Cohen & Company Inc (COHN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alesco Financial Fourth Quarter 2007 Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in its earnings release and during this call contains forward-looking statements, which involve a number of risks and uncertainties.

Alesco Financial cautions readers that any forward-looking information is not a guarantee of future performance, and that actual results could differ materially from those contained or implied in the forward-looking information. Factors that may affect future results are contained in Alesco Financial's filings with the SEC, which are available at the SEC's website at www.sec.gov.

At this time, all participants have been placed in a listen-only mode. Following the formal remarks, the call will be open to questions. I would now like to turn the call over to Jay McEntee, President and CEO. Sir, please begin.

Thank you, operator, and good morning, everyone. Thank you for joining us. Also representing the Company with me this morning is John Longino, our Chief Financial Officer, as well as several other members of the Company's management team. First, I would like to apologize for the delay in accessing this call. It took us longer than it should to bring all callers into the call. We will address this in the future and try to make it better.

Before beginning with our discussion about the performance of our company, let me first make a few observations about the public markets and the financial services sector. I must once again report that general market conditions have not improved. In fact, if anything, they have worsened since our last call.

The negative environment is reflected in our stock price, as well as that of our peer group of public companies. The fact is, that the Financial Services sector is in a state of upheaval as evidenced by recent headlines. To some extent, we are seeing the results of this in the banking sector, and we will have seen this impact in a few of our TruPS issuers, as I will detail later in this call.

In addition, the continued ratings downgrades of our ABS portfolios have impacted our Kleros Real Estate transactions, as I will discuss further, including the potential impact of this on our REIT status in future periods. That being said, as I will detail on this call, the reality is that our TruPS and mid-market loan portfolios have performed well and the Company is well positioned for the future.

AFN had over $80 million of unrestricted cash at December 31, and after paying the Q4 '07 dividend and posting an additional $20 million of cash deposit to extend the middle market loan warehouse, still had over $40 million of unrestricted cash. As of December 31, we also had unrealized value in our CDS portfolio of $67 million.

Subsequent to year-end, we received $54 million in cash security against our unrealized CDS positions. This cash security was received on margin calls by us, not on us, but by us against the swap counterparty. This puts our unrestricted cash balance as of today, net of the payment of the Q1 dividend declared yesterday, at approximately $100 million in cash.

To sum up, while our performance as a company has been negatively affected by this market, our non-ABS assets are performing more or less to plan, and our liquidity is excellent. As announced yesterday, we have declared a cash dividend for the quarter ending March 31, 2008 of $0.25 per common share. We expect our adjusted earnings for the first quarter to cover this dividend.

With that, let's go through the performance of the Company in more detail. First, I will update the status of the TruPS in mid-market loan warehouses and at-risk cash deposits discussed on our last call. Second, I will provide an overview of our fourth quarter performance.

Next, I will provide you with information on our current portfolio, and I will discuss where we see opportunities for our company going forward. Then, I will hand it over to John Longino, who will discuss additional details on our results for the fourth quarter.

As for the TruPS and middle market loan warehouses and cash deposits, I am pleased to report that we have resolved those matters in the manner we expected to at the time of our last call. As you may recall, we had $30 million of at-risk cash deposited on an expiring TruPS warehouse, which still had about $53 million of TruPS assets after the majority of the assets had been moved over the Alesco XVII securitization.

We were able to close this warehouse and get back our $30 million cash deposit. However, we did need to purchase directly on to our balance sheet $29 million of trust-preferred securities at par, which although performing, we were not able to place into existing deals due to CDO concentration limits. These assets are reported as of December 31, on a mark to market value of approximately $25 million, about 84% of par value and have a weighted average spread of LIBOR plus 250.

We also had two warehouses containing $176 million of middle market loan assets supported by $20 million of first-loss cash deposits. These warehouses were due to expire this month, and really walking away from them would likely have resulted in the loss of most, if not all, of our $20 million cash deposit. Instead, we are able to combine these warehouses into a new $200 million facility, which does not expire until May of 2009.

As we had anticipated, we needed to post an additional $20 million of first-loss cash deposit to secure this extension. The $40 million of cash deposited on the middle market loan warehouse represents our only warehouse exposure as of today. And again, it is without recourse to us and does not expire until May of 2009, and it does not require the contribution of additional capital as a result of mark to market or otherwise.

With respect to the results for the fourth quarter, I am happy to report that we have adjusted earnings of $0.53 per share. This amount includes $17.5 million attributable to net gains realized on our CDS positions during the quarter. I will talk about the status of our CDS positions a bit later.

As I mentioned previously, the significant headwinds in the business climate in which we operate have negatively impacted perception of our company. We continue to have confidence in both our ability to survive in the current tumultuous market and to grow in the future. Importantly, we have no short-term recourse repo or repo-like indebtedness which might subject us to liquidity challenges.

It is worth noting again that, as of the end of the year, we had unrestricted cash of $80 million. Following the January dividend distribution and the extension of the middle market loan warehouse, we still had unrestricted cash of over $40 million. In addition, we subsequently received $54 million of cash representing margin against the $67 million of unrealized CDS gains. Our total cash on hand today is approximately $100 million, again net of the Q1 '08 dividend to be paid in April.

It should come as no surprise that the currently extremely erratic adjustments to our GAAP book value and GAAP earnings experienced in the third quarter have continued through the end of 2007. As a reminder, this relates to the requirement that we mark to market our TruPS and MBS securities portfolios.

The aggregate negative OCI and earnings adjustments recorded against AFN's book equity through December 31, 2007 related to these marks is approximately $2.9 billion, of which $2 billion relates to our MBS portfolio, and $900 million to our trust-preferred portfolio.

We indicated that we expected that the negative impact on our equity would be mitigated to some extent upon the adoption of FAS 159 effective as of January 1, 2008. We have calculated that the expected adjustment will increase our GAAP book value by $2.7 billion, bringing total shareholders' equity to approximately $272 million or $4.58 per share under GAAP.

We expect that there will be significant correlation between future changes and fair value of our assets and liabilities, due to the match-funded non-recourse nature of these investments.

We continue to believe that it is very important to understand the Company's adjusted book value. We measure our adjusted book value by looking at the capital we initially invested in each asset class, and reducing those amounts for any permanent impairments in the value of those investments.

We have calculated AFN's adjusted book value in a table included in our Q1 -- our Q4 earnings release. Total capital of $645 million has been reduced by net cumulative impairments and losses recorded through the income statement of $137 million, resulting in adjusted invested capital of $508 million.

Deducting recourse financing, which consists of our trust-preferred debt and our convertible debt, yields a net adjusted invested capital of approximately $320 million or $5.40 per share at December 31. Note that adjusted book value does not reflect unrealized temporary gains or losses that affect our GAAP equity or book value per share.

Now, let's move on to our current portfolio and ongoing investment strategy. With respect to the overall strength of our portfolio, as we have detailed in the past, we have lived up to our commitment to investors to minimize interest rate risk and minimize funding risk by having long-term non-recourse match-funding of our assets.

As of December 31, Alesco Financial held approximately $3.9 billion par value trust preferred in banks, and approximately $1.2 billion par value trust preferred in insurance companies. The portfolio was built with an eye towards continually enhancing the granularly of that portfolio.

Of the 350 distinct banks and insurance companies held at December 31, no single issuer represented more than 2.4% of the pool. 336 issuers each represented less than 1% of the pool, and 302 issuers each represented less than 0.5% of the pool. IndyMac at 2.4% and E*Trade at 2.2% continued to be the largest exposures of our portfolio.

In terms of the quality of the bank portfolio, we do expect to see an increase from recent levels in the number of problem banks being placed on the FDIC's watch list and ultimately in bank deferrals and defaults in contrast to historical levels. As of December 31st, we had experienced one deferral in our portfolio, a bank with an $8 million TruPS in Alesco X deferred its December payment.

Subsequent to year-end, two banks in Alesco X, one for $6.5 million and one for $6 million and one bank with $20 million trust-preferred Alesco XIV have given notice that they intend to defer their March payments.

The regular notice date for deferring payments due in March has passed, without us receiving notice of other banks or insurance companies on our portfolio indicating it is their intention to defer. We have permanently impaired two of these TruPS by a total of $18 million in our fourth quarter income statement.

The combined impact from all of these deferrals will reduce our net investment income by about $300,000 or less than $0.01 per share per quarter. These deferrals do not result in an overcollateralization failure of any our trust preferred CDOs. In the event that an overcollateralization failure occurs, changes to the priority of payments would result in the equity holders, including us, not receiving any cash flows until such time as the failure is cured. Additional deferrals could result in the triggering of an overcollateralization test.

As previously stated, our portfolio of banks is being affected by the unsettled nature of the financial markets. We do expect further bumps in the road ahead. However, we remain bullish on this portfolio, and while there are likely to be some additional bank deferrals and defaults, we expect this portfolio to perform fairly well over time.

In fact, on March 6th, Moody's Investors Service issued a special report outlining its 2008 outlook for the trust preferred sector. In short, it noted that the primary impact of the current environment on TruPS CDOs has been felt by pools holding REITs or home builders. We have no exposure to these credits.

In terms of the quality of the insurance portfolio, generally speaking, the property and casualty side of the insurance industry, which dominates our TruPS business, has experienced a sharp increase in capitalization over the last several years to historically high levels. This is true of our portfolio as well. At the present time, we see no material credit issues in our insurance TruPS portfolio.

Now, I would like to turn to our middle market loan business. As of December 31, we had $176 million of middle market loan assets on warehouse facilities secured by $20 million of cash from AFN. As I explained earlier, subsequent to December 31, we increased the cash deposit by $20 million, and extended this $200 million warehouse facility to May of 2009.

The new warehouse line, like the old ones, is non-recourse to AFN beyond posted cash equity. It is not subject to margin calls and AFN has no liability with respect to this line beyond the posted cash collateral. Also, we have the option but not the obligation to increase the size of this warehouse facility to $260 million, which would increase our at-risk cash deposit to as much as $60 million.

There have recently been varying reports of problematic conditions in the leverage loan market. However, we believe that the middle market loans that have been acquired through our Emporia platform continue to represent an attractive investment opportunity for the following reasons.

First, we believe that the inherent structural and credit protection built into our loans distinguishes them from the market as a whole. Second, the diversification of this portfolio is quite significant. Further, we have intentionally avoided some of the borrower friendly structural provisions that we have viewed as too aggressive.

In particular, we have very limited exposure to the covenant like loans. They represent less than 2.5% of our entire portfolio. The average borrower in our portfolio comprises just 0.6% of the portfolio.

Through our proprietary platform, we have originated and retained about $150 million of loans, loans that we originate average nearly one full term less than the remainder of the portfolio in terms of leverage, which will be two full terms less than the broader market.

Approximately 90% of our loans are senior secured first-lien loans. These loans were made to companies in over 30 different industry sectors, and we have not experienced any significant credit losses or deteriorations in our portfolio, but we remain cautious over the short-term about the impact of general economic conditions on this portfolio.

Going forward, we remain positive about this business for both the mid and long-term. We are cautious given where liability spreads are currently, and about access to available financing over the short-term. This outlook played a role in our decision to commit additional capital to secure warehouse financing for these assets for the next year. We will continue to closely monitor market conditions and react accordingly.

Now, let's turn our attention to our MBS portfolio. As we have previously explained, the maximum investment at risk to the Company in the Kleros Real Estate assets is $120 million. Losses recognized in our income statement above this amount do not affect the financial performance of Alesco Financial.

As we have also explained, none of the Kleros Real Estate CDOs are making cash distributions to AFN, since they have all triggered overcollateralization tests, as a result of significant rating agency downgrade activity. The net cash flow of the Kleros Real Estate CDOs is currently being used to pay down the most senior note holders in each CDO.

Despite the fact that each Kleros CDO has triggered overcollateralization tests, the net interest earnings of these CDOs will continue to be reflected in AFN's net investment income and re-taxable income so long as the underlying MBS continue to make payment to the CDOs.

Further, the assets and income from these vehicles will continue to be factored into our re-qualification tests until such time as our equity and the underlying CDOs is sold, or the CDOs default and are then liquidated by the senior debt holders.

Subsequent to December 31st, we were notified of additional rating agency downgrades that triggered an event of default in Kleros Real Estate III. An event of default condition gives the senior debt holder the right to liquidate the deal.

To date, we have not received notice that the senior debt holder for KRE III intends to trigger the liquidation of this transaction. Should they choose to do so, we would no longer include the income from KRE III in taxable income. In addition, we would no longer be able to factor the assets or income from KRE III into our requalification tests.

We do not expect that the liquidation of only one of the four Kleros Real Estate deals would present a significant challenge to AFN maintaining its REIT status throughout all of 2008. However, liquidation of two or more of these deals could present a challenge depending upon when the liquidation occurs.

The deeper into 2008 the deals remain in place, the less significant the challenge is to secure sufficient real estate qualifying assets to generate sufficient additional qualifying income to maintain 2008 REIT status.

That being said, I would like to point out that if the Kleros Real Estate transactions fail to produce sufficient income to satisfy the REIT income tests, the Company has options we can pursue as long as we are committed to retaining our REIT status.

As to our CDS positions, the $96 million of remaining open CDS positions we had in place during the quarter generated an additional $20 million of unrealized gains bringing the total unrealized gains to $67 million at December 31st, from $44 million at September 30.

As expected, these unrealized gains largely offset $24 million of additional permanent impairments generated on our other CDO investments reducing our remaining exposure to those other CDO investments to only $3.7 million at December 31. Other CDO investments represent interest held by us in non-consolidated CDOs, which primarily hold MBS.

During the quarter, we also realized net gains on our CDS positions of $17.5 million. At December 31, 2007, Alesco Financial holds the residual in $1 billion of prime hold residential mortgage loans. Not surprisingly, these loans have been performing worse than originally expected resulting in loan-loss provisions of 0.8% life-to-date.

Our cumulative loss estimate on the currently performing loans in the portfolio is now approximately 1.1% as compared to the original 0.30% original expected amount. Note that the mortgage loans are not a significant component of our adjusted earnings contributing less than $0.01 per share quarterly.

Now, I would like to talk about our business going forward. Our number one goal and priority beginning in late summer when the stress in the capital markets began to surface and continuing through the end of the year, had been to address our liquidity and to ensure the viability of the Company. At this juncture, it is clear to us that this goal has been accomplished.

It is now time to focus on mid and long term goals for the Company. During the first quarter of 2008, we have not been expanding our portfolio of assets, nor have we been focused on fighting the markets to effectuate any transactions. However, we now believe that it is appropriate to consider what opportunities current market conditions may present.

We do believe that the turmoil in the marketplace will offer significant opportunities to us and we are considering several, while we are not at a point where we have sufficiently developed definitive plans to recommend new investment strategies, I want to emphasize that we are actively reviewing various alternatives.

As part of this analysis, and given the increased risk of outside forces possibly impacting our ability to remain a REIT, we are keenly focused on identifying a strategy that will enable Alesco Financial to continue to build a strong successful business, and a structure that does not hinder future performance.

The optimal structure may very well be to continue to operate as a REIT. Alternatively, it could be more advantageous to become a C-Corp or a publicly traded partnership. We hope to be reporting back to you over the next several months as to our plans in this regard.

Due to possible liquidity issues related to our TruPS and middle market loan warehouses existing earlier in the quarter, we have not bought back shares prior to entering into our current blackout period. We will continue to consider stock buybacks, but given the importance of maintaining our liquidity, we are not firmly committed to effectuate such a buyback at this time.

I will now turn the call over to John Longino, our Chief Financial Officer, who will discuss the Company's financial results.

Thank you, Jay. For the fourth quarter ended December 31, 2007, we had $31.2 million or $0.53 per diluted share of adjusted earnings, a non-GAAP measure of performance as compared to $18.7 million or $0.31 per diluted share for the third quarter. The fourth quarter amount includes $17.5 million of net gains realized on our CDS positions.

We define adjusted earnings as net income available to common stockholders determined in accordance with GAAP adjusted for the following non-cash items; stock based compensation, allowance for loan losses, unrealized gains or losses on derivatives, impairments on investments, amortization of deferred financing costs, and deferred tax amounts.

For the fourth quarter, we reported a GAAP net loss of $729.3 million, or negative $12.31 per diluted share based on $59.2 million weighted average shares outstanding, as compared to a GAAP net loss of $496.6 million, or negative $8.36 per diluted share based on $59.4 million weighted average shares outstanding during the third quarter.

As I will discuss in more detail, this loss is primarily due to $775 million in losses related to other than temporary impairments of our MBS portfolio, other CDO investments, and TruPs portfolio.

Adjusted earnings of $31.2 million reflects the following non-cash reconciling items arising during the quarter. $769 million of impairments primarily on our MBS portfolio, other CDO investments and TruPs. $17.6 million of realized and unrealized net gains on derivatives. $6.2 million of loan loss provisions, and certain other minor amounts reflected in this schedule attached to our earnings release. The result is $0.53 of adjusted earnings per diluted share for the fourth quarter of 2007.

Net investment income, which also includes the amount earned by minority interest holders, was $26 million, or $0.44 per diluted share in the fourth quarter, and $21.8 million, or $0.37 per diluted share for the third quarter.

Net investment income for the fourth quarter was generated from trust preferred $21.8 million, or $0.37 per share, middle market loans $4.7 million, or $0.08 per share, residential mortgages was actually a loss of $3 million, or $0.05 per share, mortgage backed securities $5.2 million, or $0.09 per share, and other CDO investments $1.4 million, or $0.02 per share.

Also included in net investment income is interest expense of $4.1 million, or negative $0.07 per share related to our $190 million of recourse indebtedness. Net investment income for the residential mortgage loans and the leverage loans include approximately $4.5 million and $2 million respectively of provisions for loan losses recorded during the three months ended December 31, 2007.

Related party management compensation, which is primarily asset management fees paid by the underlying CDOs, remained consistent with the third quarter at approximately $4.7 million. General and administrative cost for the fourth quarter increased to $3.4 million, as compared to $3.1 million for the third quarter.

The primary cause for this increase is the addition of Alesco XVII CDO. By far the most significant number in the income statement for the fourth quarter is the $731 million of other than temporary impairments on our MBS investments.

As we have discussed, prior to the adoption of FAS 159, generally accepted accounting principles require us to mark the nearly $4 billion of MBS investments held on our balance sheet to fair value each quarter, but does not permit fair value adjustments to the corresponding non-recourse liabilities supporting these investments.

GAAP also requires us to recognize in the income statement impairment losses on individual bonds within the $4 billion portfolio, which are deemed to be other than temporary. Through December 31, 2007, the fair value of these MBS investments has been decreased by a total of $1.9 billion, which includes $554 million reflected in other comprehensive income, and a total of $1.3 billion including the $731 million fourth quarter amount in the income statement.

Given our total investment in MBS of $120 million, this amount exceeds the maximum possible economic loss on this portfolio by $1.8 billion. While $1.3 billion in losses have been recognized in the income statement to date on the MBS portfolio, none of this loss has actually been realized for tax purposes to date.

In addition, even in such time as these losses might be realized for tax purposes, they would represent capital loses, which may not be deductible in determining REIT taxable income and the related minimum dividend distribution requirement for REITs of 90% of REIT taxable income.

Interest and other income of $2.5 million consists primarily of interest earned on restricted cash held in our CDOs, which closed earlier in 2007. This is down from the $4.3 million of interest and other income for the third quarter as the restricted cash amount has decreased, as additional trust preferred and mid-market loans were obtained to fully ramp each of the closed deals. Restricted cash totaled $95 million at December 31st, as compared $174 million at September 30th.

Net realized and unrealized gains of $39 million, consist primarily of $19 million of realized and $20 million of unrealized gains on our credit defaults loss. The unrealized gain of $20 million on CDS positions in the quarter was offset by the continued deterioration of our remaining other CDO investments, which declined to $3.7 million at December 31st, from $27.3 million at September 30th.

As of December 31st, after reflecting mark-to-market adjustments, our investment portfolio totaled approximately $8.5 billion, including $4.5 billion related to trust preferred and subordinated debentures, $2.1 billion in mortgage backed securities, $1.1 billion in residential mortgages and $0.8 billion of leverage loans.

Of the $11.1 billion of debt on our balance sheet at December 31st, only $190 million is recourse to AFN. This consists of $140 million of convertible bonds issued during the second quarter, and $50 million of trust preferred debt.

The $10.9 billion of non-recourse indebtedness consists of $9.4 billion of CDO notes payable, $1 billion of securitized mortgage debt, $0.4 billion of trust preferred obligations, and $0.1 billion of warehouse indebtedness. Also, as of December 31st, we had negative GAAP book value per share -- per common share outstanding of $40.45.

Book value is calculated by dividing total stockholders' deficit by the number of common shares outstanding. The total stockholders' deficit was $2.4 billion and total common shares outstanding was $59.3 million. Our equity has been reduced by write-downs of MBS by over $1.8 billion beyond our possible economic loss.

We have also recorded a cumulative unrealized loss with other comprehensive loss of approximately $924 million on the trust preferred and subordinated debentures that are consolidated in our financial statements. The unrealized change in fair value of TruPS is primarily attributable to the increases in credit spreads due to the recent developments in the macro credit markets.

In the fourth quarter, we also recorded a permanent impairment charge on TruPS assets totaling $18 million. The aggregate negative OCI and earnings adjustments recorded against AFN's book value through December 31, 2007 related to these marks is approximately $2.9 billion. We indicated that we expected the negative impact on our equity will be mitigated to some extent upon the adoption of FAS 159 effective as of January 1, 2008.

We have calculated that the expected adjustment will increase our GAAP book value by $2.7 billion, bringing total stockholders equity to $272 million, or $4.58 per share under GAAP. As Jay previously explained, our adjusted book value of $5.40 per share does not reflect the unrealized temporary gains or losses that do affect our GAAP equity and book value per share.

At this point, I would like to turn the call back to Jay McEntee.

Thanks, John. I think it is appropriate to once again acknowledge the significant uncertainty that exists in the financial markets, and that we are not immune to the adverse developments in these markets. That being said, we have been weathering the storm, and we believe we are well positioned to move forward.

We have a strong balance sheet, which unlike many of our peer companies, has no repo or repo-like exposure. Most importantly, we remain focused on translating our progress into value for shareholders.

We have set the first quarter dividend at $0.25 per share, and we believe investors should anticipate that as long as we continue to operate as a REIT the dividends for the remainder of 2008 will remain in the $0.25 to $0.30 per quarter range. In addition, we hope to be able to report to you over the next few months the strategy that we think is best for the Company to move forward.

So now, I would like to ask the operator to open the floor for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Robert Knapp from Ironside Partners. Please proceed.

Hello, good morning guys, a couple of quick questions. I will say them, and then you can order it and answer whichever ones you want, or whatever order you want. You had $0.53 of what I understand is some form of NOI, you are only paying out $0.25, I was wondering if you could just try to explain the difference? And in answering it, what are the RIC rules require you distribute?

And then, in terms of what you might do with your future structure, could you discuss how -- whether you are going to have some substantial tax losses and how you can manage those or when they get realized? Because obviously if you switch to a C-Corp, one of the attractions to investors will be, if there's a long runway of profits that you can make that won't be taxed.

And then finally, just philosophically on the yield, you got a 35% yield right now, you don't have any repo structure. Merrill Lynch wrote a nice note recently saying that the equity tranches of some of your CDOs you have structured are trading around a 40% yield, and I would just be interested in hearing what your thoughts are in terms of the risk-reward versus what else is out there. Thanks.

Sure. Thanks for your questions. First the $0.53 versus the $0.25, we did have economic earnings of $0.53 and we could have declared a dividend of the $0.53, I suppose. It seems to us two things, one that we should be communicating to investors sort of the run rate and $0.25 in our view is much more akin to the run rate than the $0.53. The $0.53 included significant CDS gains. Without the CDS in Q4, we are looking adjusted earnings in the $0.30 range.

You then asked the question about the RIC rules. I think you meant the REIT rules in terms of distribution. We, in order to be REIT, we are required to distribute by the end of the year actually technically slightly subsequent to the end of the year, 90% of our REIT earnings for the year. So, we would have to distribute 90% to maintain REIT status.

In terms of future structures including NOL utilization or generation and other things, I really much prefer to defer that discussion until we actually have a plan. I don't want to discuss various alternatives that we haven't really thought through completely yet. So, I am going to punt on that question if you don't mind. In terms of the yield, I am no longer able to figure out the equity capital markets and how the stocks are priced.

Obviously, you can see how we trade in sympathy to a number of other companies. When company X has a major negative announcement, we trade down. Those announcements tend to be of late related very much to repo financing and margin calls and things of that sort, and we have worked very hard to create a company that does not have that risk. And so, I am a little bit upset about the fact that we trade in sympathy with those issues, but it's the world in which we live and there's really not a lot that we can do about.

We do have -- we are a credit company. Our company is focused on and engineered to take credit risk and is so in the financial services sector. So, given all the noise in that sector, I think one could expect some volatility. It doesn't surprise me. Should our stock be under $3 a share, I really don't think it should, but it is what it is and our job is to block and tackle every day, not really to focus so much on the share price frankly.

Okay. Great, thanks for that.

Sure.

Our next question comes from Jim Ballan from Bear Stearns. Please proceed.

Hi, this is a [Tate Solomon] for Jim Ballan, two questions. I think you said you had $50 million of cash within the CDOs. Is part of this cash in the CLOs and can you redeploy wider spreads? And then the second question is, can you just comment on the return profile of your different asset categories? I think you disclosed that last quarter. Thank you.

Yes, the total restricted cash is actually $95 million, Tate. About -- a majority of that is actually in the Emporia, more than half of it is in the Emporia mid-market loans. So, we can deploy that in wider spreads. The second question was by category?

Right, I think you broke it up on the return on investment capital based on your TruPS and CLO buckets, but can you give any sort of guidance what you expect for the rest of the year?

I mean, it should be consistent with what we had previously.

Okay, thanks. And all the cash in the system including restricted, do you earn a residual, a small interest amount on that?

It varies. The cash that sits inside of a CDO, there is interest earned on that. Some of the unrestricted cash that we hold today, we receive that cash on margin calls. We don't actually earn interest on it. We, in fact have to pay interest over until we close out the CDS position.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS)

Our next question comes from [Joe Laban] from Smith Barney. Please proceed.

Hi, what is the most highly probable favorable thing that could happen in the industry or to Alesco, and what is the most highly probable negative thing that could happen to Alesco going forward?

I am not really sure how to answer that question, but I think the focus of the Company is on credit. And so, as goes credit in the financial services sector generally and the broader market with respect to our mid market loan portfolio, as goes that market so will go Alesco.

So, the doomsday scenario is massive bank failure or a wide and deep recession, as opposed to a technical and short recession. That would have a negative impact on our cash flow. And conversely coming out more quickly from the turbulence that we are seeing today would have a positive impact. I don't think there is a discreet one-off issue that I would focus on as being a key driver to our success or less success.

Thank you.

Our next question comes from Lee Cooperman from Omega Advisors. Please proceed.

Yes. Hi, I am a novice in this area.

Yes, that's very fine.

No, no, I have given my performance so I qualify. But, basically, you make it very clear in your statements that the viability to company, I think you actually used the word viability to the Company is clear. I see you are not concerned about debt, you are trying to find ways of growing it and improving it.

I look at FASB 159, there is some enormous unbelievable mark-up of that book value because your liabilities are trading at such a low value. The only thing I would suggest to you with $100 million odd of unrestricted cash, there is a lot of value you could create by looking at those liabilities outstanding that you are ultimately going to have to pay back.

And if you are a viable organization, I think you create a lot of value for the existing shareholders by retiring some of these liabilities at $0.20, $0.30, $0.40, $0.50 in a dollar, and the implied rate of return is enormous. So, I just put that in your bonnet and do with it as you like.

Sure. Lee, we can't affirm. We have worked very hard to get the balance sheet in solid shape. And as I said, we have got $100 million in the bank today because of that, and absolutely no short-term call on that at all. We see no issue with us continuing to -- even in a doomsday scenario continuing to satisfy our normal ordinary obligations and then some. So, I don't foresee or see any scenario in which this Company's life is threatened.

