Deerfield Capital Corp. Announces Second Quarter 2010 Results

CHICAGO, Aug. 16 /PRNewswire-FirstCall/ -- Deerfield Capital Corp. (Nasdaq: DFR) ("DFR" or the "Company") today announced its results of operations for the second quarter ended June 30, 2010.

Second Quarter 2010 Highlights

• Net income attributable to DFR for the quarter totaled $17.9 million, or $2.25 per diluted common share, compared to $52.9 million, or $7.85 per diluted common share, for the second quarter of 2009. A significant portion of 2010 net income was derived from the early extinguishment of our Senior Notes (defined below) at a discount. A significant portion of 2009 net income related to the deconsolidation of Market Square CLO (defined below) and its net gains prior to deconsolidation.  Both were one time events.  (see "Second Quarter 2010 Financial Overview" below).
• DFR Operations (defined below) net revenues were $13.2 million for the quarter, an increase of $9.9 million or 300 percent, compared with the second quarter of 2009. Investment advisory fees were $7.0 million for the quarter, an increase of $3.0 million, or 75 percent, compared with the second quarter of 2009.  CDO management fees represent the majority of this increase totaling $6.8 million in the second quarter, an increase of $3.1 million or 84 percent from the second quarter of 2009.
• Core earnings for the quarter totaled $6.4 million, or $0.74 per diluted common share, compared to $5.5 million, or $0.82 per diluted common share, for the second quarter of 2009. Core earnings is a non-GAAP financial measure that primarily reflects GAAP earnings excluding certain non-cash items, non-recurring items, special charges and income tax effects (see "Reconciliation of Non-GAAP Measure" below).
• On June 9, 2010, the Company completed several key strategic transactions, including the acquisition of Columbus Nova Credit Investments Management, LLC, an investment manager specializing in bank loans (the "CNCIM Acquisition"), and the issuance of $25.0 million principal amount of senior subordinated convertible notes (the "Convertible Notes").  The Company used the proceeds from the issuance of the Convertible Notes, along with available cash, to 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 $55.0 million (the "Senior Notes Discharge").  
• Assets under management ("AUM") totaled $10.1 billion as of July 1, 2010.

Second Quarter 2010 Financial Overview

Discussing the quarter and the CNCIM Acquisition, Jonathan Trutter, the Company's Chief Executive Officer said, "We made significant improvements to our capital structure and continued to generate increased positive core earnings during the quarter. The CNCIM Acquisition and related strategic transactions provide us with both a stronger balance sheet and increased future top line revenue from the increase in AUM.  Taken as a whole, these transactions position DFR well for future growth.  Operating results also benefited from significant improvements in investment advisory fees."  

On June 9, 2010, the Company completed the CNCIM Acquisition, and the discussion below includes the operating results of CNCIM since that date.

On January 1, 2010, pursuant to a new accounting standard, the Company was required to consolidate  the results of seven collateralized debt obligations ("CDOs") managed by the Company. Upon completion of the CNCIM Acquisition, the Company was also required to consolidate the four CDOs managed by CNCIM (along with the seven CDOs previously consolidated, the "CIP CDOs"). Although the Company now consolidates the CIP CDOs into its financial results in the Consolidated Investment Products segment, there have been no changes to the terms of the Company's management contracts with the CIP CDOs, the revenues the Company is contractually entitled to receive from the CIP CDOs or the Company's exposure to liability with respect to the CIP CDOs.  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. The DFR Operations results are comparable to the Company's consolidated GAAP results for periods prior to 2010 during which the Company was not required to consolidate the CIP CDOs.  

DFR Operations

During the three months ended June 30, 2010, net revenues were $13.2 million, a net increase of $9.9 million, or 300.0 percent, as compared to the three months ended June 30, 2009.  This significant improvement is the result of an $8.8 million decrease in the provision for loan losses and a $3.0 million increase in investment advisory fees, partially offset by a $2.0 million decrease in net interest income.

Investment advisory fees were $7.0 million for the three months ended June 30, 2010, an increase of $3.0 million, or 75.0 percent, as compared to the three months ended June 30, 2009.  The increase in investment advisory fees is primarily attributable to an increase in subordinated management fees as certain of the Company's collateralized loan obligations ("CLOs") have resumed current payment of subordinated management fees and begun to pay previously deferred subordinated management fees. As of June 30, 2010, the Company's CLOs had unrecognized deferred subordinated management fees totaling approximately $5.8 million.

Net interest income was $6.4 million for the three months ended June 30, 2010, a decline of $2.0 million, or 23.8 percent, as compared to the second quarter of 2009.  This decline is primarily the result of the deconsolidation of Market Square CLO Ltd. ("Market Square CLO") which contributed $1.8 million to net interest income during the second quarter of 2009.

During the three months ended June 30, 2010, expenses decreased by $1.5 million, as compared to the three months ended June 30, 2009.  This decrease was primarily driven by a $3.4 million decrease in other general and administrative expenses, partially offset by an increase in professional services of $1.2 million and depreciation and amortization of $1.4 million. The decrease in other general and administrative expenses is primarily the result of $3.3 million in one-time Deerfield Pegasus Loan Capital LP ("DPLC") structuring and organizational expenses incurred in the second quarter of 2009.  

During the three months ended June 30, 2010, net other income (expense) and gain (loss) decreased by $43.7 million, as compared to the three months ended June 30, 2009.  This decrease is primarily related to Market Square CLO, and includes a $29.6 million gain on the deconsolidation of Market Square CLO on June 30, 2009 and $24.9 million of net gains in the 2009 quarter on the Company's loan portfolio (principally loans held in the Market Square CLO prior to the deconsolidation). In addition, the three months ended June 30, 2010 included a $17.4 million gain related to the Senior Notes Discharge.

Assets Under Management

As of July 1, 2010, the Company's AUM totaled approximately $10.1 billion held in 31 CDOs, DPLC and six separately managed accounts.

Principal Investing Portfolio

The Principal Investing segment's total invested assets increased by $11.3 million, or 1.9 percent, to $605.5 million as of June 30, 2010, as compared to March 31, 2010. The increase was primarily attributable to net purchases of loans and corporate bonds held in DFR Middle Market CLO Ltd. ("DFR MM CLO") of $10.9 million. Residential mortgage-backed securities ("RMBS") net purchases and increases in the fair value of the RMBS holdings contributed $2.5 million to the increase. These increases were partially offset by the sale of loans held in DPLC of $1.7 million.

Liquidity

Unencumbered RMBS and unrestricted cash and cash equivalents aggregated $45.0 million at June 30, 2010. In addition, net equity in the financed RMBS portfolio (including associated interest rate swaps), excluding the unencumbered RMBS included above, totaled $15.9 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 $60.9 million as of June 30, 2010.

Strategic Transactions

On June 9, 2010, the Company completed the CNCIM Acquisition. The Company acquired all of the outstanding equity interests of Columbus Nova Credit Investments Management, LLC ("CNCIM"), an investment manager specializing in bank loans with $1.8 million of AUM, from Bounty Investments, LLC ("Bounty") for a total purchase price consisting of (i) the issuance of 4,545,455 shares of the Company's common stock and (ii) deferred cash payments totaling $7.5 million payable in five equal annual installments beginning on December 9, 2010.  

On June 9, 2010, in connection with the CNCIM Acquisition, Bounty purchased $25.0 million in aggregate principal amount of the Convertible Notes, convertible into 4,132,231 shares of the Company's common stock (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 June 9, 2010, the Company completed the Senior Notes Discharge by paying the holders of the Senior Notes $55.0 million, plus accrued interest.  This transaction resulted in a $17.4 million gain.  

About the Company

DFR, through its subsidiaries Deerfield Capital Management LLC and CNCIM, 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.

Certain statements in this press release are forward-looking as permitted 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 the Company.  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.  Forward-looking statements contained in this press release are made as of the date hereof, and the Company does not undertake any obligation to update any forward-looking statement to reflect subsequent events, new information or circumstances arising after the date of this press release.  All future written and oral forward-looking statements attributable to us or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referenced above.  In addition, it is the Company's policy generally not to make any specific projections as to future earnings, and the Company does not endorse any projections regarding future performance that may be made by third parties.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: general economic and market conditions, particularly as they relate to the markets for debt securities, such as RMBS and CDOs; continued availability of financing and the Company's ability to access capital markets on commercially reasonable terms; the Company's ability to maintain adequate liquidity; the Company's ability to maintain compliance with its existing debt instruments and other contractual obligations; impact of restrictions contained in the Company's existing debt instruments; the Company's future operating results; the Company's business prospects and the business prospects of companies in which the Company invests; changes in the Company's investment, hedging or credit strategies or the performance and values of the Company's investment portfolios; reductions in the Company's assets under management and related management and advisory fee revenue; the Company's ability to make investments in new investment products and realize growth of fee-based income; the Company's receipt of previously deferred CDO subordinated management fees and its receipt of future CDO subordinated management fees on a current basis; the Company's ability to assume or otherwise acquire additional CDO management contracts on favorable terms, or at all; the Company's ability to maintain its exemption from registration as an investment company pursuant to the Investment Company Act of 1940; the costs and effects of the current Securities and Exchange Commission ("SEC") investigation into certain mortgage securities trading procedures in connection with which the SEC has requested information from the Company and Deerfield Capital Management LLC regarding certain of the Company's mortgage securities trades; changes in, and the ability of the Company to remain in compliance with, laws, regulations or government policies affecting the Company's business, including investment management regulations and accounting standards; and the Company's failure to realize the expected benefits of the CNCIM Acquisition.

These and other factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements set forth in the Company's annual report on Form 10-K for the year ended December 31, 2009, quarterly reports on Form 10-Q and 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.

DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES

RECONCILIATION OF NON-GAAP MEASURE

The Company believes that core earnings, a non-GAAP financial measure, is a useful metric for evaluating and analyzing its performance.  The calculation of core earnings, which the Company uses to compare financial results from period to period, eliminates the impact of certain non-cash items, non-recurring items, special charges and income tax. Core earnings provided herein may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measure and may therefore be defined differently by other companies. Core earnings include the earnings from the Company's indirect wholly-owned subsidiaries, DFR MM CLO and Market Square CLO (until the Company sold all of its preference shares in and deconsolidated Market Square CLO as of June 30, 2009). Core earnings are not necessarily indicative of cash flows received from these entities.    

Core Earnings

The table below provides reconciliation between net income (loss) and core earnings:

The Consolidated Investment Products segment includes the results of CIP CDOs. DFR MM CLO is not included in the Consolidated Investment Products segment, but instead is included in the Principal Investing segment because the Company owns all of its preferred shares. The assets of the CIP CDOs are held solely to satisfy the obligations of the CIP CDOs. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by the CIP CDOs, beyond the Company's minimal direct investments in, and management fees generated from, the CIP CDOs. If the CIP CDOs were to liquidate, the assets would not be available to the general creditors of DFR, and as a result, the Company does not consider them to be DFR assets. Additionally, the investors in the CIP CDOs have no recourse to the general credit of DFR for the debt issued by the CIP CDOs. The Company therefore does not consider this debt to be an obligation of DFR.  When reviewing and analyzing the financial results, management excludes the impact of the Consolidated Investment Products segment as this segment does not have any economic impact on the Company's operations. The following summarizes the segment results of operations and "DFR Operations" represents the combined results of the Investment Management and Principal Investing Segment:

DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES

INVESTMENT ADVISORY FEES AND INTEREST INCOME AND EXPENSE

The following table summarizes the Company's investment advisory fees and interest income and expense from DFR Operations:  

DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES

AUM AND INVESTMENT PORTFOLIO

The following table summarizes AUM for each product category:

The following table summarizes the principal investing portfolio:

SOURCE Deerfield Capital Corp.

WANT YOUR COMPANY'S NEWS FEATURED ON PRNEWSWIRE.COM?

440k+
Newsrooms &
Influencers

9k+
Digital Media
Outlets

270k+
Journalists
Opted In

GET STARTED