Deerfield Capital Corp. Announces First Quarter 2010 Results

CHICAGO, May 17 /PRNewswire-FirstCall/ -- Deerfield Capital Corp. (Nasdaq: DFR) ("DFR" or the "Company") today announced the results of operations for its first quarter ended March 31, 2010.

First Quarter 2010 Highlights

• Net loss attributable to DFR for the quarter totaled $0.1 million, or $0.02 per diluted common share, compared to net income attributable to DFR of $11.5 million, or $1.72 per diluted common share, for the first quarter of 2009. This change is primarily due to fluctuations in mark-to-market values of certain assets held by the Company and the acceleration of depreciation and amortization of fixed assets in connection with the Company's move to new office space.
• Core earnings for the quarter totaled $4.5 million, or $0.66 per diluted common share, compared to $5.0 million, or $0.75 per diluted common share, for the first quarter of 2009. Core earnings is a non-GAAP financial measure which primarily reflects GAAP earnings excluding certain non-cash and special charges and income tax effects (see reconciliation of non-GAAP measure below).
• On March 22, 2010, the Company signed a definitive agreement (the "Acquisition Agreement") to acquire Columbus Nova Credit Investment Management, LLC ("CNCIM"), an investment manager specializing in leveraged loan credit products with $1.8 billion of assets under management ("AUM"), from Bounty Investments, LLC ("Bounty"), an investment vehicle managed by Renova U.S. Management LLC ("Columbus Nova"), a New York-based investment management firm, for $25.0 million of the Company's common stock (at an implied price per share of $5.50) and deferred payments totaling $7.5 million of cash payable over five years (the "Acquisition"). Additionally, Bounty has agreed to purchase $25.0 million in principal amount of senior subordinated convertible notes (the "Convertible Notes") issued by the Company. The Company will use the proceeds from the issuance of the Convertible Notes, along with available cash, to repurchase and retire all of the $73.9 million in principal amount of the outstanding Series A and Series B Senior Secured Notes issued by Deerfield & Company LLC (the "Senior Notes") for a total purchase price of $55.0 million plus accrued interest. See "Proposed Strategic Transaction" below for additional detail.
• On January 1, 2010, the Company was required to adopt a new accounting standard pursuant to which the Company consolidated the results of seven collateralized debt obligations ("CDOs") managed by the Company (the "CIP CDOs"). While DFR consolidated the CIP CDOs into the Company's financial results, the economic impact to DFR continues to be only the management fees and actual investments in certain of the CDOs.
• Unrestricted cash, cash equivalents, unencumbered residential mortgage backed securities ("RMBS") and net equity in financed RMBS totaled approximately $75.6 million at March 31, 2010.
• AUM totaled $8.9 billion as of April 1, 2010.

First Quarter 2010 Financial Overview

On March 22, 2010, the Company signed the Acquisition Agreement to acquire CNCIM, an investment manager specializing in leveraged loan credit products with $1.8 billion of AUM (see "Proposed Strategic Transaction").  The below discussion does not include the operating results of CNCIM or the financial impact of the Acquisition.

The discussion below focuses on "DFR Operations" (see "Segment Condensed Statement of Operations" table), which represents the combined results of the Investment Management and Principal Investing segments.  This is the metric that the Company uses to evaluate its financial results.  While the Company is required to include the Consolidated Investment Products segment in its consolidated GAAP financial results, this segment does not have any economic impact on DFR's economic condition or operations. The DFR Operations results are comparable to our consolidated GAAP results for prior periods during which we were not required to consolidate the CIP CDOs.  

Discussing the quarter and the Acquisition, Jonathan Trutter, Chief Executive Officer of DFR said, "We made significant improvements to our overall liquidity position and continued to generate positive core earnings during the quarter. We continue to focus on growing AUM, and with the expected closing of our strategic transaction with Columbus Nova late in the second quarter, we will have both a stronger balance sheet and increased top line revenue from the increase in AUM.  We are excited about the Company going forward and our ability to accelerate growth through organic business development and possible acquisitions."

