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CIFC > SEC Filings for CIFC > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for CIFC CORP.


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our Condensed Consolidated Financial Statements and notes thereto included in Part I-Item 1. Condensed Consolidated Financial Statements and Notes (Unaudited) of this Quarterly Report on Form 10-Q (the "Quarterly Report"). The statements in this discussion regarding the industry outlook and our expectations regarding the future performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Special Note Regarding Forward-Looking Statements and Part I-Item 1A. Risk Factors in our 2012 Annual Report on Form 10-K. Unless otherwise noted or the context otherwise requires, we refer to CIFC Corp. as "CIFC," to CIFC and its subsidiaries as "we," "us," "our," "our company" or "the Company," to CIFC Asset Management LLC, one of our wholly-owned subsidiaries, as "CIFCAM," to Deerfield Capital Management LLC, one of our indirect wholly-owned subsidiaries, as "DCM," to CypressTree Investment Management, LLC, one of our indirect wholly-owned subsidiaries, as "CypressTree," to Columbus Nova Credit Investments Management, LLC, one of our indirect wholly-owned subsidiaries, as "CNCIM" and to CIFCAM, DCM, CypressTree and CNCIM together as the "Advisors."


CIFC Corp. ("CIFC" and, together with its subsidiaries, "we" or "us") is a Delaware corporation that specializes in managing investment products which include corporate credit obligations and primarily senior secured corporate loans ("SSCLs"), as the primary underlying investments.
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 across the world. Our existing investment products are primarily collateralized loan obligations ("CLOs") and also include collateralized debt obligations ("CDOs") and other investment vehicles. We also make investments in certain investment products we manage and SSCLs that we warehouse to launch new investment products.
The investment advisory fees paid to us by these investment products is 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 senior and subordinated management fees based on the amount of assets held in the investment product and, in some cases, incentive fees based on the returns generated for certain investors. We also earn net investment income and incur gains/losses from our investments in CLOs (also referred to as equity investments in CLOs below), warehouses and other investment products we manage. Market and Economic Conditions

During the first quarter of 2013, the CLO market showed signs of improvement from the fourth quarter of 2012, with higher levels of CLO issuances. The new-issued leveraged loan volume topped $185.2 billion, a year over year increase of 61%. During the quarter, the credit market started seeing a move from fixed rate bonds to floating rate loans as investors contributed $12.7 billion into loan mutual funds and the CLO volume reached a post-crisis high of $26.3 billion. We also witnessed benchmark rates remaining near historic lows, high yield spreads tightening moderately and default rates remaining relatively consistent at 2.21%. Overall, the loan market has been generally unaffected by the different risk markets with strong inflows, CLO issuances, pay downs and coupon payments.

The overall U.S. economy saw further improvements in consumer and business spending, housing and unemployment rates which is a contrast to the overall global economy. Fiscal tightening in the U.S., however, has had a negative impact on growth and could impact U.S. corporate profitability as well as curtail U.S. growth. With respect to the overall U.S., global and CLO markets, we remain cautious with respect to investments and could be vulnerable to volatility in transaction activity, fees and potential future investment gains.

Executive Overview

We had a strong first quarter with asset management fee revenues and Economic Net Income ("ENI") increasing significantly over the prior year quarter. We sponsored two newly issued CLOs totaling $1.0 billion and our loan-based Fee Earning Assets Under Management ("Fee Earning AUM" or "AUM") increased (after normal attrition) to $12.4 billion from $11.8 billion at December 31, 2012 and from $10.4 billion at March 31, 2012. Also, we are excited to be teaming up with HarbourVest and see significant opportunity to jointly deliver investment solutions focused on private debt. We continue to focus on growth in this market environment.

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CIFC reported net income attributable to CIFC Corp. of $2.8 million for the first quarter of 2013, compared to $1.6 million in the same period of the prior year. This $1.2 million increase from the prior year period was primarily due to the increases in (i) incentive fees as more CLOs reached their incentive fee hurdles compared the first quarter of the prior year, (ii) senior and subordinated management fees from the issuances of five new CLOs and the acquisition of CLOs since the first quarter of 2012, (iii) net investment income from realized gains due to the settlement on two warehouses, (iv) decreases in net losses on contingent liabilities due to changes in expected performance on certain CLOs and (v) the absence of restructuring costs during the current period. These increases were offset by (i) higher unrealized losses on the investments in CLOs and warehouses due to the softening in CLO equity prices during the period, (ii) principal paydowns, calls and redemptions of certain legacy CLOs and CDOs, (iii) higher taxes, (iv) higher compensation and professional fees to support our continued growth and (iv) during the first quarter of 2012, CIFC recorded a gain on sale from Gillespie CLO PLC ("Gillespie", a European CLO) of $5.8 million.

