Cohen & Company Inc (COHN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alesco Financial Incorporated 2009 First Quarter Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in this earning release and during this call contain forward-looking statements which involve a number of risks and uncertainties.

Alesco Financial cautions readers that any forward-looking statement information is a not 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's financial filings with the SEC, which are available at the SEC's Web site at www.sec.gov.

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

Thank you very much, operator, and good morning, everyone. Welcome to our 2009 First Quarter Earnings Call. Also representing the Company with me today is John Longino, our Chief Financial Officer. Not much has changed for Alesco Financial since our last earnings call held two months ago, including the difficult environment in which we operate.

On our last call, we attempted to provide you with an appreciation for Alesco's positioning to deal with both the challenges these times present and the opportunities that they afford us. We also talked about the proposed merger between Alesco and Cohen & Company. We appreciate the fact that all of our shareholders are interested in more information about this transaction. I would like to remind everyone again that the shareholders will not be asked to vote on the proposed merger until a few months from now.

In the interim, the proxy statement and related documents will be filed with the SEC and ultimately submitted to shareholders for consideration. These documents will contain more detailed information on the merger, including the year-end audited and first quarter financials for Cohen & Company and pro forma information on the combined company. As a result of the fact that we will be filing the proxy shortly, we anticipate that today's call will be fairly brief.

With respect -- on our call today, I would like to focus on a few major areas. First, I'll update you on our liquidity and financial position. Second, I'll provide a brief overview of our asset performance and then I will hand the call over to John Longino who will provide some high-level information about our results for the first quarter. Finally, I will again comment on the proposed merger with Cohen & Company.

As for liquidity, unrestricted cash was $87.7 million as of March 31, 2009, up slightly from $86 million at 12/31/2008. Recourse indebtedness continues to consist of $28.7 million of convertible debt which can be put to us at par in May of 2012 and $49.6 million of TruPS debt with an average maturity date of August, 2036.

With respect to our asset performance, we continue to be materially impacted by the financial crisis. By way of review, our business strategy was to invest on a levered basis in MBS securities, loans to financial services companies, mostly banks, and middle market loans. Each of these areas has been and is being adversely affected by current conditions.

With respect to our MBS securities and residential mortgage loans, we believe there is very little, if any value, that remains in these investments and we believe there is little prospect, if any, for recovery. In the case of our loans to financial services companies, consisting mostly of trust preferred securities issued by banks held in CDOs, deferral and/or default rates across our CDOs now average over 14%. As expected, we experienced additional deferrals in connection with the March payment dates for these securities. This is well in excess of anything anyone expected, even under the worst of assumptions.

As of March 31, 2009, the aggregate principal amount of the 46 TruPS investments that have defaulted or are currently deferring interest payments was $726 million, representing approximately 14% of our combined TruPS portfolio. Of this amount, $308 million are defaulted securities which have been completely written off in our consolidated financial statements.

As previously reported, the TruPS deferrals and defaults have resulted in the over-collateralization tests being triggered in all eight TruPS CDOs in which we hold equity interests. It now appears unlikely that AFN as a holder of equity securities will receive any further distributions of cash on our TruPS CDO portfolio and, if there are any distributions, they will not be realized for years to come.

The Emporia platform, our middle-market loan portfolio, has experienced a significant increase in the number of loans being moved onto our watch list and has begun to see an increase in the level of actual defaults. We have increased reserve levels on specific problem loans to $33.6 million at March 31, 2009, as compared to $16.4 million at December 31st and total reserves to $46.7 million at March 31st as compared to $26.8 million at 12/31.

Current conditions suggest that the Emporia assets will suffer added stress. Therefore, we believe defaults are likely to increase. In addition, ratings on the underlying loans which can impact cash flows, are deteriorating. On February 28, 2009, Cohen & Company sold its Emporia business to an unrelated third party in recognition of the limited potential to grow the business in the near and mid-term. The Emporia assets owned by Alesco will continue to be managed by most of the same team now employed by the unrelated third party. I will now hand the call over to John Longino to provide some high-level information on our results for 2009.

Thank you, Jay. As I did on our last earnings call, I will concentrate my comments on what we believe most of our investors want to better understand. Net cash from investments, debt service cost and ongoing G&A expenses, as well as additional information about cash. In the first quarter, we received $6.6 million in net cash on our investments, down from $8.3 million in the fourth quarter of 2008.

Of the $6.6 million, $4.2 million came from the Emporia portfolio which was down slightly from $4.5 million in Q4. $2 million came from our residential mortgage portfolio, down from $3 million in Q4. Both of these amounts include proceeds from the sales of REO properties. $200,000 came from TruPS which is consistent with Q4 and $200,000 came from other which is primarily interest income on unrestricted cash and is also consistent with Q4. In Q1 '09, we received no cash from MBS assets as compared to $400,000 in Q4 of '08.