During the three months ended March 31, 2010, DFR Operations had net revenues of $6.6 million, a net decrease of $2.8 million, or 29.8 percent, in net revenues as compared to the three months ended March 31, 2009.  This decline was the result of a $2.5 million decrease in net interest income and a $2.1 million increase in the provision for loan losses which were partially offset by a $1.8 million increase in investment advisory fees.  

Investment advisory fees were $6.5 million for the three months ended March 31, 2010, an increase of $1.8 million, or 38.3 percent, compared to the three months ended March 31, 2009.  The increase in investment advisory fees is primarily attributable to the receipt of previously deferred subordinated management fees from certain of the collateralized loan obligations ("CLOs") managed within the Company's Investment Management segment.  

All or a portion of the Company's subordinated management fees from the CLOs may be deferred if, among other things, noncompliance with overcollateralization tests and other structural provisions cause cash flows from the underlying collateral to be diverted from the payment of management fees and other expenses to the prepayment of principal of the debt securities issued by the CLOs.  The Company expects a portion of its CLO subordinated investment advisory fees to continue to be deferred in the near term.  However, as a result of improvement in market conditions and effective portfolio management, certain of the Company's CLOs have returned to compliance with their overcollateralization tests, and the Company has begun to receive some of its deferred subordinated management fees from those CLOs and expects those CLOs to pay future subordinated management fees on a current basis.  With continued improvement in market conditions and ongoing effective portfolio management, the Company expects its other CLOs to return to compliance with their overcollateralization tests, and, subject to the satisfaction of certain other conditions, the Company expects to recoup at least a portion and potentially substantially all of its deferred subordinated management fees from those CLOs and to receive future subordinated management fees on a current basis.  As of March 31, 2010, the Company's CLOs have unrecognized deferred subordinated management fees totaling approximately $7.0 million.

Net interest income was $4.3 million for the three months ended March 31, 2010, a decline of $2.5 million, or 36.8 percent, compared to the first quarter of 2009.  This decline is the result of a $1.4 million decrease in net interest income related to the deconsolidation of Market Square CLO Ltd. during the second quarter of 2009 and a $2.6 million decrease in net interest income related to accelerated amortization of certain of the Company's RMBS holdings that were purchased by the Company at a premium and were redeemed by the issuers at par.  These declines were partially offset by improvements in the net interest income earned from DFR Middle Market CLO Ltd. ("DFR MM CLO") and Deerfield Pegasus Loan Capital LP ("DPLC"), which, in the aggregate, contributed a $0.9 million increase to net interest income.  A reduction in the interest rate environment and, to a lesser extent, a decrease in the Company's long-term debt outstanding contributed an additional $0.6 million improvement to net interest income.  

During the three months ended March 31, 2010, expenses increased by $5.2 million as compared to the three months ended March 31, 2009.  This increase of $5.2 million was primarily driven by a $4.1 million increase in fixed asset depreciation and amortization due to an acceleration of expense in connection with the Company's move to new office space on May 1, 2010 and abandoning the fixed assets in its previous space, a $1.1 million increase in professional service fees primarily related to the proposed strategic transactions with Columbus Nova and a $0.7 million increase in general and administrative expenses primarily composed of a $0.5 million related to the new warrants issued to Pegasus Deerfield (AIV), LLC and its affiliates in connection with the restructuring of DPLC and a $0.2 million increase in compensation to the board of directors relating to the proposed strategic transaction with Columbus Nova. This increase in expenses for the three months ended March 31, 2010 as compared to 2009 is partially offset by a $0.6 million decrease in compensation and benefits expense.

During the three months ended March 31, 2010, net other income and gain (loss) declined by $3.0 million as compared to the three months ended March 31, 2009 primarily as a result of lower gains on the Company's corporate loan portfolio.