CIFC reported non-GAAP ENI of $6.2 million for the first quarter of 2013, compared to $2.3 million for the same period in the prior year. See the reconciliation to GAAP net income under the Section entitled Economic Net Income "ENI" (Non-GAAP Measures). ENI increased period to period by $3.9 million primarily as a result of the increase in (i) incentive fees as more CLOs reached their incentive fee hurdles compared to the first quarter of the prior year,
(ii) senior and subordinated management fees from the issuances of five new CLOs and the acquisition of four CLOs since the first quarter of 2012 and (iii) net investment income from realized gains due to the settlement on two warehouses. These increases were partially offset by (i) higher unrealized losses on investments in CLOs and warehouses due to the changes in the current market values of the assets, (ii) principal paydowns, calls and redemptions of certain legacy CLOs and CDOs as well as (iii) higher expenses to support our continued growth.

Fee Earning AUM

The following table summarizes the Fee Earning AUM, for which we are paid a
management fee by significant investment product category (1):

                                        March 31, 2013                        December 31, 2012                        March 31, 2012
                             Number of                               Number of                              Number of
                              Accounts      Fee Earning AUM (2)      Accounts       Fee Earning AUM (2)      Accounts      Fee Earning AUM (2)
                                              (In thousands)                          (In thousands)                         (In thousands)
Post 2011 CLOs                      5     $           2,585,214             3     $           1,579,558            1     $             398,683
Legacy CLOs (3)                    27                 9,004,131            29                 9,599,220           27                 9,945,083
   Total CLOs                      32                11,589,345            32                11,178,778           28                10,343,766
Other Loan-Based Products           2                   780,288             3                   666,120            1                    73,256
Total Loan-Based AUM               34                12,369,633            35                11,844,898           29                10,417,022
ABS CDOs                            9                 2,038,739            10                 2,402,088           10                 2,823,527
Corporate Bond CDOs                 3                    48,578             4                    67,053            4                   180,692
Total Fee Earning AUM              46     $          14,456,950            49     $          14,314,039           43     $          13,421,241

Explanatory Notes:

(1) We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs are expected to continue to decline as these funds run-off per their contractual terms.

(2) Fee Earning AUM generally reflects the aggregate principal or notional balance of the collateral and, in some cases, the cash balance held by the CLO as of the date of the last trustee report received for each CLO prior to the respective AUM date.

(3) Legacy CLOs represent all managed CLOs issued prior to 2011, including CLOs acquired since 2011 but issued prior to 2011.

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Total Fee Earning AUM activity for the three months ended March 31, 2013 is as follows:
(In thousands)

Total loan-based AUM - Beginning Balance   $    11,844,898
CLO New Issuances                                1,001,334
CLO Principal Paydown                             (412,412 )
CLO Calls, Redemptions and Sales                  (165,141 )
Fund Subscriptions                                 122,597
Fund Redemptions                                   (10,354 )
Other (1)                                          (11,289 )
Total loan-based AUM - Ending Balance           12,369,633
Total CDOs                                       2,087,317
Total Fee Earning AUM - Ending Balance     $    14,456,950

Explanatory Note:

(1) Other includes changes in collateral balances of CLOs between periods and market appreciation on other loan-based products.

During the three months ended March 31, 2013, total AUM increased by $0.1 billion primarily as a result of increases in loan-based AUM of $0.5 billion, partially offset by the decreases in CDO AUM of $0.4 billion. The increase in loan-based AUM was primarily a result of the issuance of two CLOs with AUM of approximately $1.0 billion. These increases were partially offset by the calls and redemptions of two CLOs: Cumberland II CLO Ltd. and Rosemont CLO, Ltd., as well as declines in AUM from certain CLOs which have reached the end of their contractual reinvestment periods. Most of the CLOs and CDOs issued prior to 2011 that we manage have passed their first optional call date and are generally callable by their subordinated note holders, subject to satisfaction of certain conditions. CDO AUM declined during the three months ended March 31, 2013, primarily due to the exit of their scheduled reinvestment periods. We do not expect to issue new CDOs so we expect CDO AUM to continue to decline going forward as these funds run-off per their contractual terms.

