NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CIFC Corp. (formerly known as CIFC Deerfield Corp. and previously as Deerfield Capital Corp.) (“CIFC” and, together with its subsidiaries, “us,” “we” or “our”) is a Delaware corporation that specializes in managing investment products which have corporate credit obligations, primarily senior secured corporate loans (“SSCLs”), as the primary underlying investments. On April 13, 2011, we completed a merger (the “Merger”) with Commercial Industrial Finance Corp. (“Legacy CIFC”).
Business Overview
We establish and manage investment products for various types of investors, including pension funds, hedge funds and other asset management firms, banks, insurance companies and other types of institutional investors located primarily in North America, Europe, Asia and Australia. Our existing investment products are primarily collateralized loan obligations ("CLOs") and also include collateralized debt obligations ("CDOs") and other investment vehicles. For a detailed description of CLOs see
Collateralized Loan Obligations
in Note 4. The investment advisory fees paid to us by these investment products are our primary source of revenue and are generally paid on a quarterly basis and are ongoing as long as we manage the products. Investment advisory fees typically consist of management fees based on the amount of assets held in the investment product and, in certain cases, incentive fees based on the returns generated for certain investors.
We formerly managed our own fixed income investments, which included SSCLs and other corporate debt. This was primarily accomplished through our investments in the DFR Middle Market CLO, Ltd. (the “DFR MM CLO”) prior to their sale. We had historically consolidated the DFR MM CLO as we owned all of its subordinated notes. On February 7, 2012 we completed the sale of our investments in and our rights to manage the DFR MM CLO and deconsolidated this entity. Historically, our fixed income investments also included significant investments in residential mortgage-backed securities (“RMBS”) until we made the decision to liquidate this portfolio during the second quarter of 2011. Additionally, we also may utilize our liquidity to acquire SSCLs, generally to warehouse such SSCLs until they can be included as collateral for new CLOs and other funds we manage.
We are required to consolidate into our financial statements certain variable interest entities (“VIEs”), which include certain of the CLOs, CDOs and other entities we manage, in accordance with consolidation guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810—
Consolidation
(“ASC Topic 810”), as amended by Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”) as they are VIEs with respect to which we are deemed to be the primary beneficiary. See
Variable Interest Entities
in Note 2 for additional information.
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2.
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ACCOUNTING POLICIES AND RECENT ACCOUNTING UPDATES
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Basis of Presentation
— We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and they are in the form prescribed by the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X and the instructions to Form 10-Q. Accordingly, we do not include all of the information and footnotes for complete financial statements. The interim unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended
December 31, 2011
, which are included in our Annual Report on Form 10-K filed with the SEC on March 30, 2012 (our “2011 10-K”). In our opinion, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of our financial position, results of operations and cash flows have been included. The nature of our business is such that the results of any interim period information are not necessarily indicative of results for a full year.
Principles of Consolidation
—The condensed consolidated financial statements include the financial statements of CIFC and (i) our wholly-owned subsidiaries, (ii) subsidiaries in which we have a controlling interest and (iii) certain other entities known under GAAP as VIEs with respect to which we are deemed under ASC Topic 810 to be the primary beneficiary. All intercompany balances and transactions have been eliminated upon consolidation. This consolidation, particularly with respect to the VIEs, significantly impacts our financial statements.
Variable Interest Entities
—ASC Topic 810 requires the consolidation of the assets, liabilities and results of operations of a VIE into the financial statements of the enterprise that is the VIE’s primary beneficiary, through its controlling financial interest in the VIE. ASC Topic 810 also provides a framework for determining whether an entity should be considered a VIE
and accordingly evaluated for consolidation. Pursuant to this framework, we consider all relevant facts to determine whether an entity is a VIE and, if so, whether our relationship with the entity (whether contractual, through direct investments in the entity, or otherwise) results in a variable interest. If we determine that we do have a variable interest in the entity, we perform an analysis to determine whether we are deemed to be the primary beneficiary.
For CLOs and CDOs, if we are deemed to (i) have the power to direct the activities of the CLO or CDO that most significantly impact the economic performance and (ii) either the obligation to absorb losses or the right to receive benefits that could be significant to the CLO or CDO, then we are deemed to be the primary beneficiary of the CLO or CDO and are required to consolidate the CLO or CDO. Generally, our contractual relationship as collateral manager of the CLOs and CDOs described herein satisfies criteria (i) of the prior sentence, and our ownership interests in and/or ability to earn certain incentive or other management fees in certain of our CLOs and CDOs can (but does not always) satisfy criteria (ii).
We have a variable interest in each of the CLOs and CDOs we manage due to the provisions of their respective management agreements and direct investments in certain of the CLOs. With respect to these direct investments, as of
September 30, 2012
, we own a small portion of the total debt and subordinated notes issued by the CLOs. Where we have a direct investment, it is typically in the unrated, junior subordinated tranches of the CLOs. These unrated, junior subordinated tranches, referred to herein as “subordinated notes,” take the form of either subordinated notes or preference shares. For a detailed description of CLOs see Note 4.
As of
September 30, 2012
, we consolidated
23
CLOs and
one
CDO (the “Consolidated CLOs”) under the amendments to ASC Topic 810. The Consolidated CLOs are comprised of: (i)
six
CLOs and
one
CDO we began to consolidate on January 1, 2010 (the adoption date of the amendments to ASC Topic 810), (ii)
four
CLOs we began to consolidate on June 9, 2010 in conjunction with the acquisition of Columbus Nova Credit Investments Management LLC (“CNCIM”), (iii)
ten
CLOs we began to consolidate on April 13, 2011 in conjunction with the Merger (the “CIFC CLOs”), and (iv)
three
new CLOs closed or newly consolidated during 2012. The
three
newly consolidated CLOs include (i) CIFC Funding 2011-I, Ltd. (“CIFC CLO 2011-I”) which we began to consolidate upon its close in January 2012, (ii) CIFC Funding 2012-I, Ltd. ("CIFC CLO 2012-I") which we began to consolidate upon its close in July 2012, and (iii) Navigator CDO 2006, Ltd. ("Navigator 2006 CLO") which we began to consolidate on the closing date of the GECC transaction (as described in Note 3). See
Consolidated CLOs
in Note 4 for additional discussion of our Consolidated CLOs.
As of
September 30, 2012
, we had a variable interest in
22
additional CLOs and CDOs that were not consolidated as we are not the primary beneficiary with respect to those VIEs. Our maximum exposure to loss associated with unconsolidated CLOs and CDOs is limited to future investment advisory fees and receivables. We recorded investment advisory fee receivables totaling
$0.7 million
and
$0.9 million
from the unconsolidated CLOs and CDOs as of
September 30, 2012
and
December 31, 2011
, respectively.
As of September 30, 2012, we also consolidated a special purpose vehicle, CIFC Funding 2012-III, Ltd. ("CIFC 2012-III Warehouse"), an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. See
CIFC 2012-III Warehouse
in Note 4 for more information.
As of
December 31, 2011
, we also consolidated a special purpose vehicle (the “Warehouse SPV”), under ASC Topic 810. During the second quarter of
2011
, the Warehouse SPV entered into a total return swap (the “Warehouse TRS”) agreement with Citibank, N.A. (“Citibank”). The reference obligations under the Warehouse TRS agreement were SSCL exposures that we accumulated and were ultimately included within CIFC CLO 2011-I, the CLO that closed in January 2012 and is managed by CIFC Asset Management LLC (“CIFCAM”). We deconsolidated the Warehouse SPV in January 2012 in conjunction with the settlement of the Warehouse TRS and the closing of CIFC CLO 2011-I. See
Total Return Swap
in Note 7 for more information on the Warehouse TRS.
Fair Value Measurements and Presentation
—In accordance with ASC Topic 820—
Fair Value Measurements and Disclosures
(“ASC Topic 820”), we have categorized our financial instruments carried at fair value into a three-level fair value hierarchy based on the transparency of the inputs to the valuation of the asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is determined by the lowest level of input that is significant to the fair value measurement. The assessment of significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The three levels are defined as follows:
Level 1
—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
The types of assets included in Level 1 are generally equity securities or derivatives listed on an exchange with active markets. We held no Level 1 securities as of
September 30, 2012
or
December 31, 2011
.
Level 2
—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Our assets and liabilities generally included in this category are loans where asset valuations are provided by third-party pricing services or our comparable companies pricing model, corporate bonds and investments in CLOs or CDOs where asset valuations are provided by third-party pricing services (prior to our valuation methodology change effective
December 31, 2011
), long-term debt of our Consolidated CLOs (prior to our valuation methodology change effective September 30, 2011) and the Warehouse TRS.
Level 3
—inputs to the valuation methodology include significant unobservable inputs to the fair value measurement. This includes situations where there is little, if any, market activity for the asset or liability.
Our assets and liabilities generally included in this category are corporate bonds, investments in CLOs or CDOs, loans where asset valuations are not provided by third-party pricing services or our comparable companies pricing model, warrants, long-term debt of our Consolidated CLOs (including the subordinated notes) and the conversion feature contained in our senior subordinated convertible notes ("Convertible Notes").
Determination of Fair Values
As defined in ASC Topic 820, fair value is the price a market participant would receive in the sale of an asset, or pay to transfer a liability, in an orderly transaction at the measurement date. Where available, fair value is based on observable market prices or parameters or is derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are utilized. These valuation models involve our estimation and judgment, the degree of which is dependent on both the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized for disclosure purposes based on the level of judgment associated with the inputs used to measure their value as described above. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that market participants are willing to pay for an asset. Ask prices represent the lowest price market participants are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, our policy is to take the mid-point in the bid-ask spread to value these assets and liabilities as a practical expedient for determining fair value permissible under ASC Topic 820. Fair value is a market-based measure considered from the perspective of the market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, when market assumptions are not readily available, our assumptions are set to reflect those that we believe market participants would use in pricing the asset or liability at the measurement date.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and, current market conditions. Determinations of fair value require more judgment to the extent that the valuation is based on inputs that are either less observable or unobservable in the market. Accordingly, the degree of judgment we exercise in determining fair value is greatest for assets and liabilities classified in Level 3.
The fair value process is monitored by our Valuation Committee. The Valuation Committee is chaired by our Chief Investment Officer and is comprised of investment, finance, valuation and risk management professionals. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources. Meetings are held regularly to discuss and analyze the significant assumptions utilized in our internally developed models and to review the valuations provided by third-party pricing services for reasonableness. We engage reputable third-party pricing services and regularly review the valuation methodologies provided by those third-party pricing services to ensure the fair value measurement provided by those services is in accordance with ASC Topic 820.
The following is a description of our valuation methodologies for financial assets and liabilities measured at fair value by class as required by ASC Topic 820, including the general classification of such instruments pursuant to the valuation hierarchy described above. Under certain market conditions, we may make adjustments to the valuation methodologies
described below. We maintain a consistent policy for the process of identifying when and by how such adjustments should be made. To the extent that we make a significant fair value adjustment, the valuation classification would generally be considered Level 3 within the fair value hierarchy. We determined our classes of financial assets and liabilities based on our analysis of the nature, characteristics and risks of such financial assets and liabilities at fair value.
Loans
—Loans are generally valued via a third-party pricing service. The value represents a composite of the mid-point in the bid-ask spread of broker quotes or is based on the composite price of a different tranche of the same or similar security if broker quotes are unavailable for the specific tranche we own. Loans valued in this manner are classified as Level 2 within the fair value hierarchy. When a value from a third-party pricing service is unavailable, the value may be based on our comparable companies pricing model (an internally developed model using composite or other observable comparable market inputs). Loans valued in this manner are classified as Level 2 within the fair value hierarchy. When sufficient data points are not available to utilize the comparable companies pricing model, the value may be based on an internally developed model using data including unobservable market inputs. Loans valued in this manner are classified as Level 3 within the fair value hierarchy.
Corporate Bonds
—Corporate bonds are generally valued via a third-party pricing service. The inputs to the valuation include trades, discount rates and forward yield curves. Although the inputs used in the third-party pricing services valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective
December 31, 2011
, we concluded corporate bonds priced in this manner would be classified as Level 3 within the fair value hierarchy. Prior to this change, corporate bonds priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote. Corporate bonds valued in this manner are classified as Level 3 within the fair value hierarchy.
Other Assets
—Other assets at fair value primarily represent investments in CLOs or CDOs which are generally valued via a third-party pricing service. The inputs to the valuation include trades, discount rates, forward yield curves, and loan level information (including loan loss, recovery and default rates, prepayment speeds and other security specific information obtained from the trustee and other service providers related to the product being valued). Although the inputs used in the third-party pricing service’s valuation model are generally obtained from active markets and are observable, the third-party pricing service does not provide sufficient visibility into their pricing model, and as such effective
December 31, 2011
, we concluded other assets priced in this manner would be classified as Level 3 within the fair value hierarchy. Prior to this change, other assets priced in this manner were classified as Level 2. When a value from a third-party pricing service is unavailable, the value may be based on an internally developed discounted cash flow model which includes unobservable market inputs or by broker quote. Inputs to the internally developed model include the structure of the product being valued, estimates related to loan default, recovery and discount rates. Other assets valued in this manner are classified as Level 3 within the fair value hierarchy.
Contingent Liabilities
—The fair value of the contingent liabilities is determined via a third-party valuation firm and is based on discounted cash flow models. The models are based on projections of the relevant future investment advisory fee cash flows from the CLOs managed by CIFCAM and its wholly-owned subsidiary, CypressTree Investment Management, LLC (“CypressTree”), and utilize both observable and unobservable inputs in the determination of fair value. See
Quantitative Information about Level 3 Assets and Liabilities
in Note 5 for further information regarding the significant inputs to these valuation models. The contingent liabilities are classified as Level 3 within the fair value hierarchy.