During the three months ended March 31, 2010, net loss attributable to DFR declined to $0.1 million, as compared to net income attributable to DFR of $11.5 million for the same period in 2009. Although core earnings also declined during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, it remained positive at $4.5 million, or $0.66 per share.  

Assets Under Management

As of April 1, 2010, the Company's AUM totaled approximately $8.9 billion held in 28 CDOs, DPLC and six separately managed accounts.

Principal Investing Portfolio

The Principal Investing segment portfolio's total invested assets decreased by $15.3 million, or 2.5 percent, to $594.2 million as of March 31, 2010 as compared to December 31, 2009. The decrease was primarily attributable to the sale of loans held in DPLC contributing $10.9 million to the decrease.  The paydown and sales of our RMBS accounted for $1.9 million of the decline during the first quarter of 2010.  The remaining net decline is primarily attributed to sales, repayments and other declines in the Company's Principal Investing portfolio.

Liquidity

Unencumbered RMBS and unrestricted cash and cash equivalents aggregated $38.8 million at March 31, 2010. In addition, net equity in the financed RMBS portfolio (including associated interest rate swaps), excluding the unencumbered RMBS included above, totaled $36.8 million at quarter end. In total, the Company had unrestricted cash and cash equivalents, unencumbered RMBS and net equity in its financed RMBS portfolio of $75.6 million as of March 31, 2010. As of March 31, 2010, the fair value of its Agency RMBS and non-Agency RMBS portfolios were $300.8 million and $2.5 million, respectively.   During the first quarter of 2010, Fannie Mae and Freddie Mac announced and began to carry out its plans to buy "substantially" all mortgages held in RMBS pools issued under their respective programs that are delinquent by 120 days or more. This resulted in a significant increase in paydowns during the first quarter of 2010 and a significant temporary increase in net equity in RMBS as of March 31, 2010, as reflected in Other receivables in the condensed consolidated balance sheet.

Proposed Strategic Transaction

On March 22, 2010, the Company entered into the Acquisition Agreement with Bounty and CNCIM, pursuant to which the Company agreed to acquire all of the outstanding equity interests of CNCIM from Bounty for a total purchase price of $32.5 million consisting of (i) the issuance of 4,545,455 shares (at an implied price of $5.50 per share) of the Company's common stock (the "Acquisition Shares") and (ii) deferred payments totaling $7.5 million in cash payable in five equal annual installments beginning six months after the closing date of the Acquisition and the issuance of the Convertible Notes.  

On March 22, 2010, in connection with entering into the Acquisition Agreement, the Company entered into the Convertible Notes Agreement with Bounty pursuant to which Bounty has agreed to purchase for cash $25.0 million in aggregate principal amount of the Convertible Notes, convertible into 4,132,231 shares of the Company's common stock (the "Conversion Shares") (as such amount may be adjusted in certain events or increased in connection with the payment of interest-in-kind) at an initial conversion price of $6.05 per share, subject to adjustment.

On March 22, 2010, DFR and Deerfield entered into a Payment Agreement and Release with the holders of the Senior Notes pursuant to which DFR has agreed with the holders of the Senior Notes to discharge all of the approximately $48.8 million in aggregate principal amount of Series A Notes outstanding at approximately 64.1 percent of the principal amount thereof plus accrued interest, and all of the approximately $25.1 million in aggregate principal amount of the Series B Notes outstanding at approximately 94.5 percent of the principal amount thereof plus accrued interest, or an aggregate discount of approximately 25.6 percent from the face amount of the Senior Notes plus accrued interest.  

The Company's stockholders are being asked to vote to approve the issuance of the Acquisition Shares and Conversion shares at a stockholders' meeting on June 9, 2010.  See "Important Additional Information" below for further details.

About the Company

DFR, through its subsidiary, Deerfield Capital Management LLC, manages client assets, including bank loans and other corporate debt, RMBS, government securities and asset-backed securities. In addition, DFR has a principal investing portfolio comprised of fixed income investments, including bank loans and other corporate debt and RMBS.

