Cohen & Company Inc (COHN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alesco Financial Incorporated Third Quarter 2008 Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in the earnings release and during the call contain 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 the Alesco Financial filings with the SEC, which are available in the SEC's website at www.sec.gov. At this time, all participants have been placed into a listen-only mode. Following the formal remarks, the call will be open for questions.

I would now like to turn the call over to Mr. Jay McEntee, President and CEO. Sir, you may begin.

Thank you, Operator, and good morning, everyone, and thank you for joining us. Also representing the Company with me this morning is John Longino, our Chief Financial Officer. On the call today I would like to focus on a few major areas. First, I will explain the steps we have taken to continue to enhance our liquidity and financial position.

Second, I'll provide a brief overview of our asset performance through the end of the third quarter. Finally, I'll make some observations on the possible alternatives for the future direction of the Company. Then I will hand the call over to John Longino, who will provide certain details about our results from the third quarter.

The significant turmoil in the marketplace provided us with an opportunity to dramatically enhance our liquidity and financial position by buying back 80% of our convertible debt. This debt, which totaled $140 million at June 30, could have been put to us on -- in May of 2012 at par. As of the end of the third quarter, we had bought back $78.8 million at an average price of $0.42. We recorded a $43.9 million net gain in the quarter on these purchases.

Early in the fourth quarter, we bought back an additional $32.5 million of bonds, increasing the total net gain on the convert purchases to nearly $60 million. This entire gain is offset by tax losses and does not give rise to additional distribution requirements relative to the maintenance of our REIT status. As of today, the outstanding balance of the convertible debt is only $28.7 million, while our restricted cash balance is approximately $80 million.

With respect to our asset performance, we continue to experience significant challenges. Through today, we have had a total of 21 banks, representing a total of $328 million in trust preferred securities, defer payments to us. We have also had four banks holding $162.5 million of TruPS in our deals actually default. As of September 30, the aggregate principal amount of trust preferred securities in deferral and default is $490.5 million, representing approximately 9.5% of AFN's consolidated trust preferred securities portfolio and an aggregate of $6.2 million in quarterly interest payments to the eight CDOs in which AFN invested.

These deferrals resulted in overcollateralization failures in all eight of our TruPS CDOs. Assuming a zero recovery on all defaulted and currently deferring securities, we expect two of the eight CDOs to cure overcollateralization failures and recommence making equity distributions within two to three years, while the other six may not cure from anywhere from five to fifteen years. These estimates could change if there are additional deferrals or if some of the deferring banks were to begin making payments.

With respect to the middle market loan business, as of September 30, we had $172.6 million of middle-market loan assets on a warehouse facility, secured by $40 million of cash from AFN. This warehouse facility expires in May of 2009. The warehouse 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.

Mid market loans held as of September 30, including those on the warehouse, totaled $882.5 million. While we continue to believe that the middle market loans that have been acquired through our Emporia platform will provide an attractive return for -- on investment for Alesco, the ongoing problems with the economy have certainly placed some stress on certain of these loans. We have increased our loan loss reserves in this portfolio to $20.6 million as of the end of the quarter.

Now I will discuss the possible alternatives with respect to the future direction of the Company. We have reviewed various business strategies and investment opportunities over the last two quarters. However, given the tremendous uncertainty in the markets, none of these transactions have met our investment qualifications.

The past year has been a very frustrating time for us and for most financial services companies. However, in hindsight, it is clear that the actions we have taken to strengthen our balance sheet and to maintain adequate liquidity, starting with our CDS positions and including the recent convert buybacks, represented the best course of action for us. We believe our strong cash and liquidity positions will provide various options for moving the Company forward in a positive way.

We may acquire another company or business platform. We also might invest a portion of our unrestricted cash in distressed or undervalued assets, which provide significant upside potential to us. We intend to monitor all viable opportunities and pursue only those which are accretive and which can provide long-term value to shareholders. What we won't do, and frankly, do not need to do, is rush into any plan for the sake of having a plan, but there are opportunities for us. 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. I would like to provide an update on each of the following key areas, our cash and liquidity positions, the New York Stock Exchange delisting notice, REIT status, and our book value and investment portfolio summary.

As of June 30, we had $136 million of unrestricted cash. During the third quarter we paid out $15 million related to the second quarter dividend and $35 million to buy back convertible debt. We also generated $10 million of positive cash flow, net of interest, G&A, and other costs, leaving unrestricted cash of $96 million as of September 30. Early in the fourth quarter, we used an additional $18.6 million to buy back more convertible debt.

The convertible debt balance was $140 million as of June 30. As of today, that balance totals just $28.7 million. The only other recourse indebtedness we have is the $48 million of TruPS debt, which has 30 weighted average years to maturity. We have no other short term or even near term recourse indebtedness, which could place demands on our current $80 million unrestricted cash position.