Long-Term Debt of the Consolidated CLOs
—Long-term debt of the Consolidated CLOs consists of debt and subordinated notes of the Consolidated CLOs. Effective
September 30, 2011
, the fair value of the debt and subordinated notes of the Consolidated CLOs is based upon discounted cash flow models and utilizes both observable and unobservable inputs in the determination of fair value. See
Quantitative Information about Level 3 Assets and Liabilities
in Note 5 for further information regarding the significant inputs to these valuation models. The debt and subordinated notes of the Consolidated CLOs are classified as Level 3 within the fair value hierarchy.
Prior to September 30, 2011, the fair value for the debt of the Consolidated CLOs was generally valued via a third-party pricing service. The debt of our Consolidated CLOs valued in this manner was classified as Level 2 within the fair value hierarchy. Prior to
September 30, 2011
, the subordinated notes of the Consolidated CLOs were valued by management by considering, among other things, available broker quotes. If a broker quote was unavailable, the subordinated notes of Consolidated CLOs were valued using internally developed models consistent with the current methodology described above. The subordinated notes of our Consolidated CLOs valued in this manner were classified as Level 3 within the fair value hierarchy.
Reclassifications
—Certain amounts in the condensed consolidated statement of cash flows for the nine months ended September 30, 2011 have been reclassified to conform to the presentation for the nine months ended September 30, 2012.
Recent Accounting Updates
—In May 2011, the FASB issued ASU No. 2011-4,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(“ASU 2011-4”). ASU 2011-4 amends ASC Topic 820 to converge the fair value framework between U.S. GAAP and International Financial Reporting Standards. ASU 2011-4 clarifies existing fair value measurement guidance, updates the fair value measurement principles for certain financial instruments and expands fair value disclosure requirements. ASU 2011-4 is effective for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2011. We have adopted ASU 2011-4 and the adoption did not have a material impact on our condensed consolidated financial statements. The additional disclosures required by ASU 2011-4 are included within Note 5.
In June 2011, the FASB issued ASU No. 2011-5,
Presentation of Comprehensive Income
(“ASU 2011-5”). ASU 2011-5 amends ASC Topic 220—
Comprehensive Income
to require entities to report components of comprehensive income either in a single continuous statement of comprehensive income or two separate but consecutive statements. ASU 2011-5 does not change the items that must be reported in other comprehensive income. ASU 2011-5 is effective for interim and annual reporting periods beginning after December 15, 2011. We have adopted ASU 2011-5 and we have elected to present a separate statement of comprehensive income.
In September 2011, the FASB issued ASU No. 2011-8,
Testing Goodwill for Impairment
(“ASU 2011-8”). ASU 2011-8 amends ASC Topic 350—
Intangibles—Goodwill and Other
to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-8 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We have adopted these amendments and do not expect the amendments to have a material impact on our condensed consolidated financial statements. We perform our goodwill impairment test in the fourth quarter of each year, and on an interim basis if necessary.
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3.
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STRATEGIC TRANSACTIONS
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GECC Transaction
On September 24, 2012 (the "Closing Date"), the Company closed a
five
year strategic relationship with General Electric Capital Corporation's (“GE Capital”) Bank Loan Group. The Company believes that this strategic relationship could provide CIFC with significant new opportunities to create new CIFC-managed investment products, including those involving GE Capital loan originations and/or vehicles which GE Capital provides financing. Further, partnering with GE Capital positions the Company for unique opportunities given GE Capital's strength as a leading corporate lender coupled with CIFC's loan asset management platform.
Pursuant to the transaction: (i) a commercial council (the “Commercial Council”) comprised of senior members of both GE Capital and the Company was formed to explore joint business opportunities; (ii) the Company and GE Capital entered into a referral agreement (the “Referral Agreement”) pursuant to which (a) GE Capital will refer certain potential investment advisory clients (“Referred Clients”) to the Company for a period of
five
years (which may be extended for up to
two
consecutive
one year
periods) and (b) the Company is obligated to pay GE Capital
15%
of any advisory fees in excess of
$9.0 million
earned from Referred Clients in the aggregate; and (iii) GE Capital Debt Advisors LLC, a wholly owned indirect subsidiary of GE Capital (“GECDA”), exited the business of providing certain loan management services to third parties and assigned to CIFCAM its role as manager of
four
“Navigator” CLOs (the “Navigator Management Agreements”). The transaction described in this paragraph shall hereinafter be referred to as the “GECC Transaction”.
The GECC Transaction is considered a taxable business combination in accordance with ASC Topic 805-
Business Combinations
(“ASC Topic 805”). As consideration for the GECC Transaction, on the Closing Date the Company (i) issued
1.0 million
shares of its common stock to GE Capital Equity Investments, Inc., a wholly-owned subsidiary of GE Capital (“GECEII”), with a Closing Date fair value of
$7.5 million
, (ii) issued a warrant to GECEII to purchase
2.0 million
shares of a newly created class of non-voting stock (the “GECEII Warrant”) at a per share exercise price of
$6.375
with an estimated Closing Date fair value of
$3.7 million
and (iii) paid to GECDA
$4.5 million
in cash, subject to certain adjustments.
On the Closing Date, the Company and GECEII entered into an investment agreement setting forth certain rights and obligations of GECEII as a stockholder of the Company, including a right of GECEII to designate a member of the board of directors (the "Board") so long as GECEII (together with its affiliates) owns at least
5%
of the outstanding capital stock of the Company, calculated assuming the full conversion of all outstanding Convertible Notes into common stock and the full exercise of the GECEII Warrant.
Calculation of the purchase consideration in accordance with ASC Topic 805 is as follows:
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(In thousands,
except share and
per share
information)
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Shares issued
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1,000,000
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Multiplied by Closing Date share price
|
$
|
7.51
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|
(1)
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|
Value of shares
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$
|
7,510
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|
|
|
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Warrants issued
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2,000,000
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|
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Multiplied by Closing Date estimated fair value per warrant
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$
|
1.83
|
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(2)
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Value of warrants
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$
|
3,660
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|
|
|
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Cash
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$
|
4,525
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Total purchase consideration
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$
|
15,695
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_________________________________
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(1)
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Represents the closing price of the Company's common stock on the Closing Date.
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(2)
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The estimated fair value per warrant was determined utilizing a Black-Scholes model with the assistance of an independent valuation firm.
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The following is a summary of the recognized amounts of assets acquired and liabilities assumed as a result of the GECC Transaction:
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(In thousands)
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Receivables
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$
|
147
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Identifiable intangible assets
|
7,470
|
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Excess of purchase consideration over identifiable net assets acquired - Goodwill
|
8,078
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|
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$
|
15,695
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The fair values of the assets acquired were estimated by management with the assistance of an independent valuation firm. The identifiable intangible assets acquired by asset class are as follows:
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Closing Date
Estimated Fair Value
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Closing Date Estimated
Average Remaining Useful Life
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|
|
(In thousands)
|
|
(In years)
|
|
Intangible asset class:
|
|
|
|
|
|
Investment management contracts
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$
|
3,660
|
|
|
3
|
|
Referral Arrangement
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3,810
|
|
|
7
|
|
|
$
|
7,470
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|
|
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The fair value of the intangible assets related to the Navigator Management Agreements were determined utilizing an excess earnings approach based upon projections of future investment advisory fees from the CLOs. Significant inputs to the investment advisory fee projections include the structure of the CLOs and estimates related to loan default, recovery and discount rates. The intangible assets related to the management contracts are amortized based on a ratio of expected discounted cash flows from the contracts over their expected remaining useful lives.
The fair value of the intangible asset related to the Referral Arrangement (a defined term intended to encompass both referrals under the Referral Agreement described herein and any other business GE Capital may refer to us) was determined utilizing an excess earnings approach based upon projections of future revenues generated from the relationship. Significant inputs utilized in the projections include the structure of potential new investment vehicles generating revenues, the timing of investments in such vehicles and discount rates. The intangible assets related to the Referral Arrangement will be amortized based on estimated discounted cash flows of the significant projected future revenue streams. See Note 9 for additional disclosures regarding intangible assets.
Tax deductible goodwill of
$8.1 million
is the excess of the total purchase consideration over the identifiable tangible and intangible assets acquired in the GECC Transaction. This goodwill relates to the additional strategic opportunities that management believes will be available to the Company as a result of the association with GE Capital primarily sourced through the Commercial Council, including, but not limited to (i) growth in AUM, (ii) newly developed CIFC-managed investment products and business lines and (iii) preferred access to GE Capital originated loans.
CIFC considered whether the requirement under the Referral Agreement for the Company to pay GE Capital
15%
of any investment advisory fee in excess of the first
$9.0 million
that we receive from Referred Clients constituted contingent consideration for the GECC Transaction. Management determined that the estimated fair value for this obligation was immaterial as of the Closing Date. Future payments to GE Capital under the Referral Agreement, if any, will be accounted for under ASC Topic 450 -
Contingencies
.
Management is still in the process of finalizing the purchase price calculations and allocations related to identifiable intangible assets, goodwill and contingent liabilities, pending finalization of revenue projections.
The Company expensed GECC Transaction-related costs as incurred. For the
three and nine months ended September 30, 2012
, the Company incurred costs related to the GECC Transaction of
$0.7 million
which are recorded within strategic transactions expenses in the condensed consolidated statements of operations.
Pro forma disclosures have not been provided for the GECC Transaction as retrospective application requires significant estimates of amounts which the Company is unable to distinguish objectively. Principally, the GECC transaction did not include the acquisition of a stand-alone business that had financial statements. Given the strategic nature of the transaction, a significant amount of the expected benefits are based on future revenue streams from products that have not yet been developed. Investment advisory fee revenues related to the Navigator Management Agreements prior to the Closing Date of the GECC transaction (and therefore excluded from net income attributable to CIFC Corp.) were
$1.0 million
and
$3.4 million
for the three and nine months ended September 30, 2012, respectively, and
$1.4 million
and
$4.6 million
for the three and nine months ended September 30, 2011, respectively. This includes investment advisory fees from Navigator 2006 CLO which would have been eliminated in consolidation of
$0.4 million
and
$1.2 million
for the three and nine months ended September 30, 2012, respectively, and
$0.4 million
and
$1.2 million
for the three and nine months ended September 30, 2011, respectively.
During the
three months ended
September 30, 2012
the Company recorded net income attributable to CIFC Corp. of
$18,000
related to the investment advisory fees from the Navigator CLOs which represents accrued investment advisory fees from the Navigator Management Agreements from the Closing Date through
September 30, 2012
.
As a result of the GECC Transaction, the Company consolidated
one
Navigator CLO, Navigator 2006 CLO. As of the Closing Date, the Company consolidated assets of
$316.8 million
and non-recourse liabilities of
$313.2 million
related to this CLO. As of
September 30, 2012
, the Company consolidated assets of
$320.0 million
and non-recourse liabilities of
$314.0 million
related to this CLO. For the
three months ended
September 30, 2012
, the Company recorded a net income of
$0.9 million
related to Navigator 2006 CLO within net results of Consolidated Variable Interest Entities.
Merger with Legacy CIFC
On April 13, 2011 (the “Merger Closing Date”), we completed the Merger with Legacy CIFC. As a result of the Merger, Legacy CIFC became CIFCAM and a wholly-owned subsidiary of CIFC. The consideration for the Merger paid or payable to CIFC Parent Holdings LLC (“CIFC Parent”), the sole stockholder of Legacy CIFC, consisted of (i)
9,090,909
shares of our common stock, (ii)
$7.5 million
in cash, payable in
three
equal installments of
$2.5 million
(subject to certain adjustments), the first of which was paid on the Merger Closing Date, the second of which was paid on April 13, 2012 and the final installment is payable on the second anniversary of the Merger Closing Date, (iii)
$4.2 million
in cash as consideration for the cash balance at Legacy CIFC on the Merger Closing Date (adjusted for certain items), (iv) out-of pocket costs and expenses incurred by Legacy CIFC and CIFC Parent in connection with the Merger of approximately
$2.9 million
, (v) the first
$15.0
million
of incentive fees received by the combined company from certain CLOs managed by CIFCAM as of the Merger Closing Date, (vi)
50%
of any incentive fees in excess of
$15.0 million
in the aggregate received by the combined company over the next
ten
years from certain CLOs managed by CIFCAM as of the Merger Closing Date and (vii) payments relating to the present value of any such incentive fees from certain CLOs managed by CIFCAM as of the Merger Closing Date that remain payable to the combined company after the tenth anniversary of the Merger Closing Date. The Merger is reflected in our condensed consolidated financial statements as of
December 31, 2011
and
September 30, 2012
, and for the period from the Merger Closing Date to
September 30, 2012
.