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The structure of the CLOs we manage affects the investment advisory fees paid to us. The following summarizes select details of the structure of each of the CLOs we manage:

                                                                                            Termination of
                                                       March 31, 2013      First Optional    Reinvestment    Maturity
                                     Issuance Date     Fee Earning AUM     Call Date (1)      Period (2)     Year (3)
                                      Month/Year       (In thousands)                Month/Year
Post 2011 CLOs
CIFC Funding 2011-I, Ltd. ("CIFC
CLO 2011-I")                             01/12       $         401,771         01/14            01/15          2023
CIFC Funding 2012-I, Ltd. ("CIFC
CLO 2012-I")                             07/12                 452,493         08/14            08/16          2024
CIFC Funding 2012-II, Ltd. ("CIFC
CLO 2012-II")                            11/12                 729,617         12/14            12/16          2024
CIFC Funding 2012-III, Ltd. ("CIFC
CLO 2012-III")                           01/13                 500,295         01/15            01/17          2025
CIFC Funding 2013-I, Ltd. ("CIFC
CLO 2013-I")                             03/13                 501,038         04/15            04/17          2025
Total Post 2011 CLOs                                         2,585,214
Legacy CLOs
Forest Creek CLO Ltd.                    05/03                  21,323         07/07            07/08          2015
Navigator 2003 CLO, Ltd. (4)             12/03                  15,749         02/07            11/08          2015
Navigator 2004 CLO, Ltd. (4)             10/04                  87,639         01/11            01/11          2017
Hewett's Island CLO II, Ltd.             12/04                  53,962         12/08            12/10          2016
Market Square CLO Ltd.                   05/05                  80,276         07/07            04/11          2017
Navigator 2005 CLO, Ltd. (4)             07/05                 166,695         10/11            10/11          2017
Hewett's Island CLO III, Ltd.            08/05                 142,678         08/09            08/11          2017
Marquette Park CLO Ltd.                  12/05                 184,209         04/10            01/12          2020
Bridgeport CLO Ltd.                      06/06                 480,677         10/09            07/13          2020
CIFC Funding 2006-I, Ltd.                08/06                 457,909         10/10            10/12          2020
Columbus Nova 2006-I, Ltd.               08/06                 378,258         10/09            10/12          2018
Navigator 2006 CLO, Ltd. (4)             09/06                 323,075         09/10            09/13          2020
CIFC Funding 2006-I B, Ltd.              10/06                 394,499         12/10            12/12          2020
Burr Ridge CLO Plus Ltd.                 12/06                 283,233         06/12            03/13          2023
CIFC Funding 2006-II, Ltd.               12/06                 616,438          3/11            03/13          2021
Columbus Nova 2006-II, Ltd.              12/06                 495,360         02/10            02/13          2018
Hewett's Island CLO V, Ltd.              12/06                 361,401         12/09            12/12          2018
CIFC Funding 2007-I, Ltd.                02/07                 395,811         05/11            11/13          2021
CIFC Funding 2007-II, Ltd.               03/07                 591,601         04/11            04/14          2021
Columbus Nova 2007-I, Ltd.               03/07                 479,078         05/10            05/13          2019
Hewett's Island CLO VI, Ltd.             05/07                 362,369         06/10            06/13          2019
Schiller Park CLO Ltd.                   05/07                 409,389         07/11            04/13          2021
Bridgeport CLO II Ltd.                   06/07                 492,404         12/10            09/14          2021
CIFC Funding 2007-III, Ltd.              07/07                 439,410         07/10            07/14          2021
Primus CLO II, Ltd.                      07/07                 367,242         10/11            07/14          2021
CIFC Funding 2007-IV, Ltd.               09/07                 490,679         09/10            09/12          2019
Columbus Nova 2007-II, Ltd.              11/07                 432,767         10/10            10/14          2021
Total Legacy CLOs                                            9,004,131
Total CLOs                                           $      11,589,345

Explanatory Notes:

(1) CLOs are generally callable by equity holders once per quarter beginning on the "first optional call date" and subject to satisfaction of certain conditions.

(2) Termination of reinvestment period refers to the date after which we can no longer use certain principal collections to purchase additional collateral, and such collections are instead used to repay the outstanding amounts of certain debt securities issued by the CLO.

(3) Represents the contractual maturity of the CLO. Generally, the actual maturity of the deal is expected to occur in advance of contractual maturity.

(4) Represents acquisition of rights to manage four CLOs through the completion of the GECC transaction. See "Item1 - Condensed Consolidated Financial Statements - Note 4" for further details.

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