The $6.6 million in the first quarter net cash receipts on investments is expected to decrease in the second quarter of 2009. This decrease is due primarily to the Emporia assets. While we have not experienced any over-collateralization failures in this portfolio, we did have a partial failure in an interest diversion test in Emporia II, resulting in a reduction of our Q2 '09 cash distribution. The expected Q2 '09 decrease assumes we receive comparable earnings from our on-balance sheet TruPS and unrestricted cash, but does not include any possible proceeds from additional sales of REO properties. Unless we buy back additional debt, the annual recourse debt service cost is expected to be approximately $6 million.

G&A costs paid directly by Alesco consist primarily of legal and professional fees, outside Director fees and D&O liability insurance expense. These costs typically total about $1.6 million per quarter. However, as expected, these costs spiked up to about $2.6 million in the first quarter of 2009 due to costs associated with the proposed merger. We expect G&A costs in future quarters, excluding any merger-related costs, will return to the $1.6 million level.

Unrestricted cash was $87.7 million as of March 31, 2009, up slightly from $86 million at December 31, 2008. As long as the two Emporia CLOs continue to cash flow, we expect to have modest positive cash flow each quarter. As of March 31, our cash is primarily invested in FDIC insured funds which protect us from loss in the event our banking institution was to fail, what results in a very low interest rate being earned on our unrestricted cash balance. I will now turn the call back over to Jay McEntee.

Thanks, John. Before opening the call to questions, I would like to provide an update on the status of the merger. We currently expect to file the proxy by the end of May. The proxy will contain detailed information on the merger, including audited financial statements for Cohen & Company for the year ended December 31st, financial information for the first quarter and pro forma information on the combined company. The transaction is not expected to be voted on until late in the third quarter or early in the fourth quarter 2009. Therefore, Alesco's shareholders will have plenty of time to review these materials and to ask further questions.

We are still in the early stages of presenting information in connection with this transaction. We appreciate our shareholders' willingness to take the time to learn more about the potential for the merger and to consider its merits. We continue to be confident that you will reach the same conclusion that we have that this transaction is in the best interest of Alesco's shareholders.

Thank you for your time today and attention. I and the rest of the management team look forward to meeting and speaking with you over the coming months. Operator, we will now open the call up for questions.

(Operator Instructions)

Your first question comes from the line of Lee Cooperman of Omega Advisors. Please proceed.

Hi, Jay. You've answered one of my three questions and that's, I guess, the proxy at the end of May. The other two questions, is there anything in this release new to Cohen that would affect their interest in doing this deal? And secondly, is there anything going on at Cohen that would concern you regarding your original intention to enter into this deal?

No, Lee. I think the answer to both questions is no. I don't think there's anything unexpected in the Alesco filing. It continues to be consistent with what's been going on in this marketplace. And similarly on the Cohen side, I think Cohen has been functioning as we at Alesco expected them to when we first considered the merger. So I think things are moving forward positively.

Thank you.

(Operator Instructions)

Your next question comes from the line of [Dan Redman] of Merrill Lynch. Please proceed. And Dan, your line is open.

Yes, thank you. Gentlemen, I was curious as to whether the recent upturn in financials -- did that have any kind of impact on the portfolio? And whether or not, if that were to be sustained, if that would change your outlook for the portfolio going forward?

Yes. Good morning, Dan. We've -- the deferrals on the TruPS portfolio have continued, so while the equity markets have responded favorably and the debt markets have responded favorably to financials, we still have quite a few deferrals. So it would have to be an extraordinary turnaround. It doesn't mean it can't happen; but it would have to be a pretty strong turnaround for the OC tests to be satisfied and cash flow to begin again in those TruPS portfolios.

Okay. A quick follow-up. I'm assuming most of these deferrals are using a pretty standard allotment of time that are within the portfolio. I think it's usually like five years that they can defer without being considered in default of the original instrument. Is that correct?

Correct. Each of the TruPS has a five-year deferral before a technical default occurs.

Have you gotten any indication from -- do the institutions, if their underlying positions get stronger, do they still intend to use the full five years or is it their intent to get paying back sooner if possible?

No one's communicating that to us. I mean the TruPS do pick, so an otherwise healthy and highly liquid institution is incented to do -- to begin paying again. But there's no one communicating that to us.

Thank you.

(Operator Instructions)

And there are no further questions at this time. I'd like to turn it back to management.

Thank you, operator, and thank you, everyone, for listening this morning. And again, we will be filing our proxy this month. So you should soon be seeing some much more detail on what the merger will look like. And I look forward to speaking with all of you. Thank you very much.

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Good day.