DFR Cifc Corp. (MM)

NEW YORK, Aug. 14, 2012 /PRNewswire/ -- CIFC Corp. (NASDAQ: DFR) ("CIFC" or the "Company") announced its results of operations for its second quarter ended June 30, 2012.

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Second Quarter 2012 Highlights

• Adjusted Earnings Before Taxes ("AEBT") for the second quarter of 2012 totaled $2.6 million compared to $2.7 million for the first quarter of 2012.
• GAAP net loss attributable to CIFC Corp. was $8.5 million, or $0.42 of diluted loss per share, for the second quarter of 2012 compared to net income of $1.6 million, or $0.08 of diluted earnings per share, for the first quarter of 2012.
• On July 30, 2012, the Company announced plans to enter into a five-year strategic alliance with General Electric Capital Corporation's ("GECC") Bank Loan business to develop new business opportunities between the two firms, including investment advisory referrals.  GECC is exiting the third party investment advisory business in connection with which the Company will acquire the rights to manage four "Navigator" collateralized loan obligations ("CLOs") representing approximately $700.0 million in additional CLO assets under management ("AUM").  A commercial council will be formed of senior CIFC and GECC management to meet regularly to facilitate new business development. An affiliate of GECC will become a shareholder in the Company and have the right to appoint a member to the Company's board of directors.
• The Company successfully priced a new CLO, CIFC Funding 2012-I, Ltd. ("CIFC 2012-I") in June 2012, which closed on July 26, 2012 and is expected to represent approximately $450.0 million of additional loan AUM when it is fully ramped.

Executive Overview

"The second quarter saw CIFC continue to successfully launch new loan funds, with the pricing of CIFC Funding 2012-I", said Peter Gleysteen, President and Chief Executive Officer. 

"In addition, we are excited about the five-year strategic alliance with GECC which we expect will close in the third quarter. Our alliance is about growth and positioning CIFC to benefit from underlying changes in the industry.  GECC is one of the largest corporate lenders, and in addition to near-term opportunities, we believe strategic opportunities will arise from both increasing integration of investor-provided private debt capital with how loans are originated and the continued development of the loan asset class."

"The second quarter's AEBT was essentially flat to the prior quarter and down substantially from the prior year second quarter, which principally reflects reduced net investment and interest income. This is due to the strategic redeployment of capital from investing in assets to building new fee generating investment products which is now underway."

AEBT (Non-GAAP)

AEBT is a non-GAAP financial measurement that management utilizes to analyze, manage and present the Company's performance. This non-GAAP financial measurement was developed by management after the April 2011 merger (the "Merger") between the Company and Commercial Industrial Finance Corp. ("Legacy CIFC") given the Company's decision to focus on its core asset management business. The Company believes AEBT reflects the nature and substance of the business and the economic results driven by investment advisory fee revenues from the management of client funds, which are primarily CLOs.

The Company is required under GAAP to consolidate certain variable interest entities, which include certain of the CLOs the Company manages. This required consolidation results in a presentation that materially differs from the way management views the business and as a result management developed AEBT, a non-GAAP metric for measuring the performance of its core business.

To derive AEBT, the Company starts with the GAAP statement of operations, deconsolidates all of the CLOs and CDOs consolidated by the Company (the "Consolidated CLOs") and then eliminates and adjusts certain other items. A detailed calculation of AEBT and a reconciliation between GAAP net income (loss) attributable to CIFC Corp. and AEBT is set forth in Exhibits 1.2 to 1.6 to this press release and a summary description is set forth below.