As we indicated in our press release and 8-K filing on October 16, we were notified by the New York Stock Exchange that we were not in compliance with their continued listing standard, which requires the average closing price of any listed security not to fall below $1.00 per share for any consecutive 30 trading-day period.

Under the NYSE rules, we have six months, or until April 10, 2009, to cure this condition of noncompliance. We have advised the NYSE that we fully intend to cure this condition and maintain our listing on the Exchange. The NYSE continued listing standards also require that our average market capitalization be at least $25 million over any 30 consecutive trading days and that we maintain our REIT status.

With respect to maintaining REIT status, the Kleros Real Estate I, II, and IV deals continue to provide us with requalifying assets and income. Therefore, we believe maintaining our requalification through December 31, 2008, should not be an issue. Even if the remaining Kleros deals were to fail and be liquidated, there are a number of options available to us for maintaining REIT status in 2009 and beyond, if that is our desired course of action.

GAAP book value at September 30 was $267.8 million, or $4.53 per diluted share, based on 59.1 million shares outstanding. That is compared to $203.4 million, or $3.41 per share, based on 59.6 million shares outstanding as of June 30, 2008. The breakdown of GAAP book value by asset class is set forth in a table on page one of our earnings press release. At this point, I would like to turn the call back to Jay McEntee.

As discussed over the last few months, the realized tax losses we have experienced during 2008 are expected to significantly offset or eliminate our taxable income and any REIT required additional dividend distributions for the 2008 year. Decisions regarding future dividends will continue to be made based upon projections regarding our taxable income and liquidity and are subject to the review and approval of our Board of Directors.

As a result of our strong cash position and our strong liquidity position, we continue to believe that we have the ability to be patient and to manage through these difficult times. We believe there are viable business acquisition and other options available to us as solid investment opportunities, which we intend to pursue vigorously, but at the same time, cautiously.

So I would now ask that the operator open the floor for questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Greg Walker with Bear Stearns. Please proceed.

I just want to be clear, in terms of dividend generation and dividend distribution, at this point you're not generating a dividend nor plan on paying one. Is that correct?

Well, we haven't made a final decision with respect to the balance of the year. Obviously, terminating the dividend for a prior quarter is telegraphing a desire to retain cash, but that decision has not been finalized yet, but I'm certainly not giving dividend guidance for the balance of the year as -- at this point.

Okay. Thank you very much.

Your next question comes from the line of Robert Knapp with Ironsides Partners. Please proceed.

Hey, good morning. Seems like those purchase of the bonds was -- worked out very well. Good job. One thing about the income statement that's always been tough for me to kind of understand is what is actually coming through to Alesco, because you have to consolidate everything.

And I appreciated that you sort of made it a little bit easier on us, saying that you spent 35 buying the bonds, and you had a net $10 million of positive cash flow. Can you kind of just give us a little bit more detail? What is actually providing cash flow up to the parent -- up to the AFN level at this point?

Yes, the majority of the positive cash flow is coming from the Emporia portfolio, between the warehouse, as well as the Emporia deals, which continue to cash flow. We're also generating cash from the residential mortgage portfolio. On an income statement basis, the loan loss provisions are significant. Therefore, those are throwing off losses, but from a cash flow perspective, they are throwing off cash.

Okay. So the TruPS portfolio, though, now has stopped providing any cash up to AFN at this point?

Yes, we had $458,000 worth of cash this quarter from that, and that will be virtually zero. We have some on balance sheet TruPS that continue to provide us with some nominal amount of cash.

Right. But the previous quarter, if I remember, you had eight -- you have eight of them. Six had stopped cash flowing, and now all eight have stopped. Is that correct?

That's correct. That is correct.

Okay. And then on the Emporia portfolio, what -- can you give us a little bit of an idea of what kind of leverage loans those are? Not the names, necessarily, but just --.

Sure. There -- we have - we focus in the middle margin space, so we're looking at companies with EBITDA of $50 million and less, let's call it. Typical aggregate loan size of which we are participant might be $100 million. There's obviously quite a bit of variability there, but it's that smaller -- the non broadly syndicated loan space is where we focus our energies.

Okay. And what -- can you give us an idea -- if you show us the statement here that says that it looks like the leverage loan investments are at $75 million? If that's producing $10 million a quarter? Am I -- I mean, am I -- can I have a -- is it a 14%, 15% yield [that it's growing]?

It's not producing $10 million a quarter. I said it's -- the significant cash flow are really from the Emporia and from the residential mortgages, and they were roughly $5 million each.

Okay.

And if you don't mind, we really would -- we've been receiving some complaints that we end up having conversations with people and not earnings calls, so --.

If you have other questions, you can get back in the queue.

Get back in the queue.

Okay. Sorry about that. I didn't -- I thought these were just basic questions that everyone would like to know the answer to.

