Guarantor, enforceable against the
Guarantor in accordance with its terms.

 

2.3          The Guarantor hereby represents and warrants that, to the best of
its knowledge, as of the date hereof, (i) no Event of Default (as defined in the
Loan Agreement) has occurred and is continuing and no event which, but for the
passage of time or the giving of notice or both, would constitute an Event of
Default, (ii) no Event of Default will occur as a result of the execution,
delivery and performance by the Guarantor of this Amendment, and (iii) no
default under any of the terms, covenants or provisions of the Guaranty
Agreement has occurred and is continuing and no event which, but for the passage
of time or the giving of notice or both, would constitute a default under the
Guaranty Agreement.

 

Section 3.              Effect Upon Loan Documents.

 

3.1          The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Lender under the
Loan Documents (as defined in the Loan Agreement), or any other document,
instrument or agreement executed and/or delivered in connection therewith.

 

3.2          The Guarantor acknowledges that nothing contained herein shall be
construed to relieve the Guarantor or the Borrower from their respective
obligations under any Loan Document (as defined in the Loan Agreement) except as
otherwise expressly and specifically modified by this Amendment.

 

Section 4.              No Oral Modification.   This Amendment may not be
modified, amended, waived, changed or terminated orally, but only by an
agreement in writing signed by the party against whom the enforcement of the
modification, amendment, waiver, change or termination is sought.

 

Section 5.              Binding Effect.  This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.

 

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Section 6.              Counterparts.  This Amendment may be executed in any
number of duplicate originals and each such duplicate original shall be deemed
to constitute but one and the same instrument.

 

Section 7.              Invalidity.  If any term, covenant or condition of this
Amendment shall be held to be invalid, illegal or unenforceable in any respect,
this Amendment shall be construed without such provision.

 

Section 8.              Governing Law.  This Amendment shall be governed by the
laws of the state of New York (without giving effect to any choice or conflict
of law provision or rule that would cause the application of the laws of any
other jurisdiction) and applicable United States Federal Law.

 

Section 9.              No Novation.  No action undertaken pursuant to this
Amendment shall constitute a waiver or a novation of the Lender’s rights under
the Guaranty Agreement or any of the other Loan Documents (as defined in the
Loan Agreement).

 

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Section 10.            Costs.  The Guarantor hereby acknowledges and agrees that
it shall be responsible for the payment of any out-of-pocket costs, fees and
expenses of the Lender incurred in connection with the preparation, negotiation,
execution or delivery of this Amendment (including, without limitation, the
reasonable fees and disbursements of counsel to the Lender).

 

[Signatures appear on following pages]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed by their duly authorized representatives, all as of the day and year
first above written.

 

 

 

GUARANTOR:

 

 

 

ARES COMMERCIAL REAL ESTATE

 

CORPORATION, a Maryland corporation

 

 

 

 

 

By:

/s/ Timothy B. Smith

 

 

Name: Timothy B. Smith

 

 

Title: Vice President

 

 

[SIGNATURES CONTINUE ON NEXT PAGE]

 

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LENDER:

 

 

 

CITIBANK, N.A.,

 

a national banking association

 

 

 

 

 

By:

/s/ Richard B. Schlenger

 

 

Name: Richard B. Schlenger

 

 

Title: Authorized Signatory

 

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