AEBT includes the following:

1. Investment advisory fees net of any fee sharing arrangements;
   1. In accordance with the Company's revenue recognition policy, senior management fees are recorded as revenue on an accrual basis, while subordinated and incentive management fees are recorded on a cash basis;
2. Net investment and interest income as follows:
   1. Distributions on the Company's investments in CLO subordinated notes (also known as "CLO equity");
   2. Interest income on the Company's investments in CLO debt investments;
   3. Net interest income from balance sheet investments (which included RMBS until the liquidation of that portfolio);
   4. Net investment and interest income from warehouses established from time-to-time to facilitate launching new CLOs or other funds and gains (losses) on assets within such warehouses, determined and accrued upon formalizing a transaction (not upon settlement);
   5. Realized gains (losses) from dispositions of core assets;
3. Routine expenses directly attributable to generating revenues;
4. Corporate interest expense;
5. Depreciation and amortization expenses of fixed assets.

AEBT excludes the following:

1. Realized and unrealized gains (losses) on dispositions of non-core assets;
2. Unrealized gains (losses) on core assets;
3. Non-recurring operating expenses, and one-time strategic transaction expenses (such as expenses related to the Merger and integration);
4. Non-cash expenses such as amortization and impairment of intangible assets;
5. Income taxes.

AEBT may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measurement that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. In addition, AEBT should be considered an addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.

The discussion of AEBT and GAAP results herein focuses on the second quarter of 2012 as compared to the first quarter of 2012 as management determined the comparison to the most recent quarterly period is more useful than comparisons to prior year periods. Please refer to the Company's June 30, 2012 10-Q filing for discussions of the comparative results to the three and six months ended June 30, 2011.

The following table represents the Company's AEBT, Adjusted EBIT, and Adjusted EBITDA for the quarters ended June 30, 2012 and March 31, 2012:

1. See detailed reconciliations between net income (loss) attributable to CIFC Corp., the most comparable GAAP financial measure, and AEBT in Exhibits 1.2 to 1.6.
2. Adjusted EBIT is AEBT excluding corporate interest expense.
3. Adjusted EBITDA is Adjusted EBIT excluding depreciation and amortization of fixed assets.

Net Revenues

Investment Advisory Fees

During the quarters ended June 30, 2012 and March 31, 2012, the Company earned investment advisory fees from its management of CLOs, CDOs and other investment products. Investment advisory fees from CLOs and CDOs totaled $12.1 million and $11.7 million for the quarters ended June 30, 2012 and March 31, 2012, respectively.

Investment advisory fees from CLOs comprised 93% of the total investment advisory fees the Company earned during the three months ended June 30, 2012 and March 31, 2012.

Net Investment and Interest Income

Net investment and interest income totaled $0.9 million and $1.1 million for the quarters ended June 30, 2012 and March 31, 2012, respectively. The slight decline in net investment and interest income is primarily due to lower warehouse net investment and interest income.

Expenses

Expenses totaled $10.5 million and $10.1 million for the quarters ended June 30, 2012 and March 31, 2012, respectively. The increase was primarily the result of increases in other general and administrative expenses of $0.6 million which was primarily due to additional technology costs incurred during the quarter and the expenses related to the annual equity awards for the independent members of the board of directors that were fully vested on the date of grant.   

GAAP Operating Results 

Net loss attributable to CIFC Corp. was $8.5 million, or $0.42 of diluted loss per share for the quarter ended June 30, 2012, compared to net income attributable to CIFC Corp. of $1.6 million, or $0.08 of diluted earnings per share for the quarter ended March 31, 2012.

Net income (loss) attributable to CIFC Corp. decreased $10.1 million for the quarter ended June 30, 2012, compared to the quarter ended March 31, 2012. The decrease is primarily due to the $6.2 million of income tax expense recorded in the quarter ended June 30, 2012 compared to an income tax benefit of $1.7 million recorded in the quarter ended March 31, 2012.  In addition, the quarter ended March 31, 2012 included a $5.8 million net gain on the sale of the Company's rights to manage Gillespie CLO PLC ("Gillespie").