In terms of the opportunities that are in front of us, there are many. Buying back some of our debt is certainly one of them. There are many who beat a drum to buyback stock for a long period of time and it did seem compelling at the time. But, looking back over that time, I think it made sense to gather cash. Cash is king in this environment.

It doesn't mean we should turn our back on compelling opportunities. We should not, but we need to think through what the strategy of the Company should be to create value. And certainly purchasing debt at a discount is without question one of the options that exists. And frankly, purchasing stock at its current level I think is also an option. I don't think anything is off the table.

And now, as I said, we have gotten through what I -- I didn't really expect it to be a time that would threaten the Company, but I just wasn't sure given what was going on in the world. Now, we are very solid. We have no short-term calls on our cash at all beyond the obligation to distribute our regular earnings. So, I feel good about where we are and I think there are many opportunities, and some of the ones that you mentioned fall in that bucket.

Good, thank you.

Our next question comes from [Ken Tomkins]. Please proceed.

Yes, hi. My question goes back to what you were saying. It seems like the most compelling value is the pre-purchase of your shares at these ridiculously low levels. Can you comment on what the probability is that you will be reinitiating your stock buyback?

Yes. I won't give you -- I won't comment in terms of probability. I am, as you can well imagine, very cognizant of the opportunity to buying the stock back would entail and it's something that has come up on every call, something we think about constantly and talk about constantly.

I continue to have Board authorization to do so, but as I stated a few minutes ago, I think that what we should be doing right now is considering the strategy for moving forward. And, I think our job is to make sure we create long term value for shareholders, the best thing to do may be to buy back shares, that's something that's on the list of alternatives, but I can't commit any greater than I just said previously.

Okay, thank you.

We have a follow-up question from (inaudible). Please proceed.

Hi again. The common theme on this call is cash is king and liquidity is crucially important. It would seem under these circumstances that when you are analyzing your three investment choices about a structure going forward, REIT C-Corp or publicly traded partnership that not being a REIT would certainly assist in the cash is king, liquidity is crucial concept because then you wouldn't be required to pay what is equivalent of $60 million a year in dividends. Is this an accurate assessment on my part?

Well, it is an accurate observation to the extent that cash is king, not having to pay the dividend will increase our cash. That being said, our job really is to create value for shareholders and we believe in paying dividends.

And so, we think that some of the earnings should be distributed out to shareholders so that the issue of, if I thought that the Company was in a dire situation, I probably wouldn't have paid first quarter dividend, right. But, I think the Company is quite solid and shareholders came into this Company expecting to be paid their regular dividend assuming all was reasonably okay in the world and it would be my expectation to meet that expectation.

Thank you.

Our next question comes from Paul Berman from RBC. Please proceed.

Good morning. Being a 28 year veteran in the brokerage business, I am still perplexed I guess to understand why buying back stock when you are paying a $1.25 dividend, which obviously you can save up to let's say [375] on the share price, so you get the third back on not paying that dividend. Why wouldn't that move to the top of the list?

I know you don't -- for some reason, you don't want to prioritize what your investment choices are, but it's not all or none it seems to me if you are sitting with this type of liquidity. So, maybe you can enlighten me a little bit on why that wouldn't go to the top of the list at least for a part of this liquidity that obviously would create more liquidity for you?

[Tim] I'm a little befuddle on how I would create more liquidity, I still would have to distribute 90% of my earnings, but I don't quibble with the value proposition you are presenting, which is -- it's very compelling. It's been very compelling since August and I thought it was compelling at $6 frankly. And others were hammering me to do it, and I didn't have very good arguments against it other than I felt assuring the liquidity of the Company was priority number one.

And as I said, we have done that, we have accomplished that. So, it's a good question to say why don't I buy back shares now. As Lee Cooperman just pointed out, there is a discount in how our debt trades today and perhaps that's a sound investment as well. It may not be -- the math may not be as compelling as the common stock, but that activity will begin to mitigate the 2012 payment date that I have for that debt. So, I think that's a relevant consideration as well.

The other piece of course is that to the extent that I use the liquidity that I have and that liquidity is gone, I am taking other options off the table including moving forward as a successful Company. I can't engage in additional activities investing, yes, I don't have cash to do it. And so, all of these things have to be put into the hopper and thought about.

It may be that the investment opportunities are not as compelling as simply buying back the stock and continuing in a steady state form for the Company. That being said, I think a company that doesn't project, doesn't prove that it has a future, I think the discount that's going to be associated with that company is quite significant. I think you see part of that today and people don't believe that we can move forward.

And given what's going on in the world generally, I am not surprised that that's how they feel, but I do think that looking at all of the options moving forward, buying back stock, buying the convert, all of these things are worth a very deep dive, thoughtful consideration.

And I am not telling you that six months from now when I look back we will say, oh you know what, we executed that perfectly. I don't know. But, we are going to think long and hard about it, and come up with what in our best judgment is the best course of action.

Just to follow up, I am sure you are and as a shareholder, and as my clients as a shareholder, we obviously have the confidence that you are riding the ship. Obviously, you are aware of the short position that is in the stock and obviously as you have said almost on every comment you are doing everything you can do to bring shareholder value. Certainly a buyback sends a signal to the shorts that are currently out there, that I'm sure as you are aware of.

Yes, I am aware and you are an expert at this, I'm not. So, I feel reluctant to say too much, but I'm generally reluctant to engage in stock buyback activity to sort of impact the market, which is what you're suggesting. It just should be a fundamental analysis of value. And I just don't -- I am sympathetic with your argument. I just don't think it's the right thing to us to do, wake up in the morning, check the short position and buy stock based on what the short position is. I admit I could be wrong on that, but that's how we feel about it.

No, that's -- I mean, it's a philosophical discussion. Obviously, if the stock was $6 instead of $3, it gives you other opportunities that you don't have when the stock is $3. And some of us participated obviously on the RBC offering at a much higher price.

And so, you have seen very smart managers of companies in my 28 years sell at a price and buy back at a lower price and continue that process over years. And unfortunately, because rules of engagement have changed with the shorts of the world, I think it is a consideration when you have shareholder, when you are obviously trying to do what you can do for shareholder value. But, anyway, a good job, continue better success.

Yes, thanks for your comments. They're fair.

Yes, they are fair.

Our next question comes from Rick Sherman from Oppenheimer. Please proceed.

Yes, hi. I think on your last call, I might have just missed this on this one. You broke down the -- how the dividend was derived. I think you commented like $0.20 was from the TruPS and so much was from the middle market, et cetera. Could you kind of run through that like how you derived the current $0.25 dividend or any dividend that you pay?

What we talked about -- the current dividend by the way is -- that we have just declared and we will be paying in April is a forecast of the first quarter. The December dividend which is the earnings that we just released, and what we did walk through in the call was kind of the components of net investment income.

So that's kind of above the line, but before you get into the later party management fees and G&A costs, et cetera, as well as any below the line gains and losses which are clearly impacting is the re-taxable income and the distribution. So, we did talk in terms of the components. The biggest pieces of the income are still coming from the trust preferred and the mid-market loans.

Okay. Is there -- at what level of impairment on the TruPS preferred, does that start to -- you have mentioned a few things of where you have taken a more permanent impairment subsequent to the end of the quarter. When does that -- I think you said it was less than $0.01 right now, but when does that start to actually bite?

Well, again, we have not triggered in any of the individual deals the overcollateralization test which would start to affect cash. Even at that point frankly, it doesn't necessarily affect our income.

As you will recall with our Kleros Real Estate deals, we -- even though each of those deals have shut off cash flow to us, all four of them including the one that has actually had an event of default, all four of them continue to have earnings inside the vehicle and therefore, we have income at the REIT level. And that same phenomena could occur in the trust preferred CDOs or the mid market loans CLOs even if we were at some point trigger an OC test.

Okay. And then on your credit default swaps, if you wanted to close those out, is that something that can be done in a day, a month? I mean what's the process if you truly want it --? Let's say you had reached a conclusion that the market had bottomed and it's getting ready to go the other way. It is all hypothetical, but I am saying, what are your options relative to closing that out and grabbing the profit and the cash?

Sure. We look at these, and frankly, we are taking positions where we do continue to pay premium on these bonds, and therefore to the extent we believe we can actually either go out and buy a bond and retire that way or close the position, we will do some of that. It is going to be done within a day or week depending upon which bond we are talking about.

Some of this is, we are looking at positions that we just felt we are going to continue to go down and eventually we will go to zero. So, it makes sense for us to continue to pay the premium and to reap the full benefit of those.

So, this is something that's liquid and also because there is a problem obviously with some markets, you can't really get the right pricing, so these do have easy to realize pricing mechanisms still?

Yes. In fact, one of the telltale signs of that is that we were able to go out there and get $54 million worth of cash and we did that very much by just saying, "Okay, the positions are in the money, we need some cash collateral against these positions."

Your counterparty, are they stable well known companies?

I mean, the fact is regardless of who our counterparty is, we don't make an assumption today that any counterparty is beyond reproach, and therefore we wanted cash even though we do feel that our counterparty [sell] is very solid.

Okay. Thank you.

Our next question comes from [Al Mitchell]. Please proceed.

Yes. Can you give a little more clarity on the TruPS and the deferred payment, who they are?

Yes. Our policy with respect to that is we generally don't list the names of what I would call the ad hoc banks that are in. We do list concentrated positions. These banks are regionally diverse, not currently large companies so we are quite reluctant to release those names. There is nothing informative about who they happen to be.

Can you also give us an idea of what are some of your plans to create more income going forward?

I think I would like to defer that discussion until we have a more definitive strategy to discuss. I think that we continue to be bullish on these asset classes, the trust preferred as well as the middle market loan business, and we are thinking through different ways of creating value in those sectors and to a lesser extent some other sectors.

So, we are not reinventing ourselves. We are looking at ways to evolve with the credit skills such that we have in a capital markets environment that's effectively closed. We have some ideas in that regard and we are working on some things.

Okay, thanks for a good quarter.

Sure.

Our next question comes from [Stephen Young] from Wedbush Morgan. Please proceed.

Looking forward, is there still much or any possibility or probability of recovery on the value of the assets?

On the MBS side of the equation?

Anything that you have marked down, I realize your new FASB rules given you a lot of it back, but just by say looking forward, is there any opportunity to see some increase in asset value?

Sure. Yes. On the ABS side, I mean we would just throw up our hands and say no. There's of course some theoretical possibility, but frankly what's going on in these ABS structures is well beyond anyone's wildest imaginations just six months ago or nine months ago, and I think it doesn't make sense to spend a lot of time on that.

On the trust preferred side, absolutely. We don't have any, even the deferring banks are alive and moving forward and a lot of it depends upon what the regulatory scheme is over the short-term, but absolutely are hopeful that we see full recovery on that. That's not what I am promising or projecting, but we do have some hope that that would evolve in that fashion.

Thank you.

Our next question comes from [Mark Ames] from [Ames Capital Management]. Please proceed.

Hi, thank you. I was wondering regarding your TruPS portfolio, can you give any more color without giving specific names on the cash flow and rating triggers in those deals and anything that would allow us to analyze whether the likelihood of those deals -- the equity in those deals getting cut off?

Sure. Typically, in each transaction, you got approximately 3% of the entire transaction, maybe a little bit more that must go into deferral before the cash flow shut off is triggered. In these, we continue to have accretion in each of the transactions that we have. So, depending on kind of where the world goes in the future, that will dictate whether or not there is cash flow upset there.

And just to follow on, the average size of each individual asset in those deals is what percent of the portfolio?

The average size isn't the right question, it is the maximum size. The maximum size is close to that 3%, so that we can have inside particular issuer, particular CDO, a 3% concentration in that. So, one bank would come very close if it was the largest concentration.

Okay.

Yes, the average is actually like 0.28%, but the average is not what's going to trigger an LC trigger, it would be concentrated positions, the highest -- so as I said, the highest can be close to that 3%.

Thank you.

Our next question comes from [Chris Walry] from Raymond James. Please proceed.

Hi guys. There has been a lot of talk about the issue of buying back stock on the call today, and I just wondered maybe it might be simpler to explain those, maybe from your perspective, is there more of a cash flow issue with buying back stock? And I am not sure how the accounting rules apply, but it seems to me if you bought back stock, you would still have to distribute 90% of your income.

So, on a cash flow basis, it doesn't necessarily benefit you because still 90% of your taxable income goes out. Maybe explaining that a little bit more might help me and other people understand why you are wrestling around with the idea simply because we are looking at the same -- you have got a 30%, 35% ROI by buying back stock and you know your company as opposed to going out and doing other things makes sense or not. So, maybe you can talk about that a little bit more.

Sure. You are exactly correct, so that -- to the extent that my current cash is depleted to purchase stock, I don't get the benefit, for example, of the dividend. The dividend is going to get paid to the Company, I continue to have to distribute the 90% of the REIT earnings to the then-existing shareholders.

It is quite beneficial to shareholders, I am not quibbling with that, because if I am increasing each shareholders relative ownership in the Company, it will be significantly beneficial, which is why we are very focused on it as an option. But, in terms of cash, it is a reduction in our liquidity.

And frankly, until now, I think the right course of action clearly was to maximize liquidity. And as I said, we have accomplished that. So, it is -- without question, it is on the table here. But, I think the course of action that we have taken to get to where we are and to think now and the future think through what the options are before removing those options by eliminating our liquidity I think it makes sense to do that.

And Jay, maybe you can clarify a little bit more for us -- maybe it is Kleros, maybe it is some other things including just frankly more banks deferring, but maybe what is kind of keeping you up at night or the skeleton is in the closet, you are feeling like, cash is king and I want to have it there, and I am waiting to see how this economy progresses, and if we get a more acceleration on deferrals or maybe even defaults in some of this thing.

Is that kind of what you are thinking you feel like, or is there some major cash infusion on some of your structures and I will be the first to admit, I am not an expert on all of these things that you guys are doing with all the different structures you have, but is there some kind of thing in the back of your mind thinking I might have to use $50 million in a short period of time?

All right. Well, a couple of things. I am sleeping a lot better today than I was six months ago, honestly. But, I don't see -- there is nothing that could happen that could result in my having to write a $50 million check anytime between now and 2012 that I can see. There are some opportunities, this call is already an hour and 23 minutes, I am trying to, as I said to John earlier, we got to get this call shorter, but I am trying to not go through every potential turn in the past year.

But, even with respect to our Alesco CDOs, there is by happenstance an opportunity by virtue of the $29 million of trust preferred that we took on our balance sheet. It would be possible to maintain the cash flow to avoid an OC trigger if we had further deterioration in a deal or two that required replacement of some collateral.

I don't want to get into too great [a] detail, but there are a number of options that we have open to us and the liquidity that we have, we created those options and because of the liquidity, I could effectuate the Alesco 17 deal, which in turn allowed me to get rid of that TruPS warehouse.

And so, I think all things have lined up pretty well. The concern that we have, the risk-reward formula that we have is credit risk. And clearly, we are in an environment in which credit risk is being discounted more greatly, not [longly]. I mean, I think we are in for a bumpy road here and we will see whether our credit skills were greater than the markets and I think that they were, time will answer that for us.

But, so I don't lay in bed at night thinking -- I don't lay in bed at night, I am sleeping well. The issue is that we will have also around credit and I -- by and large, I think if we have a deep and wide recession, credit will be worse than it otherwise would be. So, to the extent there is movement afoot to try to push this economy along, that is a good thing and it will be good for us.

To the extent we suffer through a more difficult period, I think that we are positioned -- the structures that we have in place, the people that we have in place to deal with this, I think when the dust settles, we will be happy with what we were able to accomplish. But, it may not be pretty along the way if the world continues to suffer in the ways that some of our recent headlines suggest.

All right, thank you.

Sure.

Our next question comes from [Kevin Mullen] from RBC Capital Markets. Please proceed.

Hi, just a quick question, the reserves on the prime residential portfolio, can you just tell me again, I think I missed it, what were they this quarter versus last quarter?

We actually took $4.5 million of additional provisions on the residential mortgages in the fourth quarter. So, bringing that up significantly to the point that we were at 0.8% of our total pool, our total loan-loss reserves stands at $8.5 million at the end of December.

We also do expect that pool is going to run more like 1% of the current loans going forward. Forget about the ones that we have already identified and provided losses for. The currently performing loans, we are assuming a 1% effectively loss rate on that pool whereas when we originally modeled it, it was 0.3%.

Okay. And the average FICO score that portfolio?

About 735, back when we -- at the origination of loans. So, make that whatever you think it should be.

Okay, thank you.

And now, I would like to turn the call back over to Jay McEntee for closing remarks. Please proceed.

Thank you, operator, and thanks again for all of you for listening to our comments. I promise will try and make these calls a little bit shorter and starting on time in the future, but thanks again for your time.

And easier to get into frankly, we have a button on -- our webcast on the website that we will publicize a little better next time. I think that will make it easier access for people than trying to dial in through the operators, if you prefer.

Thanks again. Have a good day, everyone.

Thank you for participating in today's conference. This concludes the presentation, you may now disconnect. Have a great day. Thank you.