Calculation of the purchase consideration in accordance with ASC Topic 805 is as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands,
except share and
per share
information)
|
|
|
Shares issued
|
9,090,909
|
|
|
|
Multiplied by Merger Closing Date share price
|
$
|
6.15
|
|
(1
|
)
|
|
Value of shares
|
$
|
55,909
|
|
|
|
Cash
|
6,683
|
|
(2
|
)
|
|
Certain acquisition-related expenses of seller paid by the Company
|
2,769
|
|
(3
|
)
|
|
Fair value of fixed deferred payments to the seller
|
4,571
|
|
(4
|
)
|
|
Fair value of contingent deferred payments to the seller
|
19,793
|
|
(5
|
)
|
|
Total purchase consideration
|
$
|
89,725
|
|
|
_________________________________
|
|
|
|
(1)
|
Represents the closing price of our common stock on the Merger Closing Date.
|
|
|
|
|
(2)
|
Represents cash consideration paid on the Merger Closing Date. Includes
$4.2 million
as consideration for the estimated Merger Closing Date cash balance at Legacy CIFC, adjusted for certain items, and a
$2.5 million
installment cash payment.
|
|
|
|
|
(3)
|
Represents estimated out-of pocket costs and expenses incurred by Legacy CIFC and CIFC Parent in connection with the Merger. This excludes
$0.2 million
of out-of-pocket costs and expenses charged to additional paid-in capital.
|
|
|
|
|
(4)
|
Represents the Merger Closing date fair value of fixed deferred payments to CIFC Parent per the Agreement and Plan of Merger dated as of December 21, 2010, (as amended from time to time, the “Merger Agreement”). These fixed deferred payments totaled
$5.0 million
and the first
$2.5 million
installment was paid on the first anniversary of the Merger Closing Date and the second installment payment is payable on the second anniversary of the Merger Closing Date. The
$2.5 million
payments are not contingent on any performance, but rather are due as a result of the passage of time and were discounted to arrive at an estimated fair value.
|
|
|
|
|
(5)
|
Represents the fair value of contingent deferred payments to CIFC Parent per the Merger Agreement.
|
The following is a summary of the recognized amounts of assets acquired and liabilities assumed as a result of the Merger:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
$
|
5,146
|
|
|
Restricted cash and cash equivalents
|
122
|
|
|
Receivables
|
5,144
|
|
|
Prepaid and other assets
|
330
|
|
|
Equipment and improvements, net
|
234
|
|
|
Accrued and other liabilities
|
(2,537
|
)
|
|
Net deferred tax liabilities (1)
|
(5,888
|
)
|
|
Contingent liabilities (1)
|
(19,244
|
)
|
|
Additional paid-in capital adjustment
|
(83
|
)
|
|
Identifiable intangible assets
|
49,900
|
|
|
Excess of purchase consideration over identifiable net assets acquired - Goodwill (1)
|
56,601
|
|
|
|
$
|
89,725
|
|
_________________________________
|
|
|
|
(1)
|
Items included adjustments since the initial purchase accounting disclosed as of June 30, 2011. Net deferred tax liabilities were increased by
$0.6 million
and contingent liabilities decreased by
$1.1 million
, resulting in a decrease to goodwill of
$0.5 million
.
|
The fair values of the assets acquired and the liabilities assumed were estimated by management with the assistance of an independent valuation firm. The identifiable intangible assets acquired by asset class are as follows:
|
|
|
|
|
|
|
|
|
|
|
Merger Closing Date
Estimated Fair Value
|
|
Merger Closing Date Estimated
Average Remaining Useful Life
|
|
|
(In thousands)
|
|
(In years)
|
|
Intangible asset class:
|
|
|
|
|
|
Investment management contracts
|
$
|
46,460
|
|
|
6
|
|
Trade name
|
1,250
|
|
|
10
|
|
Technology
|
820
|
|
|
2
|
|
Non-compete agreements
|
1,370
|
|
|
7
|
|
|
$
|
49,900
|
|
|
|
The fair value of the intangible assets related to the investment management contracts of CIFCAM and CypressTree, were determined utilizing an excess earnings approach based upon projections of future investment advisory fees from the CLOs. Significant inputs to the investment advisory fee projections include the structure of the CLOs and estimates related to loan default, recovery and discount rates. The intangible assets related to the management contracts are amortized based on a ratio of expected discounted cash flows from the contracts over their expected remaining useful lives. The fair value of the intangible assets related to the “Commercial Industrial Finance Corp.” and “CIFC” trade names and technology were determined utilizing a relief from royalty method applied to expected cash flows and are amortized on a straight-line basis over their estimated remaining useful lives. The fair value of the intangible assets associated with the non-compete agreements was determined using a lost cash flows analysis and are amortized on a straight-line basis over the estimated remaining useful life. See Note 9 for additional disclosures regarding our intangible assets.
The contingent liabilities assumed in the Merger primarily represent contingent consideration related to Legacy CIFC’s acquisition of CypressTree on December 1, 2010 and contingent liabilities Legacy CIFC assumed in its acquisition of CypressTree related to required payments to the prior sellers of CypressTree and the broker of that sale. These contingent liabilities are based on a fixed percentage of certain investment advisory fees from the CypressTree CLOs. These fixed percentages vary by CLO and have a minimum fixed percentage of
55%
. These contingent liability valuations were based on discounted cash flow projections of future investment advisory fees earned on the CLOs managed by CypressTree. These contingent liabilities and the contingent deferred payment liabilities for the Merger are remeasured at fair value at each reporting date and recorded within contingent liabilities at fair value on the consolidated balance sheets. See Note 10 for additional disclosures regarding our contingent liabilities.
Goodwill of
$56.6 million
is the excess of the total purchase consideration over the identifiable tangible and intangible assets acquired in the Merger. Goodwill relates to (i) the additional strategic opportunities that we believe will be available to us as a result of our increased scale, improved financial condition, an experienced management team and the addition of the CIFCAM CLO fund family, which has market leading performance in the U.S. managed CLO segment, (ii) the expected close of new CLOs and other investment products based on our corporate credit expertise and (iii) the expected cost synergies from the Merger.
The Merger with Legacy CIFC was a nontaxable business combination. Consequently, the future amortization expense related to approximately
$37.7 million
of the identifiable intangible assets associated with the CLOs managed by CIFCAM will not be deductible for income tax purposes. In accordance with GAAP applicable to nontaxable business combinations, on the Merger Closing Date we recorded a deferred tax liability of approximately
$17.2 million
for the future amortization of these intangible assets. Other taxable or deductible temporary differences related primarily to Legacy CIFC’s net operating loss carryforwards and its acquisition of CypressTree resulted in a Merger Closing Date net deferred tax asset of approximately
$11.3 million
. The net deferred tax liability from all of these temporary differences was
$5.9 million
and this amount was added to goodwill.
We expensed Merger-related costs (other than those related to stock issuance) as incurred. For the
three and nine
months ended
September 30, 2011
, we incurred costs related to the Merger of
$0.2 million
and
$3.3 million
, respectively, offset by
$0.1 million
and
$1.8 million
of reclassifications to additional paid-in capital for stock issuance costs for the same periods,
for net expenses of
$0.1 million
and
$1.5 million
for the three and nine months ended
September 30, 2011
, respectively, recorded within strategic transactions expenses in the condensed consolidated statements of operations.
We finalized our accounting for the Merger during the fourth quarter of 2011.
|
|
|
|
4.
|
CLOs AND CONSOLIDATED VARIABLE INTEREST ENTITIES
|
Collateralized Loan Obligations
The term CLO (which for purposes of the discussion in this note also includes the term CDO unless otherwise noted) generally refers to a special purpose vehicle that owns a portfolio of investments (SSCLs in the case of CLOs and typically asset-backed or other securities in the case of CDOs) and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s maximum exposure to any single industry or obligor and limit the ratings of the CLO’s assets. Most CLOs have a defined investment period which they are allowed to make investments and reinvest capital as it becomes available.
CLOs typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of investments. These securities receive interest and principal payments from the CLO in accordance with an agreed upon priority of payments, commonly referred to as a “waterfall.” The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO. This tranche of notes is issued at a specified spread over LIBOR and normally has the first claim on the earnings on the CLO’s investments after payment of certain fees and expenses. The mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and also are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLOs’ investments if the required interest and principal payments have been made on the more senior tranches. The most junior tranche can take the form of either subordinated notes or preference shares and is referred to as the CLO’s “subordinated notes.” The subordinated notes generally do not have a stated coupon but are entitled to residual cash flows from the CLOs’ investments after all of the other tranches of notes and certain other fees and expenses are paid. While the majority of the subordinated notes of the CLOs we manage are owned by third parties, we do own a portion of the subordinated note tranches of certain of the CLOs we manage.
CLOs, which are designed to serve as investments for third party investors, generally have an investment manager that selects and actively manages the underlying assets to achieve target investment performance, including avoidance of loss. In exchange for these services, CLO managers typically receive
three
types of investment advisory fees: senior management fees, subordinated management fees and incentive fees. CLOs also generally appoint a trustee, custodian and collateral administrator, who are responsible for holding a CLO’s investments, collecting investment income and distributing that income in accordance with the waterfall.
Consolidated Variable Interest Entities
Consolidated CLOs
Consolidated CLOs with assets of
$9.1 billion
and non-recourse liabilities of
$8.9 billion
were consolidated into our condensed consolidated financial statements as of
September 30, 2012
. Consolidated CLOs with assets of
$8.0 billion
and non-recourse liabilities of
$7.7 billion
were consolidated into our condensed consolidated financial statements as of
December 31, 2011
. Although we consolidate all of the assets, liabilities and subordinated notes of the Consolidated CLOs, our maximum exposure to loss related to the Consolidated CLOs is limited to our investments and beneficial interests in the Consolidated CLOs (
$37.6 million
and
$7.0 million
as of
September 30, 2012
and
December 31, 2011
, respectively), our investment advisory fee receivables from the Consolidated CLOs (
$2.3 million
and
$2.1 million
as of
September 30, 2012
and
December 31, 2011
, respectively), and our future investment advisory fees, all of which are eliminated upon consolidation.
The assets of each of the Consolidated CLOs are held solely as collateral to satisfy the obligations of the Consolidated CLOs. We do not own and have no right to the benefits from, nor do we bear the risks associated with, the assets held by the Consolidated CLOs, beyond our minimal direct investments and beneficial interests in, and investment advisory fees generated from, the Consolidated CLOs. If CIFC were to liquidate, the assets of the Consolidated CLOs would not be available to our general creditors, and as a result, we do not consider them our assets. Additionally, the investors in the Consolidated CLOs have no recourse to our general assets for the debt issued by the Consolidated CLOs. Therefore, this debt is not our obligation.
We have elected the fair value option for all assets and liabilities of the Consolidated CLOs. We have determined that, although the subordinated notes of the Consolidated CLOs have certain characteristics of equity, they are recorded as debt on our condensed consolidated balance sheets, as the subordinated notes have a stated maturity indicating a date on which they are mandatorily redeemable and redemption is required only upon liquidation or termination of the CLO and not upon liquidation or termination of CIFC.
Net income (loss) recorded for the Consolidated CLOs is not indicative of the cash flow distributions we receive from the Consolidated CLOs. For the
three and nine
months ended
September 30, 2012
we recorded net losses of
$169.0 million
and
$137.8 million
, respectively, within our condensed consolidated statements of operations related to the Consolidated CLOs. For the
three and nine
months ended
September 30, 2011
we recorded net losses of
$218.8 million
and
$329.2 million
, respectively, within our condensed consolidated statements of operations related to the Consolidated CLOs.
We receive cash flow distributions from the Consolidated CLOs consisting of investment advisory fees, and, to the extent that we have debt, subordinated notes or other investments in our Consolidated CLOs, interest and distributions on such investments, which are eliminated in consolidation. The following table presents the components of the cash flow distributions from the Consolidated CLOs before fee sharing and eliminations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Investment advisory fees
|
$
|
13,775
|
|
|
$
|
12,619
|
|
|
$
|
36,657
|
|
|
$
|
30,304
|
|
|
Interest on debt investments
|
36
|
|
|
34
|
|
|
109
|
|
|
104
|
|
|
Subordinated note distributions
|
1,363
|
|
|
746
|
|
|
2,414
|
|
|
2,439
|
|
|
Total cash flow distributions
|
$
|
15,174
|
|
|
$
|
13,399
|
|
|
$
|
39,180
|
|
|
$
|
32,847
|
|
DFR MM CLO
We consolidated the DFR MM CLO since its inception in 2007 because we owned all of its subordinated notes. On February 7, 2012, we sold our investments in and our rights to manage the DFR MM CLO for
$36.5 million
and deconsolidated the entity. This resulted in a deconsolidation of assets of
$108.9 million
and liabilities of
$72.4 million
. We did not elect the fair value option for the assets and liabilities of DFR MM CLO. As of
December 31, 2011
, we consolidated assets of
$130.3 million
(primarily cash and loan investments classified as held for sale as described in further detail at Note 6) and liabilities of
$93.6 million
(primarily long-term debt carried at par) related to the DFR MM CLO. Although we consolidated all of the assets and liabilities of DFR MM CLO, our maximum exposure to loss on our investment in this entity had been limited to our initial investment of
$69.0 million
(
$50.0 million
of subordinated notes and
$19.0 million
of debt). The economic impact of our investments in DFR MM CLO had been determined by the cash distributed to us on our investment therein which, from the date of our initial investment through the date of sale, totaled
$52.2 million
on our subordinated notes investment and
$4.8 million
in interest on our debt investment. The DFR MM CLO’s debt holders had recourse only to the assets of the DFR MM CLO and not to our general assets.
For the
three and nine
months ended
September 30, 2012
, we recorded net losses of
zero
and
$0.2 million
, respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations related to the DFR MM CLO. For the
three and nine
months ended
September 30, 2011
, we recorded a net losses of
$5.2 million
and
$5.0 million
, respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations related to the DFR MM CLO. For the
three and nine
months ended
September 30, 2011
, we received cash flow distributions from the DFR MM CLO consisting of interest on our debt investment of
$0.2 million
and
$0.6 million
, respectively, and distributions on our subordinated note investment of
$2.8 million
and
$9.4 million
, respectively, which were eliminated in consolidation. No distributions were received during the
three and nine
months ended
September 30, 2012
.
Warehouse SPV
We consolidated the Warehouse SPV since its inception during the second quarter of
2011
. We deconsolidated the Warehouse SPV in January 2012 in conjunction with the settlement of the Warehouse TRS and the closing of CIFC CLO 2011-I. We consolidated assets of
$46.5 million
and liabilities of
$0.6 million
related to the Warehouse SPV as of
December 31, 2011
. Although we had consolidated all of the assets and liabilities of the Warehouse SPV, our maximum exposure to loss was limited to our investment in this entity, which was
$46.5 million
as of
December 31, 2011
. For the
three and nine
months ended
September 30, 2012
, we recorded net income of
zero
and
$1.4 million
, respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV. For the
three and nine
months ended
September 30, 2011
, we recorded net losses of
$5.6 million
and
$5.0 million
, respectively, in net results of Consolidated VIEs within our condensed consolidated statements of operations for the Warehouse SPV. See Note 7 for more information on the Warehouse SPV and its investment, the Warehouse TRS.
CIFC 2012-III Warehouse
In September 2012, we began consolidating a special purpose vehicle, CIFC 2012-III Warehouse, an entity with a structure similar to a CLO that was created to warehouse SSCL's prior to the close of new CLOs. Our maximum exposure to loss related to CIFC 2012-III Warehouse is limited to our
$25.2 million
investment (as of September 30, 2012) in the entity. We consolidated assets of
$38.1 million
and liabilities of
$12.9 million
related to the CIFC 2012-III Warehouse as of September 30, 2012. For the
three and nine
months ended
September 30, 2012
, we recorded net income of
$0.1 million
in net results of Consolidated VIEs within our condensed consolidated statements of operations for CIFC 2012-III Warehouse.
|
|
|
|
5.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Assets and liabilities measured at fair value on a recurring basis
The following tables present the financial instruments carried at fair value on a recurring basis, by class and by level within the ASC Topic 820 valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Estimated Fair Value
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and derivative assets of Consolidated Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
—
|
|
|
$
|
8,162,128
|
|
|
$
|
5,466
|
|
|
$
|
8,167,594
|
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
74,826
|
|
|
74,826
|
|
|
Other
|
—
|
|
|
—
|
|
|
78,848
|
|
|
78,848
|
|
|
Derivative assets
|
—
|
|
|
—
|
|
|
50
|
|
|
50
|
|
|
Total investments and derivative assets of Consolidated Variable Interest Entities
|
—
|
|
|
8,162,128
|
|
|
159,190
|
|
|
8,321,318
|
|
|
Total Assets
|
$
|
—
|
|
|
$
|
8,162,128
|
|
|
$
|
159,190
|
|
|
$
|
8,321,318
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,724
|
|
|
$
|
34,724
|
|
|
Liabilities at fair value of Consolidated Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
—
|
|
|
—
|
|
|
8,535,621
|
|
|
8,535,621
|
|
|
Total liabilities of Consolidated Variable Interest Entities
|
—
|
|
|
—
|
|
|
8,535,621
|
|
|
8,535,621
|
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,570,345
|
|
|
$
|
8,570,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Estimated Fair Value
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and derivative assets of Consolidated Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
—
|
|
|
$
|
7,327,141
|
|
|
$
|
19,729
|
|
|
$
|
7,346,870
|
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
154,096
|
|
|
154,096
|
|
|
Other
|
—
|
|
|
—
|
|
|
47,806
|
|
|
47,806
|
|
|
Derivative assets
|
—
|
|
|
—
|
|
|
5,281
|
|
|
5,281
|
|
|
Total investments and derivative assets of Consolidated Variable Interest Entities
|
—
|
|
|
7,327,141
|
|
|
226,912
|
|
|
7,554,053
|
|
|
Total Assets
|
$
|
—
|
|
|
$
|
7,327,141
|
|
|
$
|
226,912
|
|
|
$
|
7,554,053
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,279
|
|
|
$
|
39,279
|
|
|
Liabilities at fair value of Consolidated Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
—
|
|
|
6,252
|
|
|
—
|
|
|
6,252
|
|
|
Long-term debt
|
—
|
|
|
—
|
|
|
7,559,568
|
|
|
7,559,568
|
|
|
Total liabilities of Consolidated Variable Interest Entities
|
—
|
|
|
6,252
|
|
|
7,559,568
|
|
|
7,565,820
|
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
6,252
|
|
|
$
|
7,598,847
|
|
|
$
|
7,605,099
|
|
Changes in Level 3 recurring fair value measurements
The following tables summarize by class the changes in financial assets and liabilities measured at fair value classified within Level 3 of the valuation hierarchy. Net realized and unrealized gains (losses) for Level 3 financial assets and liabilities measured at fair value are included within Net gain (loss) on investments, loans, derivatives and liabilities and net gain (loss) from activities of Consolidated Variable Interest Entities in the condensed consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets at Fair Value
|
|
|
Three months ended September 30, 2012
|
|
Nine months ended September 30, 2012
|
|
|
Investment and Derivative Assets of Consolidated Variable Interest Entities
|
|
Investment and Derivative Assets of Consolidated Variable Interest Entities
|
|
|
Loans
|
|
Corporate
Bonds
|
|
Other
|
|
Derivative
Assets
|
|
Total
|
|
Loans
|
|
Corporate
Bonds
|
|
Other
|
|
Derivative
Assets
|
|
Total
|
|
|
(In thousands)
|
|
Estimated fair value, beginning of period
|
$
|
4,371
|
|
|
$
|
107,912
|
|
|
$
|
72,644
|
|
|
$
|
56
|
|
|
$
|
184,983
|
|
|
$
|
19,729
|
|
|
$
|
154,096
|
|
|
$
|
47,806
|
|
|
$
|
5,281
|
|
|
$
|
226,912
|
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,058
|
|
(1
|
)
|
—
|
|
|
—
|
|
|
—
|
|
|
4,058
|
|
|
Transfers out of
Level
3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,453
|
)
|
(2
|
)
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,453
|
)
|
|
Transfers in due to consolidation or acquisition
|
660
|
|
|
—
|
|
|
863
|
|
|
—
|
|
|
1,523
|
|
|
660
|
|
|
—
|
|
|
863
|
|
|
—
|
|
|
1,523
|
|
|
Transfers out due to deconsolidation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,708
|
)
|
|
|
—
|
|
|
—
|
|
|
(5,708
|
)
|
|
Transfers between classes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,290
|
)
|
(3
|
)
|
33,290
|
|
(3
|
)
|
—
|
|
|
—
|
|
|
Net realized/unrealized gains (losses)
|
325
|
|
|
811
|
|
|
10,662
|
|
|
(6
|
)
|
|
11,792
|
|
|
1,658
|
|
|
6,341
|
|
|
12,626
|
|
|
(5,227
|
)
|
|
15,398
|
|
|
Purchases
|
185
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185
|
|
|
436
|
|
|
—
|
|
|
7,255
|
|
|
—
|
|
|
7,691
|
|
|
Sales
|
—
|
|
|
(33,897
|
)
|
|
(432
|
)
|
|
—
|
|
|
(34,329
|
)
|
|
(1,430
|
)
|
|
(45,450
|
)
|
|
(10,245
|
)
|
|
(4
|
)
|
|
(57,129
|
)
|
|
Settlements
|
(75
|
)
|
|
—
|
|
|
(4,889
|
)
|
|
—
|
|
|
(4,964
|
)
|
|
(14,192
|
)
|
|
(1,163
|
)
|
|
(12,747
|
)
|
|
—
|
|
|
(28,102
|
)
|
|
Estimated fair value, end of period
|
$
|
5,466
|
|
|
$
|
74,826
|
|
|
$
|
78,848
|
|
|
$
|
50
|
|
|
$
|
159,190
|
|
|
$
|
5,466
|
|
|
$
|
74,826
|
|
|
$
|
78,848
|
|
|
$
|
50
|
|
|
$
|
159,190
|
|
|
Change in unrealized gains (losses) for the period for the assets held as of the end of the period
|
$
|
318
|
|
|
$
|
572
|
|
|
$
|
9,323
|
|
|
$
|
(6
|
)
|
|
$
|
10,207
|
|
|
$
|
55
|
|
|
$
|
4,922
|
|
|
$
|
7,179
|
|
|
$
|
(11
|
)
|
|
$
|
12,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets at Fair Value
|
|
|
Three months ended September 30, 2011
|
|
Nine months ended September 30, 2011
|
|
|
|
|
Investment and Derivative Assets of Consolidated Variable
Interest Entities
|
|
|
|
|
|
Investment and Derivative Assets of Consolidated Variable
Interest Entities
|
|
|
|
|
Investments at
fair value
|
|
Loans
|
|
Corporate
Bonds
|
|
Other
|
|
Derivative
Assets
|
|
Total
|
|
Investments at
fair value
|
|
Loans
|
|
Corporate
Bonds
|
|
Other
|
|
Derivative
Assets
|
|
Total
|
|
|
(In thousands)
|
|
Estimated fair value, beginning of period
|
$
|
—
|
|
|
$
|
8,387
|
|
|
$
|
11,336
|
|
|
$
|
13,948
|
|
|
$
|
481
|
|
|
$
|
34,152
|
|
|
$
|
2,429
|
|
|
$
|
31,476
|
|
|
$
|
14,032
|
|
|
$
|
23,103
|
|
|
$
|
259
|
|
|
$
|
71,299
|
|
|
Net transfers in (out) of Level 3
|
—
|
|
|
12,859
|
|
(4
|
)
|
5,940
|
|
(4
|
)
|
(1,844
|
)
|
(6
|
)
|
8,232
|
|
|
25,187
|
|
|
—
|
|
|
(7,264
|
)
|
(5
|
)
|
5,940
|
|
(4
|
)
|
(3,176
|
)
|
(6
|
)
|
8,232
|
|
|
3,732
|
|
|
Transfer in due to consolidation or acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,160
|
|
|
239
|
|
|
12,830
|
|
|
276
|
|
|
14,505
|
|
|
Net realized/unrealized gains (losses)
|
—
|
|
|
(45
|
)
|
|
(637
|
)
|
|
(502
|
)
|
|
(326
|
)
|
|
(1,510
|
)
|
|
(29
|
)
|
|
1,859
|
|
|
356
|
|
|
595
|
|
|
(380
|
)
|
|
2,401
|
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,482
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,482
|
|
|
Sales
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
(147
|
)
|
|
(93
|
)
|
|
(280
|
)
|
|
(2,140
|
)
|
|
—
|
|
|
(40
|
)
|
|
(21,897
|
)
|
|
(93
|
)
|
|
(24,170
|
)
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,753
|
)
|
|
(7,094
|
)
|
|
—
|
|
|
—
|
|
|
(23,847
|
)
|
|
Settlements
|
—
|
|
|
(7,250
|
)
|
|
(3,166
|
)
|
|
—
|
|
|
—
|
|
|
(10,416
|
)
|
|
(260
|
)
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(269
|
)
|
|
Estimated fair value, end of period
|
$
|
—
|
|
|
$
|
13,951
|
|
|
$
|
13,433
|
|
|
$
|
11,455
|
|
|
$
|
8,294
|
|
|
$
|
47,133
|
|
|
$
|
—
|
|
|
$
|
13,951
|
|
|
$
|
13,433
|
|
|
$
|
11,455
|
|
|
$
|
8,294
|
|
|
$
|
47,133
|
|
_________________________________
|
|
|
|
(1)
|
The transfers into Level 3 represent loans valued by an internally developed model utilizing unobservable market inputs as of
September 30, 2012
which were previously valued by the comparable companies pricing model or a third-party pricing service.
|
|
|
|
|
(2)
|
The transfers out of Level 3 represent loans valued by the comparable companies pricing model or a third-party pricing service as of
September 30, 2012
which were previously valued by an internally developed model utilizing unobservable market inputs.
|
|
|
|
|
(3)
|
The transfers between classes represent investments in CLOs and CDOs classified as corporate bonds as of
December 31, 2011
.
|
|
|
|
|
(4)
|
The transfers into Level 3 represent positions valued by an internally developed model utilizing unobservable market inputs as of
September 30, 2011
which were previously valued by the comparable companies pricing model or a third-party pricing service. The transfers into Level 3 were partially offset by positions valued by the comparable companies pricing model or a third-party pricing service which were previously valued by an internally developed model utilizing unobservable market inputs.
|
|
|
|
|
(5)
|
The transfers out of Level 3 represent positions valued by the comparable companies pricing model or a third-party pricing service as of
September 30, 2011
which were previously valued by an internally developed model utilizing unobservable market inputs. These transfers out of Level 3 were partially offset by positions valued by an internally developed model utilizing unobservable market inputs as of
September 30, 2011
which were previously valued by the comparable companies pricing model or a third-party pricing service.
|
|
|
|
|
(6)
|
The transfers out of Level 3 represent certain investments valued by the comparable companies pricing model or a third-party pricing service as of
September 30, 2011
which were previously valued by an internally developed model utilizing unobservable market inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Liabilities at Fair Value
|
|
|
Three Months Ended September 30, 2012
|
|
Nine Months Ended September 30, 2012
|
|
|
Contingent Liabilities at Fair Value
|
|
Long-term Debt of Consolidated Variable Interest Entities
|
|
Total
|
|
Contingent Liabilities at Fair Value
|
|
Long-term Debt of Consolidated Variable Interest Entities
|
|
Total
|
|
|
(In thousands)
|
|
Estimated fair value, beginning of period
|
$
|
31,796
|
|
|
$
|
7,894,238
|
|
|
$
|
7,926,034
|
|
|
$
|
39,279
|
|
|
$
|
7,559,568
|
|
|
$
|
7,598,847
|
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
—
|
|
|
(4,500
|
)
|
(1
|
)
|
(4,500
|
)
|
|
—
|
|
|
(4,500
|
)
|
(1
|
)
|
(4,500
|
)
|
|
Transfer in due to consolidation or acquisition
|
—
|
|
|
313,093
|
|
|
313,093
|
|
|
—
|
|
|
313,093
|
|
|
313,093
|
|
|
Net realized/unrealized (gains) losses
|
6,059
|
|
|
332,752
|
|
|
338,811
|
|
|
9,400
|
|
|
582,124
|
|
|
591,524
|
|
|
Purchases
|
—
|
|
|
105
|
|
|
105
|
|
|
—
|
|
|
62,905
|
|
|
62,905
|
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,000
|
)
|
|
(5,000
|
)
|
|
Issuances
|
—
|
|
|
443,807
|
|
|
443,807
|
|
|
—
|
|
|
821,184
|
|
|
821,184
|
|
|
Settlements
|
(3,131
|
)
|
|
(443,874
|
)
|
|
(447,005
|
)
|
|
(13,955
|
)
|
|
(793,753
|
)
|
|
(807,708
|
)
|
|
Estimated fair value, end of period
|
$
|
34,724
|
|
|
$
|
8,535,621
|
|
|
$
|
8,570,345
|
|
|
$
|
34,724
|
|
|
$
|
8,535,621
|
|
|
$
|
8,570,345
|
|
|
Change in unrealized gains (losses) for the period for the liabilities held as of the end of the period
|
$
|
(5,441
|
)
|
|
$
|
(268,358
|
)
|
|
$
|
(273,799
|
)
|
|
$
|
(9,209
|
)
|
|
$
|
(381,878
|
)
|
|
$
|
(391,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Liabilities at Fair Value
|
|
|
Three Months Ended September 30, 2012
|
|
Nine Months Ended September 30, 2011
|
|
|
Derivative
Liabilities
|
|
Contingent
Liabilities at Fair
Value
|
|
Long-term Debt of
Consolidated
Variable Interest
Entities
|
|
Total
|
|
Derivative
Liabilities
|
|
Contingent
Liabilities at Fair
Value
|
|
Long-term Debt of
Consolidated
Variable Interest
Entities
|
|
Total
|
|
|
(In thousands)
|
|
Estimated fair value, beginning of period
|
$
|
9,920
|
|
|
$
|
41,004
|
|
|
$
|
483,112
|
|
|
$
|
534,036
|
|
|
$
|
11,155
|
|
|
$
|
—
|
|
|
$
|
202,844
|
|
|
$
|
213,999
|
|
|
Net transfers in (out) of Level 3
|
—
|
|
|
—
|
|
|
7,006,110
|
|
(2
|
)
|
7,006,110
|
|
|
—
|
|
|
—
|
|
|
7,006,110
|
|
(2
|
)
|
7,006,110
|
|
|
Transfer in due to consolidation or acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
265,032
|
|
|
265,032
|
|
|
Net realized/unrealized (gains) losses
|
(6,190
|
)
|
|
1,600
|
|
|
36,043
|
|
|
31,453
|
|
|
(7,425
|
)
|
|
4,501
|
|
|
51,279
|
|
|
48,355
|
|
|
Purchases
|
—
|
|
|
(1,134
|
)
|
(3
|
)
|
—
|
|
|
(1,134
|
)
|
|
—
|
|
|
39,037
|
|
(4
|
)
|
—
|
|
|
39,037
|
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
(2,550
|
)
|
|
—
|
|
|
(2,550
|
)
|
|
—
|
|
|
(4,618
|
)
|
|
—
|
|
|
(4,618
|
)
|
|
Estimated fair value, end of period
|
$
|
3,730
|
|
|
$
|
38,920
|
|
|
$
|
7,525,265
|
|
|
$
|
7,567,915
|
|
|
$
|
3,730
|
|
|
$
|
38,920
|
|
|
$
|
7,525,265
|
|
|
$
|
7,567,915
|
|
_________________________________
|
|
|
|
(1)
|
The transfers out of Level 3 represent our purchase of subordinated notes of one of the Consolidated CLOs during the periods presented, which results in the subordinated notes being eliminated in consolidation.
|
|
|
|
|
(2)
|
The transfers into Level 3 represent the change of valuation methodology of the debt of the Consolidated CLOs from an externally developed model to an internally developed model using significant unobservable inputs.
|
|
|
|
|
(3)
|
Represents a change in the initial purchase accounting of the assumed contingent liabilities related to the Merger.
|
|
|
|
|
(4)
|
Represents the contingent deferred payments which were a component of the Merger consideration and contingent liabilities assumed in the Merger as described in further detail in Note 10.
|
Quantitative Information about Level 3 Assets & Liabilities
ASC Topic 820, as amended by ASU 2011-4, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service
and the information regarding the unobservable inputs is not reasonably available to us. As such, the disclosure provided below provides quantitative information only about the significant unobservable inputs used in the valuation of our contingent liabilities and the long-term debt of our Consolidated CLOs as of
September 30, 2012
.
The valuation of both our contingent liabilities and the long-term debt of the Consolidated CLOs begins with a model of projected cash flows for the relevant CLO. In addition to the structure of each of the CLOs (as provided in the indenture for each CLO), the following table provides quantitative information about the significant unobservable inputs utilized in this projection as of
September 30, 2012
. Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement of contingent liabilities and the long-term debt of the Consolidated CLOs, as shown in the table.
|
|
|
|
|
|
|
|
|
Significant Unobservable Input
|
|
Range
|
|
Impact of Increase in Input
on Fair Value
Measurement (2)
|
|
Default rate (1)
|
|
0-3%
|
|
Decrease
|
|
Recovery rate (1)
|
|
70-75%
|
|
Increase
|
|
Pre-payment rate (1)
|
|
20-30%
|
|
Decrease
|
|
Reinvestment spread above LIBOR
|
|
3-4%
|
|
Increase
|
|
Reinvestment price
|
|
99.50
|
|
Increase
|
_________________________________
|
|
|
|
(1)
|
Generally an increase in the default rate would be accompanied by a directionally opposite change in assumption for the recovery and pre-payment rates.
|
|
|
|
|
(2)
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
|
The valuation of the contingent liabilities as of
September 30, 2012
discounts the investment advisory fees subject to fee-sharing arrangements provided from the projected cash flow model (described above) at discount rates ranging from
6%
to
15%
. The discount rate varies by type of investment advisory fee (senior management fee, subordinated management fee, or incentive fee), the priority of that investment advisory fee in the waterfall of the CLO and the relative risk associated with the respective investment advisory fee cash flow projections. Increases (decreases) in the discount rates in isolation would result in a lower (higher) fair value measurement.
The valuation of the long-term debt of the Consolidated CLOs as of
September 30, 2012
discounts the cash flows to each tranche of debt and subordinated notes provided from the projected cash flow model (described above) at discount rates ranging from
1.3%
to
9.0%
above
LIBOR
for the debt tranches and a discount rate of
15%
for the subordinated notes tranches. The discount rate varies by the original credit rating of each tranche of debt or year of issuance for the subordinated notes. Increases (decreases) in the discount rates in isolation would result in a lower (higher) fair value measurement.
Assets measured at fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis, meaning that the instruments are measured at fair value only in certain circumstances (for example, when held at the lower of cost or fair value). As of
September 30, 2012
, there were no assets or liabilities measured at fair value on a nonrecurring basis. The following table presents the financial instruments measured at fair value on a nonrecurring basis, by caption in the condensed consolidated balance sheets and by level within the ASC Topic 820 valuation hierarchy as of
December 31, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Estimated Fair Value
|
|
|
(In thousands)
|
|
Loans held for sale
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99,595
|
|
(1
|
)
|
|
$
|
99,595
|
|
_________________________________
|
|
|
|
(1)
|
Represents the loans held within DFR MM CLO. The
December 31, 2011
carrying value of the loans held for sale within DFR MM CLO was reduced to
$12.0 million
below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO for
$36.5 million
.
|
Carrying Value and Estimated Fair Value of Financial Assets and Liabilities
The carrying amounts and estimated fair values of our financial assets and liabilities for which the disclosure of fair values is required, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012
|
|
As of December 31, 2011
|
|
|
Carrying
Value
|
|
Estimated
Fair
Value
|
|
Carrying
Value
|
|
Estimated
Fair
Value
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
$
|
63,027
|
|
|
$
|
63,027
|
|
|
$
|
35,973
|
|
|
$
|
35,973
|
|
|
Restricted cash and cash equivalents (1)
|
1,732
|
|
|
1,732
|
|
|
2,229
|
|
|
2,229
|
|
|
Financial assets of Consolidated Variable Interest Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (1)
|
700,659
|
|
|
700,659
|
|
|
512,495
|
|
|
512,495
|
|
|
Investments and derivative assets at fair value
|
8,321,318
|
|
|
8,321,318
|
|
|
7,554,053
|
|
|
7,554,053
|
|
|
Loans held for sale (2)
|
—
|
|
|
—
|
|
|
99,595
|
|
|
99,595
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred purchase payments (3)
|
6,138
|
|
|
6,138
|
|
|
8,221
|
|
|
8,221
|
|
|
Contingent liabilities at fair value
|
34,724
|
|
|
34,724
|
|
|
39,279
|
|
|
39,279
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes (4)
|
18,025
|
|
|
30,248
|
|
|
17,455
|
|
|
24,743
|
|
|
Junior Subordinated Notes (5)
|
120,000
|
|
|
43,160
|
|
|
120,000
|
|
|
40,302
|
|
|
Financial liabilities of Consolidated Variable Interest Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
—
|
|
|
—
|
|
|
6,252
|
|
|
6,252
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
DFR MM CLO (6)
|
—
|
|
|
—
|
|
|
93,269
|
|
|
86,955
|
|
|
Consolidated CLOs
|
8,535,621
|
|
|
8,535,621
|
|
|
7,559,568
|
|
|
7,559,568
|
|
_________________________________
|
|
|
|
(1)
|
Carrying amounts approximate the fair value due to the short-term nature of these instruments.
|
|
|
|
|
(2)
|
The
December 31, 2011
carrying value of the loans held for sale (which were all held within DFR MM CLO) was reduced to
$12.0 million
below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO for
$36.5 million
.
|
|
|
|
|
(3)
|
The carrying amount approximates fair value. This represents the fixed deferred purchase payments payable to DFR Holdings as part of the consideration for the acquisition of CNCIM and the fixed deferred purchase payments payable to CIFC Parent as part of the Merger consideration.
|
|
|
|
|
(4)
|
The estimated fair value of our Convertible Notes was determined using a third-party valuation firm that used a binomial tree model which utilizes significant unobservable inputs, including volatility and yield assumptions. This methodology is classified as Level 3 within the fair value hierarchy.
|
|
|
|
|
(5)
|
Junior Subordinated Notes includes both our March and October Junior Subordinated Notes (defined in Note 11). The estimated fair values of our Junior Subordinated Notes were determined using a discounted cash flow model which utilizes significant unobservable inputs, including yield and forward LIBOR curve assumptions. This methodology is classified as Level 3 within the fair value hierarchy.
|
|
|
|
|
(6)
|
The estimated fair values of the long-term debt of the DFR MM CLO was calculated using the same methodology as described above for the long-term debt of the Consolidated CLOs and is classified as Level 3 within the fair value hierarchy.
|
The loans and other investments classified as investments at fair value of the Consolidated CLOs are diversified over many industries, primarily as a result of industry concentration limits outlined in the indentures of each CLO, and as such we do not believe we have any significant concentration risk.
|
|
|
|
6.
|
LOANS AND LOANS HELD FOR SALE
|
We historically held investments in loans which were not included within the Consolidated CLOs and for which the fair value option was not elected. During the periods presented, these loans were primarily held within the DFR MM CLO. The loans held within the DFR MM CLO were classified as loans held for investment (carried at cost, less allowance for loan losses) until September 30, 2011, when all of the loans within DFR MM CLO were reclassified to loans held for sale (carried at lower of cost or fair value) since, as of such date, we no longer intended to hold the loans within the DFR MM CLO to maturity. As of
December 31, 2011
, loans held for sale had a carrying value of
$99.6 million
and was comprised solely of loans held within the DFR MM CLO. The
December 31, 2011
carrying value of the loans held for sale within DFR MM CLO was reduced to
$12.0 million
below its lower of cost or estimated fair value carrying amounts in order to reflect our consolidated net equity position for DFR MM CLO at the net amount expected to be realized upon the sale of our investments in and our rights to manage the DFR MM CLO. On February 7, 2012, we sold our investments in and rights to manage the DFR MM CLO for
$36.5 million
and deconsolidated the DFR MM CLO. As of
September 30, 2012
we no longer have any loans held for investment or loans held for sale.
For the
three and nine
months ended
September 30, 2012
we recorded net losses of
zero
and
$0.7 million
, respectively, on loans held for sale within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations. For the
three and nine
months ended
September 30, 2011
we recorded net gains of
$0.2 million
and
$1.5 million
, respectively, on loans held for sale and loans held for investment within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations. In addition, during the
three and nine
months ended
September 30, 2011
,we recorded provisions for loan losses of
$7.5 million
and
$15.4 million
, respectively, within net gain (loss) from activities of Consolidated Variable Interest Entities on the condensed consolidated statements of operations related to loans held within the DFR MM CLO which were classified as loans held for investment.
|
|
|
|
7.
|
DERIVATIVE INSTRUMENTS
|
The following table is a summary of our derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
Notional
Amount
|
|
Assets
|
|
Liabilities
|
|
Net Fair Value
|
|
|
|
|
(In thousands)
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
2
|
|
|
n/m
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total derivatives
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivatives of Consolidated Variable Interest Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
11
|
|
|
n/m
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Total derivatives of Consolidated Variable Interest Entities
|
11
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
2
|
|
|
n/m
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total derivatives
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivatives of Consolidated Variable Interest Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
11
|
|
|
n/m
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
Total return swap
|
1
|
|
|
$
|
218,925
|
|
|
—
|
|
|
(650
|
)
|
|
(650
|
)
|
|
Unfunded debt commitments
|
6
|
|
|
99,967
|
|
|
5,214
|
|
|
—
|
|
|
5,214
|
|
|
Unfunded loan commitments
|
16
|
|
|
83,281
|
|
|
—
|
|
|
(5,602
|
)
|
|
(5,602
|
)
|
|
Total derivatives of Consolidated Variable Interest Entities
|
34
|
|
|
$
|
402,173
|
|
|
$
|
5,281
|
|
|
$
|
(6,252
|
)
|
|
$
|
(971
|
)
|
_________________________________
n/m—not meaningful
The following table is a summary of the net gain (loss) on derivatives included in net gain (loss) on investments, loans, derivatives and liabilities in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Embedded Derivative
|
$
|
—
|
|
|
$
|
6,188
|
|
|
—
|
|
|
7,424
|
|
|
Net gain (loss) on derivatives
|
$
|
—
|
|
|
$
|
6,188
|
|
|
$
|
—
|
|
|
$
|
7,424
|
|
The following table is a summary of the net gain (loss) on derivatives included in net gain (loss) from activities of Consolidated Variable Interest Entities in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
Warrants
|
(1
|
)
|
|
(327
|
)
|
|
(12
|
)
|
|
(380
|
)
|
|
Total return swap
|
—
|
|
|
(5,383
|
)
|
|
1,414
|
|
|
(4,825
|
)
|
|
Unfunded debt commitments
|
—
|
|
|
4,603
|
|
|
(5,214
|
)
|
|
2,087
|
|
|
Unfunded loan commitments
|
—
|
|
|
(1,334
|
)
|
|
5,400
|
|
|
(1,441
|
)
|
|
Net gain (loss) on derivatives
|
$
|
(1
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
1,588
|
|
|
$
|
(4,574
|
)
|
Total Return Swap
During the second quarter of 2011, we entered into a total return swap (the Warehouse TRS) agreement with Citibank through the Warehouse SPV. On January 19, 2012, the Warehouse SPV settled its obligations under the Warehouse TRS in connection with closing CIFC CLO 2011-I. We received proceeds of
$47.4 million
upon the settlement of the Warehouse TRS, of which we invested
$17.4 million
in the subordinated notes of CIFC CLO 2011-I.
Under the Warehouse TRS, we received the income on the reference obligations (including gains on terminated reference obligations) and paid Citibank an amount equal to LIBOR plus an agreed upon margin on the outstanding notional amount of the reference obligations and losses on terminated reference obligations. As of
December 31, 2011
the notional amount of SSCLs included as reference obligations of the Warehouse TRS was
$218.9 million
and we had
$46.5 million
of cash posted as collateral under the Warehouse TRS, which is included within restricted cash and cash equivalents of consolidated variable interest entities on our condensed consolidated balance sheets at that date.
Embedded Derivative
Our Convertible Notes contain a conversion feature with certain antidilution provisions that caused the conversion feature to be deemed an embedded derivative instrument (the "Embedded Derivative"). Such antidilution provisions expired in December 2011 and as a result of their expiration, we reclassified the fair value of the Embedded Derivative to additional paid-in capital.
Interest Rate Swaps
With respect to our Consolidated CLOs, interest rate swaps may be entered into by a CLO to protect it from a mismatch between any fixed interest rates on its assets and the floating interest rates on its debt. The interest rate swap held in the Consolidated CLOs matured during the year ended
December 31, 2011
.
Warrants
CIFC and our Consolidated CLOs hold warrants to purchase equity interests in companies with respect to which they are, or were, also a debt holder. These warrants were typically issued in connection with renegotiations and amendments of the loan agreements.
Unfunded Debt and Loan Commitments
Certain of our Consolidated CLOs have debt structures which include unfunded revolvers. Unfunded debt commitments represent the estimated fair value of those unfunded revolving debt facilities. Our Consolidated CLOs also include holdings of unfunded revolvers of loan facilities. Unfunded loan commitments represent the estimated fair value of those unfunded revolvers of loan facilities. See Note 17 for more information on unfunded loan commitments.
|
|
|
|
8.
|
NET GAIN (LOSS) ON INVESTMENTS, LOANS, DERIVATIVES AND LIABILITIES AND NET GAIN (LOSS) FROM ACTIVITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES
|
The following table is a summary of the components of our net gain (loss) on investments, loans, derivatives and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Net gain (loss) on investments at fair value
|
$
|
291
|
|
|
$
|
—
|
|
|
$
|
434
|
|
|
$
|
2,209
|
|
|
Net gain (loss) on liabilities at fair value
|
(6,059
|
)
|
|
(1,600
|
)
|
|
(9,400
|
)
|
|
(4,501
|
)
|
|
Net gain (loss) on loans
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
Net gain (loss) on derivatives
|
—
|
|
|
6,188
|
|
|
—
|
|
|
7,424
|
|
|
Net gain (loss) on investments, loans, derivatives and liabilities
|
$
|
(5,768
|
)
|
|
$
|
4,588
|
|
|
$
|
(8,966
|
)
|
|
$
|
5,095
|
|
The following table is a summary of the components of our net gain (loss) from activities of Consolidated Variable Interest Entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Investment and interest income
|
$
|
99,097
|
|
|
$
|
88,198
|
|
|
$
|
295,545
|
|
|
$
|
218,366
|
|
|
Interest expense
|
25,246
|
|
|
16,917
|
|
|
71,857
|
|
|
42,171
|
|
|
Net investment and interest income
|
73,851
|
|
|
71,281
|
|
|
223,688
|
|
|
176,195
|
|
|
Provision for loan losses
|
—
|
|
|
7,549
|
|
|
—
|
|
|
15,413
|
|
|
Net investment and interest income after provision for loan losses
|
73,851
|
|
|
63,732
|
|
|
223,688
|
|
|
160,782
|
|
|
Net gain (loss) on investments at fair value
|
108,290
|
|
|
(262,695
|
)
|
|
266,614
|
|
|
(266,910
|
)
|
|
Net gain (loss) on liabilities at fair value
|
(332,752
|
)
|
|
(17,132
|
)
|
|
(582,124
|
)
|
|
(200,655
|
)
|
|
Net gain (loss) on loans
|
—
|
|
|
185
|
|
|
(727
|
)
|
|
1,513
|
|
|
Net gain (loss) on derivatives
|
(1
|
)
|
|
(2,425
|
)
|
|
1,588
|
|
|
(4,574
|
)
|
|
Dividend and other income gain (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net gain (loss) from activities of Consolidated Variable Interest Entities
|
$
|
(150,612
|
)
|
|
$
|
(218,335
|
)
|
|
$
|
(90,961
|
)
|
|
$
|
(309,844
|
)
|
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Remaining Estimated Useful Life
|
|
Gross Carrying
Amount (1)
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(In years)
|
|
(In thousands)
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
Investment management contracts
|
5.5
|
|
$
|
76,047
|
|
|
$
|
34,477
|
|
|
$
|
41,570
|
|
|
Technology
|
0.0
|
|
7,706
|
|
|
7,706
|
|
|
—
|
|
|
Referral arrangement
|
7.0
|
|
3,810
|
|
|
—
|
|
|
3,810
|
|
|
Non-compete agreements
|
5.3
|
|
1,535
|
|
|
401
|
|
|
1,134
|
|
|
Trade name
|
8.5
|
|
1,250
|
|
|
188
|
|
|
1,062
|
|
|
Total intangible assets
|
|
|
$
|
90,348
|
|
|
$
|
42,772
|
|
|
$
|
47,576
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
Investment management contracts
|
6.2
|
|
$
|
76,748
|
|
|
$
|
25,362
|
|
|
$
|
51,386
|
|
|
Technology
|
0.5
|
|
7,706
|
|
|
5,991
|
|
|
1,715
|
|
|
Non-compete agreements
|
6.0
|
|
2,065
|
|
|
748
|
|
|
1,317
|
|
|
Trade name
|
9.3
|
|
1,250
|
|
|
94
|
|
|
1,156
|
|
|
Total intangible assets
|
|
|
$
|
87,769
|
|
|
$
|
32,195
|
|
|
$
|
55,574
|
|
_________________________________
|
|
|
|
(1)
|
Gross carrying amounts exclude any amounts related to assets impaired as of the date presented.
|
During the
three and nine
months ended
September 30, 2012
, we recorded amortization of intangible assets of
$3.6 million
and
$13.0 million
, respectively. During the
three and nine
months ended
September 30, 2011
, we recorded amortization of intangible assets of
$4.7 million
and
$11.1 million
, respectively.
The following table presents expected amortization expense of the existing intangible assets:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Remainder of 2012
|
$
|
4,373
|
|
|
2013
|
15,086
|
|
|
2014
|
10,876
|
|
|
2015
|
7,111
|
|
|
2016
|
4,180
|
|
|
2017
|
2,301
|
|
|
Thereafter
|
3,649
|
|
|
|
$
|
47,576
|
|
As a result of the GECC Transaction we acquired investment management contract intangible assets of
$3.7 million
and a referral arrangement intangible asset of
$3.8 million
during the three months ended September 30, 2012. See Note 3 for additional information.
On January 27, 2012, we completed the sale of our rights to manage Gillespie CLO PLC (“Gillespie”), a European CLO which had been managed by DCM. The sale price was comprised of a
$7.1 million
payment on the closing date and contingent payments of up to approximately
$1.1 million
. We recorded a net gain on the sale of Gillespie of
$5.8 million
within Net gain on the sale of management contract in the condensed consolidated statements of operations for the
nine
months ended
September 30, 2012
. This gain was net of a
$0.7 million
for impairment of the intangible asset associated with the Gillespie management contract and
$0.6 million
of outstanding receivables from Gillespie.
During June 2012, we received notice that a holder of the majority of the subordinated notes of Primus CLO I, Ltd. (“Primus I”) exercised their rights to call the CLO for redemption. As a result of the call of Primus I, during the nine months ended
September 30, 2012
, we recorded a
$1.8 million
expense to fully impair the intangible asset associated with the Primus I management contract.
|
|
|
|
10.
|
CONTINGENT LIABILITIES AT FAIR VALUE
|
Our contingent liabilities are comprised of contingent deferred payments which were a component of the Merger consideration and contingent liabilities assumed in the Merger as described in Note 3. These contingent liabilities are remeasured at fair value (as described in Note 2) at each reporting date and recorded within contingent liabilities at fair value on the condensed consolidated balance sheets. The estimated fair value of the contingent liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
|
(In thousands)
|
|
Contingent liabilities assumed
|
$
|
5,340
|
|
|
$
|
16,418
|
|
|
Contingent deferred payments for the Merger
|
29,384
|
|
|
22,861
|
|
|
Total contingent liabilities
|
$
|
34,724
|
|
|
$
|
39,279
|
|
The following table presents the changes in fair value of contingent liabilities recorded within net gain (loss) on investments, loans, derivatives and liabilities on the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
|
Contingent liabilities assumed
|
$
|
(1,227
|
)
|
|
$
|
(730
|
)
|
|
$
|
1,012
|
|
(1
|
)
|
$
|
(930
|
)
|
|
Contingent deferred payments for the Merger
|
(4,832
|
)
|
|
(870
|
)
|
|
(10,412
|
)
|
|
(3,571
|
)
|
|
Total net gain (loss) on contingent liabilities
|
$
|
(6,059
|
)
|
|
$
|
(1,600
|
)
|
|
$
|
(9,400
|
)
|
|
$
|
(4,501
|
)
|
_________________________________
|
|
|
|
(1)
|
Includes a
$2.5 million
gain to revalue the contingent liabilities associated with Primus I to zero as a result of the call of the CLO. See Note 9 for additional information.
|
During the
three and nine
months ended
September 30, 2012
, we made payments of
$1.6 million
and
$10.1 million
, respectively, related to the contingent liabilities assumed in the Merger. These payments during the
three and nine
months ended
September 30, 2012
, included
$0.3 million
and
$6.2 million
, respectively, of one-time earn out payments for
three
of the CypressTree management contracts which will reduce the required payments going forward related to such management contracts.
During the
three and nine
months ended
September 30, 2012
, we made payments of
$1.6 million
and
$3.9 million
, respectively, related to the contingent deferred payments for the Merger. As of
September 30, 2012
and
December 31, 2011
, the remaining payments under item (v) as described in Note 3 were
$8.3 million
and
$12.1 million
, respectively.
Recourse debt refers to debt where the lenders have recourse to our unencumbered assets to satisfy our obligations under such debt. All of the debt of the Consolidated Variable Interest Entities is non-recourse debt. Non-recourse debt refers to debt where the lenders have recourse only to specific assets pledged as collateral to the lenders.
The following table summarizes our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Current
Weighted Average
Borrowing Rate
|
|
Weighted Average
Remaining Maturity
|
|
|
(In thousands)
|
|
|
|
(In years)
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
Recourse Debt:
|
|
|
|
|
|
|
|
|
March Junior Subordinated Notes (1)
|
$
|
95,000
|
|
|
1.00
|
%
|
|
23.1
|
|
October Junior Subordinated Notes (2)
|
25,000
|
|
|
3.95
|
%
|
|
23.1
|
|
Convertible Notes (3)
|
18,025
|
|
|
9.00
|
%
|
|
5.2
|
|
Total Recourse Debt
|
138,025
|
|
|
2.58
|
%
|
|
20.8
|
|
Consolidated Variable Interest Entities Debt:
|
|
|
|
|
|
|
|
|
Consolidated CLOs (4)
|
8,535,621
|
|
|
1.17
|
%
|
|
7.6
|
|
Total long-term debt
|
$
|
8,673,646
|
|
|
1.19
|
%
|
|
7.8
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
Recourse Debt:
|
|
|
|
|
|
|
|
|
March Junior Subordinated Notes (1)
|
$
|
95,000
|
|
|
1.00
|
%
|
|
23.9
|
|
October Junior Subordinated Notes (2)
|
25,000
|
|
|
3.93
|
%
|
|
23.9
|
|
Convertible Notes (3)
|
17,455
|
|
|
8.00
|
%
|
|
6.0
|
|
Total Recourse Debt
|
137,455
|
|
|
2.42
|
%
|
|
21.6
|
|
Consolidated Variable Interest Entities Debt:
|
|
|
|
|
|
|
|
|
DFR MM CLO (5)
|
93,269
|
|
|
1.68
|
%
|
|
7.6
|
|
Consolidated CLOs (4)
|
7,559,568
|
|
|
1.01
|
%
|
|
7.3
|
|
Total Consolidated Variable Interest Entities Debt
|
7,652,837
|
|
|
1.02
|
%
|
|
7.3
|
|
Total long-term debt
|
$
|
7,790,292
|
|
|
1.04
|
%
|
|
7.5
|
_________________________________
|
|
|
|
(1)
|
The
$95.0 million
in aggregate principal amount of the March Junior Subordinated Notes bear interest at an annual rate of
1%
through April 30, 2015. Thereafter, the March Junior Subordinated Notes will bear interest at an annual rate of
LIBOR
plus
2.58%
until maturity on October 30, 2035.
|
|
|
|
|
(2)
|
The
$25.0 million
of aggregate principal amount of the October Junior Subordinated Notes bear interest at an annual rate of
LIBOR
plus
3.50%
and mature on October 30, 2035.
|
|
|
|
|
(3)
|
The Convertible Notes principal outstanding of
$25.0 million
is presented net of a
$7.0 million
discount as of
September 30, 2012
and a
$7.5 million
discount as of
December 31, 2011
. The Convertible Notes currently pay interest at the
9.00%
stated rate; however, including the discount, the effective rate of interest is
18.14%
. The Convertible Notes will mature on December 9, 2017.
|
|
|
|
|
(4)
|
Long-term debt of the Consolidated CLOs is recorded at fair value. This includes the fair value of the subordinated notes issued by the Consolidated CLOs. However, the subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate. The par value of the Consolidated CLOs long-term debt (including subordinated notes) was
$9.1 billion
and
$8.9 billion
as of
September 30, 2012
and
December 31, 2011
, respectively.
|
|
|
|
|
(5)
|
Excludes
$19.0 million
of DFR MM CLO Class D Notes and
$50.0 million
of subordinated notes that we previously owned and eliminated upon consolidation. Had this debt been included, the weighted-average borrowing rate would have been
2.14%
as of
December 31, 2011
. The subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate.
|
As a result of the February 2012 sale of our investments in and our rights to manage the DFR MM CLO, we deconsolidated the DFR MM CLO. As of
December 31, 2011
, the carrying value of the assets held in the DFR MM CLO, which are the only assets to which the DFR MM CLO debt holders have recourse for repayment was
$130.3 million
.
During the three months ended
September 30, 2012
, the Consolidated CLOs issued
$443.8 million
of debt, paid down
$380.1 million
of their outstanding debt and distributed
$63.7 million
to the holders of their subordinated notes. During the
nine
months ended
September 30, 2012
, the Consolidated CLOs issued
$821.2 million
of debt, made net borrowings under revolving credit facilities of
$57.8 million
, paid down
$622.3 million
of their outstanding debt and distributed
$171.5 million
to the holders of their subordinated notes. Additionally, the consolidation of Navigator 2006 CLO contributed an increase in Consolidated CLO debt of
$313.1 million
during the three and nine months ended
September 30, 2012
. The carrying value of the assets of the Consolidated CLOs, which are the only assets to which the Consolidated CLO debt holders have recourse for repayment was
$9.1 billion
and
$8.0 billion
as of
September 30, 2012
and
December 31, 2011
, respectively.
Common Stock
Shares of common stock outstanding totaled
20,771,072
and
20,255,430
as of
September 30, 2012
and
December 31, 2011
, respectively. In addition, we have outstanding Convertible Notes that are convertible into
4,132,231
shares (the “Conversion Shares”) of common stock (such amount may be adjusted in certain events or increased in connection with the payment of in-kind interest at an initial conversion price of
$6.05
per share, subject to adjustment).
During the
three
months ended
September 30, 2012
, we issued
1,000,000
shares related to the GECC Transaction. Additionally, during the
nine
months ended
September 30, 2012
, we granted and issued
20,922
shares of common stock comprised of
6,974
shares of common stock to each of the
three
independent directors of our Board as a component of their compensation. These grants were fully vested and were expensed based on the
$7.17
price of our common stock on the grant date. We recorded
$0.2 million
in expense within other general and administrative expenses on the condensed consolidated statements of operations during the
nine
months ended
September 30, 2012
related to these grants. In addition, during the
nine
months ended
September 30, 2012
, we issued
67,328
shares to settle restricted stock unit grants and repurchased
572,608
shares of our common stock, both as described in further detail below.
Share Repurchase Program
On March 29, 2012, we announced that our Board approved a
$10.0 million
share repurchase program. During the three and nine months ended
September 30, 2012
, we repurchased
61,333
and
572,608
shares, respectively, in open-market transactions for an aggregate cost (including transaction costs) of
$0.4 million
and
$3.8 million
, respectively, with an average price per share of
$7.26
and
$6.58
, respectively. As of
September 30, 2012
we were authorized to repurchase up to an additional
$6.2 million
of our common stock. During the
three
months ended
September 30, 2012
, the Board authorized the constructive retirement of
565,627
shares with an aggregate cost of
$3.7 million
which was reclassified from treasury stock to additional paid-in capital. As a result we reclassified the cost of the shares constructively retired from treasury stock to additional paid-in capital on the condensed consolidated balance sheet. The
6,981
of repurchased shares not yet retired as of September 30, 2012, are reflected within treasury stock on the condensed consolidated balance sheets.
GECEII Warrant
On the Closing Date of the GECC transaction, we issued the GECEII Warrant which gives the holder the right to purchase
2.0 million
shares of a newly created class of non-voting stock. The GECEII Warrant has an exercise price of
$6.375
per share, is immediately exercisable and expires September 24, 2014. The GECEII Warrant will be automatically exercised on a net share issuance basis upon the consummation of a change of control transaction or a liquidation event involving the Company. During the
three
months ended
September 30, 2012
, we recorded an
$3.7 million
increase to Additional paid-in capital on the condensed consolidated balance sheet for the Closing Date fair value of the warrants. See Note 3 for additional information.
Stock Options
We issue stock-based awards to certain of our employees and recognize related stock-based compensation for these equity awards in our condensed consolidated financial statements. These awards are issued pursuant to the CIFC Corp. 2011 Stock Option and Incentive Plan (the “2011 Stock Plan”). On May 29, 2012, our stockholders approved an amendment to the
2011 Stock Plan to increase the aggregate number of shares authorized for issuance under the 2011 Stock Plan by
1,650,000
to
4,181,929
.
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the grant. During the
three and nine
months ended
September 30, 2012
we recorded stock-based compensation expense of
$0.5 million
and
$1.3 million
, respectively, on the condensed consolidated statements of operations within compensation and benefits. During the
three and nine
months ended
September 30, 2011
we recorded stock-based compensation expense of
$0.3 million
and
$0.4 million
on the condensed consolidated statements of operations within compensation and benefits. As of
September 30, 2012
, there was
$7.7 million
of estimated unrecognized compensation expense related to unvested awards, net of estimated forfeitures. This cost is expected to be recognized over a weighted average vesting period of
3.1
years.
We estimate the fair value of stock-based awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model includes assumptions regarding dividend yield, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive stock-based awards.
In addition to the exercise and grant date prices of these awards, we utilized certain weighted average assumptions to estimate the initial fair value of stock-based awards. Weighted average assumptions related to our stock-based awards (by period issued) are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2012 (1)
|
|
2011
|
|
2012
|
|
2011
|
|
Expected dividend yield
|
N/A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected volatility
|
N/A
|
|
47.89
|
%
|
|
50.52
|
%
|
|
47.89
|
%
|
|
Risk-free interest rate
|
N/A
|
|
1.90
|
%
|
|
1.27
|
%
|
|
1.99
|
%
|
|
Expected life (years)
|
N/A
|
|
6.11
|
|
|
6.09
|
|
|
6.11
|
|
_________________________________
|
|
|
|
(1)
|
We did not issue stock-based awards during the three months ended
September 30, 2012
.
|
The stock-based awards granted have exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of
10
years and a vesting period of approximately
4
years. In addition to time based vesting requirements, certain of the awards also contain performance vesting criteria. The expected dividend yield is the expected annual dividend as a percentage of the fair market value of the stock on the date of grant. The expected volatility is estimated by considering the historical volatility of our stock, the historical and implied volatility of peer companies and our expectations of volatility for the expected life of the stock-based awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for an instrument which closely approximates the expected option term. The expected option term is the number of years we estimate that the stock-based award will be outstanding prior to exercise. The expected life of the stock-based awards issued is determined by using the simplified method.
The following table summarizes certain 2011 Stock Plan activity during the
nine
months ended
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Underlying Stock-Based Awards
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
(In years)
|
|
(In thousands)
|
|
Outstanding as of January 1, 2012
|
1,550,000
|
|
|
$
|
7.20
|
|
|
|
|
|
|
|
Granted (1)
|
2,208,251
|
|
|
5.04
|
|
|
|
|
|
|
|
Expired/canceled (2)
|
(260,000
|
)
|
|
7.25
|
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
3,498,251
|
|
|
$
|
5.83
|
|
|
|
|
|
|
Granted (1)
|
—
|
|
|
—
|
|
|
|
|
|
|
Expired/canceled (2)
|
(124,688
|
)
|
|
6.29
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Outstanding at June 30, 2012
|
3,373,563
|
|
|
$
|
5.82
|
|
|
|
|
|
|
|
Granted (1)
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Expired/canceled (2)
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
3,373,563
|
|
|
$
|
5.82
|
|
|
9.16
|
|
$
|
5,068
|
|
|
Exercisable at September 30, 2012
|
334,688
|
|
|
$
|
7.25
|
|
|
8.71
|
|
$
|
23
|
|
|
Vested and Expected to vest at September 30, 2012
|
3,036,207
|
|
|
$
|
5.82
|
|
|
9.16
|
|
$
|
4,561
|
|
_________________________________
|
|
|
|
(1)
|
On March 21, 2012 we proposed an amendment to the 2011 Stock Plan to increase the aggregate number of shares authorized for issuance under the Plan by
1,650,000
. The amendment received shareholder approval on May 29, 2012. Approximately
950,000
of the stock-based awards granted during the
nine
months ended
September 30, 2012
were contingent upon such approval.
|
|
|
|
|
(2)
|
The forfeited stock-based awards are returned to the grant pool for possible reissuance under the 2011 Stock Plan.
|
Restricted Stock Units
Each of the restricted stock units outstanding represents the right to receive
one
share of our common stock, subject to acceleration upon the occurrence of certain specified events. The number of restricted stock units may be adjusted, as determined by our Board, in connection with any stock dividends, stock splits, subdivisions or consolidations of shares (including reverse stock splits) or similar changes in our capitalization.
The following table summarizes our restricted stock units activity:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Restricted stock units outstanding as of January 1
|
170,688
|
|
|
397,052
|
|
|
Settled (1)
|
—
|
|
|
(248,069
|
)
|
|
Restricted stock units outstanding as of March 31
|
170,688
|
|
|
148,983
|
|
|
Granted
|
—
|
|
|
21,705
|
|
|
Settled (1)
|
(67,328
|
)
|
|
—
|
|
|
Restricted stock units outstanding as of June 30
|
103,360
|
|
|
170,688
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Settled (1)
|
—
|
|
|
—
|
|
|
Restricted stock units outstanding as of September 30
|
103,360
|
|
|
170,688
|
|
_________________________________
|
|
|
|
(1)
|
Settled represents the gross number of restricted stock units settled during the period. Restricted stock units are settled with the issuance of common stock to the restricted stock unit holder. During the three months ended June 30, 2012, we issued
60,095
shares of common stock to settle restricted stock grants from 2009 and
7,233
shares of common stock to settle the first 1/3 annual installment of the restricted stock units granted in 2011. During the three months
|
ended March 31, 2011, we issued
163,709
shares of common stock to settle the restricted stock unit grants from 2008, which were net of
84,360
shares of common stock withheld to satisfy income tax withholding obligations of certain of the recipients.
During the
three and nine
months ended
September 30, 2012
, we did not grant any restricted stock units. During the nine months ended
September 30, 2011
, we granted
7,235
restricted stock units to each of the
three
independent directors of our Board as a component of their compensation. These grants are fully vested, settle 1/3 annually over
three
years on the anniversary of the grant date and were fully expensed upon grant based on the
$6.22
price of our common stock on the grant date. We recorded
$0.1 million
in expense within other general and administrative expenses on the condensed consolidated statements of operations during the
nine
months ended
September 30, 2011
.
The restricted stock units outstanding as of
September 30, 2012
are all fully vested and are comprised of the
14,472
remaining 2011 grants and the
88,888
remaining grants to certain members of our Board issued during 2010. The 2010 grants settle
three
years from the date of the grant and were fully expensed upon grant based on the
$4.50
price of our common stock on grant date.
Other Warrants
Other warrants outstanding totaled
225,000
and
250,000
as of
September 30, 2012
and
December 31, 2011
, respectively. These fully vested warrants were issued in connection with the restructuring of an investment product we formerly managed. The warrants give the holders the right to purchase shares of our common stock at an exercise price of
$4.25
per share and expire on April 9, 2014. During the
nine
months ended
September 30, 2012
we settled
25,000
of the then outstanding warrants for cash payment. The decision to settle the warrants in cash, rather than shares was at our discretion.
Appropriated Retained Earnings (Deficit) of Consolidated Variable Interest Entities
Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities initially represented the excess fair value of the Consolidated CLOs’ assets over the Consolidated CLOs’ liabilities at the date of the adoption of the amendments to ASC Topic 810. On the Closing Date, we recorded an increase to appropriate retained earnings (deficit) of Consolidated Variable Interest Entities for the excess fair value of Navigator 2006 CLO's assets over Navigator 2006 CLO's liabilities on the Closing Date of
$5.1 million
. During 2011, we recorded an increase to appropriated retained earnings (deficit) of Consolidated Variable Interest Entities for the excess fair value of the CIFC CLOs' assets over the CIFC CLOs’ liabilities at the Merger Closing Date of
$285.0 million
. Appropriated retained earnings (deficit) of Consolidated Variable Interest Entities is adjusted each period for the net income (loss) attributable to Consolidated CLOs.
|
|
|
|
13.
|
EARNINGS (LOSS) PER SHARE
|
The following table presents the calculation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands, except per share data)
|
|
Net income (loss) attributable to CIFC Corp.
|
$
|
688
|
|
|
$
|
(5,924
|
)
|
|
$
|
(6,215
|
)
|
|
$
|
(10,087
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in basic calculation
|
19,957
|
|
|
20,426
|
|
|
20,201
|
|
|
17,038
|
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Warrants
|
117
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock options
|
1,834
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average shares used in diluted calculation
|
21,908
|
|
|
20,426
|
|
|
20,201
|
|
|
17,038
|
|
|
Earnings (loss) per share -
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.59
|
)
|
|
Diluted
|
$
|
0.03
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.59
|
)
|
For the three months ended
September 30, 2012
, the Conversion Shares related to the Convertible Notes were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive under the if-converted method. For the nine months ended
September 30, 2012
and the three and nine months ended September 30,
2011
, the Conversion Shares related to the Convertible Notes and the stock options and warrants outstanding during the respective periods were excluded from the calculation of diluted earnings (loss) per share as their effect was anti-dilutive under the if-converted method for the Conversion Shares and the treasury stock method for the stock options and warrants. The weighted-average shares outstanding utilized in the calculation of basic and diluted earnings per share for the
three and nine
months ended
September 30, 2012
takes into account the repurchases of our common shares on the repurchase date. See the Note 12 for more information on the share repurchase program.
We file a consolidated U.S. federal and several state income tax returns with all of our domestic corporate subsidiaries. The entities that comprise our Consolidated CLOs are foreign entities that are generally exempt from U.S. federal and state income taxes. Income taxes, if any, are the responsibility of the entity’s subordinated notes owners. Consequently, our condensed consolidated statements of operations do not include a provision for income tax expense (benefit) related to the pre-tax income (loss) of our Consolidated CLOs. However, to the extent that we hold a subordinated note interest in these entities, we are required to include our proportionate share of their income in the calculation of our taxable income.
For the three months ended
September 30, 2012
and
2011
, we recorded income tax benefits of
$1.8 million
and
$3.4 million
, respectively. For the
nine
months ended
September 30, 2012
and
2011
, we recorded income tax expense of
$2.7 million
and an income tax benefit of
$4.5 million
, respectively. Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the three months ended
September 30, 2012
was
164%
, compared to our effective tax rate for the three months ended
September 30, 2011
of
36%
. Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the
nine
months ended
September 30, 2012
was
(79)%
, compared to our effective tax rate for the
nine
months ended
September 30, 2011
of
31%
. The difference between our statutory rate and our effective tax rate for the
three and nine
months ended
September 30, 2012
is primarily attributable to state income taxes and certain discrete and permanent items during the periods, including fair value changes of certain contingent liabilities related to the Merger and the sale of our rights to manage Gillespie. We expect the tax rate for the full year
2012
to approximate
(9)%
, excluding discrete items. This difference between the statutory tax rate and our expected effective rate is primarily state income taxes and the result of permanent tax adjustments related to the Merger.
We have recorded net deferred tax assets of
$55.0 million
, net of a valuation allowance of
$11.7 million
, as of
September 30, 2012
and net deferred tax assets of
$57.8 million
, net of a valuation allowance of
$27.9 million
as of
December 31, 2011
. We have recorded deferred income taxes as of
September 30, 2012
and
December 31, 2011
in accordance with ASC Topic 740—
Income Taxes
(“ASC Topic 740”). We record deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities and their respective income tax bases. As required by ASC Topic 740, we evaluate the likelihood of realizing tax benefits in future periods, which requires the recognition of a valuation allowance to reduce any deferred tax assets to an amount that is more likely than not to be realized. Under ASC Topic 740, we are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. As of
September 30, 2012
and
December 31, 2011
, our evaluation concluded that there was a need for a valuation allowance related to our ability to utilize net operating losses (“NOLs”) and net capital losses (“NCLs”) against income taxable in Illinois. Legislation enacted in 2011 suspends the utilization of NOLs in Illinois until 2014 and, coupled with our expected apportionment of future taxable income, it is now more likely than not that the state tax benefit of the loss carryforwards will not be realized in Illinois. Additionally, as a result of the sale of our investments in DFR MM CLO, as of
December 31, 2011
, an additional allowance was recorded related to the NCL’s derived from the pending sale. Upon the closing of the sale, the deferred tax assets and associated valuation allowance were removed as they were deemed permanently impaired.
Prior to the acquisition of CNCIM, we had substantial federal NOLs and NCLs which were available to offset future taxable income or capital gains. The June 2010 issuance of the shares associated with the acquisition of CNCIM resulted in an ownership change as defined in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Ownership Change”). As a result of the Ownership Change, our ability to use our NOLs, NCLs and certain recognized built-in losses to reduce our taxable income in future years is generally limited to an annual amount (the “Section 382 Limitation”) based primarily on a percentage of the fair market value of our common stock immediately prior to the Ownership Change, subject to certain adjustments. This annual amount is approximately
$1.3 million
. NOLs and NCLs that exceed the Section 382 Limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period; however, if the carryforward period for any NOLs or NCLs expires before that loss is fully utilized, the unused portion will provide no
future benefit. As of
September 30, 2012
, our combined loss carryforwards without regard to the Merger were approximately
$31.1 million
and will begin to expire in 2028.
The Merger resulted in an Ownership Change of Legacy CIFC thereby resulting in a Section 382 Limitation of approximately
$9.5 million
annually on our ability to utilize the Legacy CIFC NOLs to reduce taxable income. As of
September 30, 2012
, our combined federal NOL, NCL and built-in loss carryforwards related to Legacy CIFC were approximately
$0.7 million
.
For periods prior to our Ownership Change, the utilization of NOLs and NCLs resulted in no provision for federal or state income taxes. As a result of our Ownership Change and Section 382 Limitation, we may no longer be able to offset all of our taxable income with our NOLs and NCLs; therefore, we may be required to pay current federal and state taxes on our current year net taxable income. Management is still assessing the Section 382 implications of the GECC Transaction. We have no reserve for uncertain tax positions at any time in the
three and nine
months ended
September 30, 2012
or as of
December 31, 2011
.
|
|
|
|
15.
|
RELATED PARTY TRANSACTIONS
|
DFR Holdings is considered a related party as a result of its ownership of
4,545,455
shares of our common stock, issued as part of the consideration for the acquisition of CNCIM. As such, the accrual and payment of interest on the Convertible Notes and on the deferred purchase payments are considered related party transactions. Fees paid to members of our Board prior to the Merger who are representatives of DFR Holdings totaled
zero
and
$46,000
for the
three and nine
months ended
September 30, 2011
, respectively. In addition, affiliates of DFR Holdings previously held investments in all
four
of the CLOs managed by CNCIM (the “CNCIM CLOs”) and as of
September 30, 2012
and
December 31, 2011
, held investments in
zero
and
two
of the CNCIM CLOs, respectively. We also have a management agreement in place with DFR Holdings to provide certain administrative and support services to DFR Holdings. We recorded receivables on the condensed consolidated balance sheets of
$5,000
and
$7,000
as of
September 30, 2012
and
December 31, 2011
, respectively, related to this management agreement. We recorded investment advisory fees related to this management agreement in the condensed consolidated statements of operations of
$15,000
and
$20,000
for the three months ended
September 30, 2012
and 2011, respectively, and
$55,000
and
$37,000
for the
nine
months ended
September 30, 2012
and
2011
, respectively.
CIFC Parent is considered a related party as a result its ownership of
9,090,909
shares of our common stock, issued as part of the consideration for the Merger. As such, the accrual and payment of the deferred purchase payments (including those classified as contingent liabilities) are considered related party transactions. In addition, as of
September 30, 2012
and
December 31, 2011
CIFC Parent either directly or indirectly holds investments in
ten
CLOs we manage,
eight
of which are Consolidated CLOs. We also have a management agreement in place with CIFC Parent to provide certain administrative and support services to CIFC Parent. The receivables on the condensed consolidated balance sheets of
$17,000
and
$17,000
as of
September 30, 2012
and
December 31, 2011
, respectively, are related to this management agreement. We recorded investment advisory fees related to this management agreement in the condensed consolidated statements of operations of
$50,000
and
$48,000
for the three months ended
September 30, 2012
and
2011
, respectively, and
$150,000
and
$88,000
for the
nine
months ended
September 30, 2012
and
2011
, respectively.
|
|
|
|
16.
|
RESTRUCTURING CHARGES
|
Following completion of the Merger, we began executing a plan to realize the expected economies of scale of the combined company, in part through a reduction of the workforce. The majority of the expected severance and associated termination benefits related to the reduction of the workforce were included within restructuring charges during the year ended
December 31, 2011
; however, payments are expected to continue through the remainder of
2012
. In addition, following the Merger we have disposed of certain non-core activities and assets and we closed our Rosemont, Illinois office in furtherance of our efforts to consolidate operations at our corporate headquarters in New York, New York.
In conjunction with the closure of our Rosemont, Illinois office, on March 16, 2012, we entered into a Lease Termination Agreement (the “Agreement”) with GLL US Office, LP (the “Landlord”) related to our lease of the 12t
h
floor of 6250 North River Road, Rosemont, Illinois 60018. The effect of the Agreement was to terminate, as of March 31, 2012 upon satisfaction of the conditions set forth in the Agreement, the lease dated July 11, 2005, as amended on October 29, 2009, between the Landlord and CIFC Corp. (the “Rosemont Lease”). In order for the incoming tenant to assume the lease on off-market terms and to cover certain other expenses related to the termination of the Rosemont Lease, we paid to the Landlord, the incoming tenant and our broker aggregate fees equal to approximately
$2.6 million
, net of our
$0.5 million
security deposit that was returned by the Landlord.
The table below provides a rollforward of the accrued restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
|
2011
|
|
|
(In thousands)
|
|
Accrued Restructuring Charges at beginning of period
|
$
|
779
|
|
|
$
|
3,273
|
|
|
$
|
1,490
|
|
|
|
$
|
—
|
|
|
Provision for Restructuring Charges
|
—
|
|
|
783
|
|
|
3,923
|
|
(1
|
)
|
|
4,104
|
|
|
Payments for Restructuring Charges
|
(305
|
)
|
|
(537
|
)
|
|
(4,156
|
)
|
|
|
(585
|
)
|
|
Non-Cash Settlement of Restructuring Charges
|
—
|
|
|
—
|
|
|
(783
|
)
|
(2
|
)
|
|
—
|
|
|
Accrued Restructuring Charges at end of period
|
$
|
474
|
|
|
$
|
3,519
|
|
|
$
|
474
|
|
|
|
$
|
3,519
|
|
_________________________________
|
|
|
|
(1)
|
The increase to the provision during the
nine
month ended
September 30, 2012
is primarily composed of
$3.1 million
of lease termination fees and the loss on disposal of associated equipment and improvements of
$1.4 million
, partially offset by a
$0.6 million
reversal of deferred rent payments recorded in conjunction with the termination of the Rosemont Lease.
|
|
|
|
|
(2)
|
Non-cash settlement of restructuring charges represents the loss on disposal of equipment and improvements partially offset by the reversal of deferred rent payments noted above.
|
|
|
|
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Proceedings
In the ordinary course of business, we may be subject to legal and regulatory proceedings and examinations that are generally incidental to our ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings or examinations, we do not believe their disposition will have a material adverse effect on our condensed consolidated financial statements.
In addition, in connection with activities of one of our investment advisor subsidiaries that occurred prior to our acquisition of such investment advisor, we expect to make certain voluntary reimbursements and other payments to certain investors and CLOs currently or formerly managed by such investment advisor. As a result of a contractual arrangement we expect to be fully indemnified for these payments by the seller of such investment advisor and do not believe they will have a material adverse impact on our consolidated financial statements.
Lease Commitments
On September 16, 2011, we entered into a new lease agreement related to our corporate headquarters at 250 Park Avenue, New York (the “Lease”). The Lease commenced on July 6, 2012 and has a term of
10.5 years
. The Lease replaced the prior lease for our corporate headquarters, which expired on July 20, 2012. The future minimum commitments under the Lease are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Remainder of 2012
|
$
|
402
|
|
|
2013
|
1,205
|
|
|
2014
|
1,607
|
|
|
2015
|
1,607
|
|
|
2016
|
1,607
|
|
|
Thereafter
|
10,296
|
|
|
|
$
|
16,724
|
|
Other Commitments and Contingencies
We had unfunded investment commitments on loans within the Consolidated CLOs of
$65.3 million
and
$83.3 million
as of
September 30, 2012
and
December 31, 2011
, respectively. The timing and amount of additional funding on these loans are at the discretion of the borrower, to the extent the borrower satisfies certain requirements and provides certain documentation.
In connection with the preparation of the condensed consolidated financial statements in accordance with ASC Topic 855—
Subsequent Events
, we evaluated subsequent events after the balance sheet date of
September 30, 2012
. There have been no significant subsequent events since
September 30, 2012
that require adjustment to or additional disclosure in these condensed consolidated financial statements.