Total expenses decreased by $1.2 million for the quarter ended June 30, 2012, compared to the quarter ended March 31, 2012.  In addition to the expense items already discussed above within the AEBT discussion, the Company recorded an impairment charge of $1.8 million during the quarter ended June 30, 2012 to fully impair the intangible asset associated with a management contract for a CLO which was called for redemption during the period. Professional services for the quarter ended June 30, 2012 increased $1.0 million compared to the three months ended March 31, 2012, primarily due to the first quarter including the benefit of the receipt of an insurance settlement received related to the reimbursement of legal fees. These increases were partially offset by a decrease in restructuring charges for the quarter ended June 30, 2012, compared to the quarter ended March 31, 2012. The quarter ended March 31, 2012 included $3.9 million in restructuring charges associated with the Merger, primarily comprised of charges related to the termination of the lease on the Company's Rosemont, Illinois office space and disposition of the associated leasehold improvements.

The net results of the Consolidated CLOs are included in net income (loss) attributable to non-controlling interests (which generally is comprised of the debt and subordinated note investments of third parties in these CLOs and CDOs) on the consolidated statement of operations.  These results are primarily driven by the changes in fair value of the assets and liabilities of the Consolidated CLOs.  These results are not indicative of the performance of the consolidated CLOs and CDOs or the cash distributions received by investors from such Consolidated CLOs.

AUM

Investment advisory fees earned from investment products the Company manages on behalf of third party investors are the Company's primary source of revenue. These fees typically consist of management fees based on the account's assets and, in some cases, incentive fees based on the returns the Company generates for the account.

The following table summarizes the AUM for the Company's significant investment product categories:

1. AUM numbers generally reflect the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLOs and CDOs and are as of the date of the last trustee report received for each CLO and CDO prior to the respective AUM date.
2. During the second quarter, two CLOs managed by the Company, representing approximately $356.7 million in CLO AUM, were called for redemption. The CLOs are expected to be fully redeemed during the third quarter.
3. Other category is comprised of loan AUM not managed in cash flow CLOs.

AUM declined during the quarter ended June 30, 2012, compared to the quarter ended March 31, 2012, mainly as a result of certain CLOs and CDOs reaching the end of their contractual "reinvestment periods", after which periods capital is returned to investors as assets pay down.

Liquidity

As of June 30, 2012, total liquidity was comprised of unrestricted cash and cash equivalents of $81.0 million. The decrease of $15.0 million in cash and cash equivalents from the March 31, 2012 is primarily attributable to the creation of an on-balance sheet warehouse during the quarter which the Company used to acquire senior secured corporate loans ("SSCLs") which were ultimately included within CIFC 2012-I.  As of June 30, 2012, the Company had sold those assets into a warehouse of which the Company is not the primary beneficiary and the Company recorded a net receivable of $12.1 for net unsettled purchases and sales.  During the quarter ended June 30, 2012, the Company also made a $2.5 million payment which represented a portion of the deferred consideration for the Merger with Legacy CIFC.

In addition, repurchases continue under CIFC's previously announced $10.0 million share repurchase program.  As of July 31, 2012, the Company had repurchased common stock for an aggregate cost of $3.7 million.

About CIFC

CIFC, based in New York, is one of the largest specialized asset managers of senior secured corporate loans in the world. CIFC combines what it believes are the best underwriting, portfolio management and value maximization practices to generate attractive and consistent returns for investors. CIFC's heritage CIFC CLO fund family has market leading performance in the U.S. managed CLO segment. The firm had $10.1 billion in AUM from corporate loan based products as of June 30, 2012 and serves more than 200 institutional investors in North America, Europe, Asia and Australia. For more information, please visit CIFC's website at www.cifc.com.

NOTES TO PRESS RELEASE

Certain statements in this press release are forward-looking statements, as permitted by the Private Securities Litigation Reform Act of 1995. These include statements regarding future results or expectations. Forward-looking statements can be identified by forward-looking language, including words such as "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "projects," "will" and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made, various operating assumptions and predictions as to future facts and conditions, which may be difficult to accurately make and involve the assessment of events beyond the Company's control.