Yes, but we just -- we would like to limit everyone to one question and one follow-up, and then other questions that others have --.

Fair enough. I would just encourage you, please, to go see your investors at some point soon. I know it's been hard, but it's been months since you've gone on the road or even gone to a -- presented at a conference. So thanks for answering the questions.

Yes.

Your next question comes from the line of [Joseph Dato]. Please proceed.

Yes, I was looking over the CDO projections, and last quarter the CDOs were valued at $106 million, and you stated previously that there was $2.25 million coming in in income. Now there's no money coming in, and they're valued at $140 million. How is this possible?

Yes. The GAAP table reflects the fair value of the assets less the fair value of the liabilities, and so, realistically, that is the GAAP accounting that we live with under FAS 159. We're measuring fair value of assets and liabilities. They move in the same direction, but they don't move completely in sync, so you're going to see variations like that from a GAAP perspective.

What accounting firm is coming up with that number?

Well, we're coming up with that number. Our auditors are Ernst & Young, but we come up with those numbers.

And one last question. What TruPS -- when you guys say that you have TruPS, I just want to make sure, because I asked this last time. It's in the unrestricted cash, and are those TruPS probably traded TruPS that you have -- outside of the CDOs?

The [on balance] sheet.

The on balance sheet, trust preferred are predominantly private. Are there any of them publicly traded? I don't think so. No, they're all private.

And they're in unrestricted cash?

No, they're not in unrestricted cash. They're in the TruPS investment line.

In the top line.

Okay. Thank you.

Your next question comes from the line of Lee Cooperman with Omega Advisors. Pleas proceed.

Thank you. I'm sorry, I came in a little bit late to the call, but I want to make sure of a couple of numbers. We had $96 million of cash, unrestricted, at the end of the quarter, and you said you spent $18.6 million on buying some additional securities back. I guess the converts. So we now presently have $77.4 million?

Yes, we actually have about $80 million. We had a few other little sources.

So we have roughly $80 million in cash. The converts that we have left are $28.7 million?

That's correct.

Okay, and then the TruPS, you went with 30 year maturity or something like that, had about $48 million?

That's right.

Got you. Okay. And you're just trying to investigate the best ways of investing that cash on behalf of your shareholders presently?

Correct.

Okay, if I could ask you kind of a philosophical -- not philosophical -- quantitative question. You guys have a stock repurchase program, and it looks like you paid roughly $1.00 a share for what you bought back. What's behind that decision? Do you guys have a view of the value of the business and that you think the stock market is mispricing the residual value of the business?

Well, we do, but -- well, as you know, the paramount concern that we've had is one of liquidity. So we've really just barely tipped our toe into the stock repurchase program, in contrast to the convert repurchase program, which is very relevant to our liquidity, because of that 2012 put right overhang that the convert represented. So, I mean, we do think -- and would be interested in continuing to look at the stock as an attractive investment for the Company, but so far we've been very careful to not -- to maintain liquidity.

Got you. Got you. Okay. Do you guys have a view of the economic value of the business? I know the book value is kind of ridiculous, the result of a lot of accounting assumptions, which are probably dubious, but --.

Right.

Do you guys have a view of the economic value of your business?

Well, we've gotten away from that economic value calculation --.

No, I meant economic in the real world.

Yes, there are just so many subjective elements to it. I mean, it's very difficult to sit here today and project what the impact of TARP will be on the underlying banks that we have deferring and so many other things. So I -- the liquidation value of our Company is not equal to the GAAP book value today, but I'm a little bit reluctant to start throwing numbers around, frankly.

But I assume you think it's in excess of the price of the stock, or you wouldn't be buying back stock.

That would be correct.

Got you. Okay. Thank you, and good luck.

Thanks.

(Operator Instructions)

Your next question comes from the line of David Taylor with David P. Taylor. Please proceed.

Thank you. I was a little astounded, frankly, given all the black headlines that we've seen in the financial area recently, that you have a $30.4 million gain relating to changes in the fair market of financial instruments. Did you -- do you want to elaborate on that?

Yes, it's just simple accounting. When you purchase back your own debt at less than par, you have a gain.

No, no. That was a $43.9 million gain. In addition to that, you have a $30.4 million gain relating to charges in the fair value of financial instruments. I'm quoting from your release.

Yes, the issue there is that, again, you're -- we're valuing all of the consolidated assets and all the consolidated debt that's in our balance sheet, and the reality is that in the current environment, the liabilities have actually suffered more, because they're securitized liabilities. They've actually suffered more than the assets. So we've actually written down the liabilities by a larger amount than we've written down the assets, which generates a gain in our income statement.

Okay. I follow you. Thank you.

Sure.

Your next question comes from the line of [Arthur Burns] with [Deltec]. Please proceed.

I -- just seeing if I heard you correctly and trying to understand the difference between deferral on a TruPS preferred issuer and a default on a TruPS preferred issue. Was there a difference?

Yes. The TruPS preferred instruments provide for a five year deferral feature that's really required in order for the underlying banks to get Tier One capital treatment for them. So when a bank notifies us that they're in deferral, it doesn't necessarily mean that the bank is going away.

But in contrast, if a bank gets taken over by the regulator, it pretty much means that that security is no longer worth anything and will never -- there will never be a recovery on it. So a deferred institution is one that has notified us, hey, we're going to [PIK] the payment, basically, and try and work through our issues, and a defaulted one is one that's gone.

Right. And the deferral does PIK? I mean, it accrues?

That's correct.

Right. Thank you very much.

You're welcome.

Your next question comes from the line of Lee Carter. Please proceed.

Morning.

Hi, Lee.

Am I correct in assuming that it's the same management for RAS as AFN?

No.

No, it's not. I mean, the AFN -- the correlation between RAIT, RAS, and AFN is that the CEO of RAS is the Chairman of AFN, but there are no other crossovers, if you will, of people.

On March 10 of '08 you issued a statement that said the approximately $2.7 billion, or $45 a share, recognized an increase in stockholders' equity. Has that disappeared, or have you recognized whatever was in that amount?

That related to the adoption of 159. If you remember, we had a [GAAP] book value of $2.4 billion coming into the year.

Right.

All that really did was get us to a more realistic GAAP book value.

Okay. On 453, correct? Today? On GAAP?

267.

267.

That's $4.53 [a share].

Thank you very much.

Yes.

Your next question is a follow-up question from the line of Joseph Dato. Please proceed.

Yes, I was wondering -- you guys kind of caught me off guard with the REIT statement. Is the NYSE not going to allow you to list unless you remain a REIT?

The requirements change. As a REIT, we need a market cap of $25 million. If we were no longer a REIT, then the market cap requirement would jump -- we would have to qualify as a new Company, effectively, and we would have to have a $100 million market cap.

Okay.

It changes the game a little.

Okay. Thank you.

Your next question comes from the line of Greg Walker with Bear Stearns. Please proceed.

And my question is somewhat similar to the last question. As I understood your comments, you are likely to remain a REIT through '09. Can you comment on what other avenues you've considered, in terms of structure, or is that too preliminary at this point?

We're not projecting that we're likely to be a REIT through '09. We're quite confident with our REIT status through '08, and I think our position on '09 is kind of a wait and see. If there are no changes at the Company, there are some hurdles to '09 status, although it's not a foregone conclusion that we would not be a REIT in '09.

In terms of our public status, there are alternatives to NYSE listing, and we're certainly focused on those and watching them over the next couple months. We have about five months left in the NYSE grace period for delisting, and we'll consider alternatives and do our best to maintain a public listing and are confident that we can do that.

So, is -- am I to interpret that as the NASDAQ is a possibility? Is that --?

AMEX is probably a better possibility.

Okay. Okay. Thank you very much.

Your next question comes from the line of Marc Berger with MKB Associates. Pleas proceed.

Hi. My questions were just answered. Thank you.

Okay.

Thank you, Marc.

And the next question comes from the line of David Trumble with Wachovia. Please proceed.

Hi. I'm interested in the expense line. Both related party management compensation and the G&A were up over the -- over last year. Would -- do you expect -- or can you explain the related party management compensation and where you expect it to go?

Yes. First of all, with respect to the G&A, what we're looking at is a three month period back to September of '07 versus September of '08. G&A is flat, quarter over quarter, September of '08 to June of '08, and that's a function of how many CDOs were in, et cetera. So G&A is flat.

With respect to the related party management comp, the asset management fees being paid by the underlying CDOs are actually down quarter over quarter. There is a onetime incentive fee payment to the manager related to the $44 million gain on the debt buyback. Under the terms of the contract, that is an item that earns an incentive fee. So that's why there is a onetime [pop] there.

So you would expect to see of that in the fourth quarter, since you bought back more debt?

Well, that depends, because it has to hit a certain level of gain before it evens trips over the hurdle rate. So at this point in time, based on what we've purchased in the fourth quarter, not necessarily.

Okay.

It's a function also of what other income we have from regular operations, whether there is any additional deferrals that result in realized losses. There's other factors that could enter into that. But the underlying asset management fees are clearly down. Most of the -- of subordinated -- not all the subordinated fees have turned off. It's just the senior fees, and frankly, even at that point, we are required to continue to accrue some of those fees in our financial statements, even if they're not being paid to the manager by the underlying CDOs.

Okay.

And we're showing no more questions in queue at this time. I would now like to send the call over to Mr. Jay McEntee for closing remarks.

Thank you, everyone, and we'll look forward to talking to you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.