For more information, please go to the Company website, at www.deerfieldcapital.com.

The Company filed a definitive proxy statement and form of proxy with the Securities and Exchange Commission on May 11, 2010 and mailed to Stockholders of record a definitive proxy statement and form of proxy on or about May 14, 2010 in connection with the issuance of the Acquisition Shares and the Conversion Shares. Before making any voting decision with respect to the issuance of the Acquisition Shares and the Conversion Shares, stockholders of the Company are urged to carefully read the definitive proxy statement and the other relevant materials because they contain important information about the proposed transactions.  The proxy statement and other relevant materials, and any other documents filed by the Company with the SEC, may be obtained free of charge at the SEC's website at www.sec.gov. In addition, investors and stockholders of the Company may obtain free copies of the proxy statement and other documents filed by the Company with the SEC from the Company's website at www.deerfieldcapital.com or from Georgeson, our proxy solicitor, at 1-800-280-0857.

The Company and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the Company's stockholders in connection with the issuance of the Acquisition Shares and the Conversion Shares.  Additional information regarding the interests of participants in the solicitation of proxies in connection with the issuance of the Acquisition Shares and the Conversion Shares is included in the proxy statement. Stockholders may obtain additional information regarding the direct and indirect interests of the Company and its directors and executive officers with respect to the transactions by reading the proxy statement and the other filings referred to above.

Certain statements in this press release are forward-looking as defined by the Private Securities Litigation Reform Act of 1995. These include statements regarding future results or expectations. Forward-looking statements can be identified by forward looking language, including words such as "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "projects," "will" and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made. Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the control of DFR.  Forward-looking statements are further based on various operating assumptions. Caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, actual results may differ materially from expectations or projections. DFR does not undertake any obligation to update any forward-looking statement, whether written or oral, relating to matters discussed in this press release, except as may be required by applicable securities laws.

Various factors could cause DFR's actual results to differ materially from those described in any forward-looking statements. These factors include, but are not limited to: the failure of the strategic transactions with Columbus Nova to close for any reason; the amount of the costs, fees, expenses and charges relating to the transactions; business uncertainty and contractual restrictions prior to the closing of the transactions; the failure by the Company to realize the expected benefits of the Acquisition; changes in economic and market conditions, particularly as they relate to the markets for debt securities, such as RMBS and CDOs; continued availability of financing; DFR's ability to maintain adequate liquidity; changes in DFR's investment, hedging or credit strategies or the performance and values of its investment portfolios; DFR's ability to comply with the continued listing standards of the NASDAQ Stock Market; DFR's ability to generate earnings or raise capital to maintain positive stockholders' equity; reductions in DFR's assets under management and related management and advisory fee revenue; DFR's ability to make investments in new investment products and realize growth of fee-based income; DFR's receipt of previously deferred CLO subordinated management fees and its receipt of future CLO subordinated management fees on a current basis; changes to DFR's tax status; DFR's ability to maintain compliance with its existing debt instruments and other contractual obligations; impact of restrictions contained in DFR's existing debt instruments; DFR's ability to maintain its exemption from registration as an investment company pursuant to the Investment Company Act of 1940; the cost, uncertainties and effect of any legal and administrative proceedings, such as the current SEC investigation into certain mortgage-backed securities trading procedures in connection with which the SEC has requested certain information from DFR regarding certain of its mortgage securities trades; and changes in, and the ability of DFR to remain in compliance with, law, regulations or government policies affecting DFR's business, including investment management regulations and accounting standards.

These and other factors that could cause DFR's actual results to differ materially from those described in the forward-looking statements set forth in DFR's annual report on Form 10-K for the year ended December 31, 2009, DFR's quarterly reports on Form 10-Q and DFR's other public filings with the SEC and public statements. Readers of this press release are cautioned to consider these risks and uncertainties and not to place undue reliance on any forward-looking statements.

SOURCE Deerfield Capital Corp.

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