Mortgage manager Firstfolio must raise capital by June to avoid defaulting on the terms of its senior debt-funding arrangement. The company disclosed in its financial report for the December half-year, which was released yesterday, that it had previously given Commonwealth Bank an undertaking to raise equity capital and retire debt by March 30.The company has debt of A$64.6 million. It has a $35.3 million senior debt facility with Commonwealth Bank and a $29.3 million loan from a "director related entity". It has net assets of $40.9 million.Earlier this month, Firstfolio announced a binding heads of agreement with Australian Capital Enterprise to raise $57.6 million in equity capital. The company negotiated an extension to its financial covenants to June 15 to correspond with the timetable for the completion of the capital raising.Australian Capital Enterprise will take $1.7 million of shares in an initial placement, underwrite a rights issue that will raise $8.9 million, and then take $47 million of shares in a second placement. Following the issues, ACE will hold between 50.54 per cent and 75.2 per cent of Firstfolio's issued capital, depending on the take up of the rights issue.ACE is "a special purpose company established to hold the investment in Firstfolio Ltd." It has approval for funding, subject to satisfaction of the conditions contained in the heads of agreement, from an unnamed US and Korean investment group.The transaction will be subject to the approval of Firstfolio share-holders at an extraordinary general meeting, which is expected to occur in April.The financial report says: "If the consolidated entity breaches its financial covenants as a result of failing to raise capital and the CBA and other debt providers require the repayment of debt on demand, then, in the opinion of the directors, material uncertainty will exist regarding the ability of the consolidated entity to continue as a going concern."Firstfolio has loan book worth close to $20 billion, which it has built up through a series of acquisitions over the past few years. Performance suffered as the mortgage market weakened, and the company struggled to cope with higher operating expenses and finance costs.It reported a 50 per cent fall in net profit in the 2011/12 financial year and announced that it would undertake a strategic review.In the December half, settlement volumes fell 14.6 per cent, compared with the previous corresponding period, and the value of the loan book fell from $19.9 billion to $19.4 billion.Operating EBITDA (earnings before interest, tax, depreciation and amortisation) was down 2.9 per cent. With the benefit of some aggressive expense management, the absence of any acquisition costs and a much lower tax bill, the company made a net profit of $1.8 million, compared with a profit of $968 million in the previous corresponding period.