Caution must be exercised in relying on forward-looking statements. The Company's actual results may differ materially from the forward-looking statements contained in this press release as a result of the following factors, among others:  reductions in the Company's AUM and related investment advisory and incentive fee revenue; the Company's ability to complete future CLO transactions, including the Company's ability to effectively finance such transactions through warehouse facilities and the amounts the Company might be required to invest in new CLO transactions, and the Company's ability to assume or otherwise acquire additional CLO management contracts on favorable terms, or at all; the Company's ability to accumulate sufficient qualified loans in its warehouse facilities and the Company's exposure to market price risk and credit risk of the loan assets held in such warehouse facilities; the Company's ability to make investments in new investment products, realize fee-based income under its investment management agreements, grow its fee-based income and deliver strong investment performance; the Company's failure to realize the expected benefits of the Merger and the acquisition of Columbus Nova Credit Investments Management, LLC; competitive conditions impacting the Company and the assets managed by the Company; the Company's ability to attract and retain qualified personnel; the Company's receipt of future CLO subordinated investment advisory fees on a current basis; the impact of certain accounting policies, including the required consolidation of numerous investment products that the Company manages into its financial statements on (i) investors' understanding of the Company's actual business and financial performance, and (ii) the Company's ability to clearly communicate management's view of such actual business and financial performance; the current United States and global economic environment; disruptions to the credit and financial markets in the United States and globally; the impact of the downgrade of the United States credit rating; and contractions or limited growth as a result of uncertainty in the United States and global economies; the ability of DFR Holdings, LLC and CIFC Parent Holdings, LLC to exercise substantial control over the Company's business; impairment charges or losses initiated by adverse industry or market developments or other facts or circumstances; the outcome of legal or regulatory proceedings to which the Company is or may become a party; the impact of pending legislation and regulations or changes in, and the Company's ability to remain in compliance with laws, regulations or government policies affecting its business, including investment management regulations and accounting standards; the Company's business prospects, the business prospects of and risks facing the companies in which the Company invests and the Company's ability to identify material risks facing such companies; the ability to maintain the Company's exemption from registration as an investment company pursuant to the Investment Company Act of 1940; reductions in the fair value of the Company's assets; limitations imposed by the Company's existing indebtedness and the Company's ability to access capital markets on commercially reasonable terms; the Company's ability to maintain adequate liquidity; fluctuation of the Company's quarterly results from quarter to quarter; and other risks described from time to time in the Company's filings with the SEC.

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

Exhibit 1.1

The table below provides AEBT for most recent five quarters:

1. See detailed reconciliations between net income (loss) attributable to CIFC Corp., the most comparable GAAP financial measure, and AEBT in Exhibits 1.2 to 1.6.
2. Adjusted EBIT is AEBT excluding corporate interest expense.
3. Adjusted EBITDA is Adjusted EBIT excluding depreciation and amortization of fixed assets.
4. Net investment and interest income in 2012 is significantly lower than that in 2011 due to the Company's exiting certain non-core activities, which process was substantially completed during the first quarter of 2012.
5. The Company refined its definition of AEBT to include warehouse net investment and interest income during the fourth quarter of 2012. As such, the previously disclosed AEBT for the third quarter of 2011 has been recast to include such net investment and interest income.

Exhibit 1.2

The table below provides a reconciliation from net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measurement used by management, for the three months ended June 30, 2012:

Exhibit 1.3

The table below provides a reconciliation from net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measurement used by management, for the three months ended March 31, 2012:

Exhibit 1.4

The table below provides a reconciliation from net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measurement used by management, for the three months ended December 31, 2011:

Exhibit 1.5

The table below provides a reconciliation from net income (loss) attributable to CIFC Corp. to AEBT, a non-GAAP measurement used by management, for the three months ended September 30, 2011: