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CIFC > SEC Filings for CIFC > Form 10-Q on 12-Aug-2013All Recent SEC Filings

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Form 10-Q for CIFC CORP.


12-Aug-2013

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."

Overview

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 across the globe. Our existing investment products are primarily collateralized loan obligations ("CLOs"). In addition, we manage other loan-based products and certain legacy collateralized debt obligations ("CDOs"). 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 of CLOs 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.

Executive Overview

The capital markets experienced an onset of volatility during the quarter. This was precipitated by the Federal Reserve ("Fed") signaling a possible end to quantitative easing which global investors interpreted to indicate a potential near term rise in interest rates. The Fed's statements, in part, further benefited the loan market as investors continued to reduce their traditional fixed income product exposure and bought floating rate loans. These market and economic conditions constituted a continued favorable environment for companies whose loans comprise the investments in the funds managed by us. In addition, the loan market inflows noted above supported favorable loan market conditions for borrowers, and increased levels of loan refinancings. This continued wave of refinancings supported new CLO issuances but accelerated shrinkage of older CLOs which had passed the end of their reinvestment periods.

We had strong performance for the second quarter with ENI management fees and ENI increasing significantly compared to the same period last year. Subsequent to quarter end, we declared a divided of $0.10 per share. Assets Under Management ("AUM") grew during the year despite the high level of loan refinancing activity and associated loan prepayments on funds that were out of their reinvestment periods. Our performance has also improved as a result of increased incentive fees, as more CLOs reached their incentive hurdles and we achieved a fee sharing hurdle on the legacy CIFC CLOs whereby, for the first time, we retained a portion of the incentive fees. We are encouraged by these strong quarterly results and are well positioned for the second half of the year.


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CIFC reported GAAP net income attributable to CIFC Corp. of $7.5 million for the second quarter of 2013, as compared to $(8.5) million in the same period of the prior year. GAAP operating results increased by $16.0 million from the prior year period, primarily as a result of the increase in (i) incentive fees on legacy CIFC CLOs acquired in April 2011 as we began recognizing 50% of incentive fees earned from these CLOs (previously, all incentive fees were paid to the seller), (ii) management fees from the five CLOs sponsored since the second quarter of 2012 and (iii) net interest income from CLO equity distributions and realized gains from warehouse activity.

CIFC reported ENI of $12.4 million for the second quarter of 2013, as compared to $3.3 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 $9.1 million primarily as a result of the increase in (i) incentive fees as more CLOs reached their incentive hurdles as compared to the second quarter of the prior year, (ii) incentive fees on legacy CIFC CLOs acquired in April 2011 as we began recognizing 50% of incentive fees earned from these CLOs (previously, all incentive fees were paid to the seller), (iii) management fees from the five CLOs sponsored since 2012, other new loan-based products and the four Navigator CLOs acquired since the second quarter of 2012, and (iv) net interest income from CLO equity distributions and realized gains from warehouse activity. These increases were partially offset by higher unrealized losses on investments in CLO equity, and a decrease in management fees from certain legacy CLOs and CDOs that are winding down pursuant to their contractual terms.

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):

                                     June 30, 2013                          March 31, 2013                        December 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                   6     $           3,219,531            5     $           2,585,214             3     $           1,579,558
Legacy CLOs (3)                 26                 8,344,616           27                 9,004,131            29                 9,599,220
   Total CLOs                   32                11,564,147           32                11,589,345            32                11,178,778
Other Loan-Based Products        3                   822,534            2                   780,288             3                   666,120
Total Loan-Based AUM            35                12,386,681           34                12,369,633            35                11,844,898
ABS CDOs                         9                 1,321,535            9                 2,038,739            10                 2,402,088
Corporate Bond CDOs              1                     4,000            3                    48,578             4                    67,053
Total Fee Earning AUM           45     $          13,712,216           46     $          14,456,950            49     $          14,314,039

Explanatory Notes:

(1) We do not expect to issue new CDOs in the future. Fee Earning AUM on CDOs is 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 and six months ended June 30, 2013 is as follows:

                                                       For the Three Months       For the Six Months
                                                        Ended June 30, 2013      Ended June 30, 2013
                                                                       (In thousands)
Total loan-based AUM - Beginning Balance               $     12,369,633          $    11,844,898
CLO New Issuances                                               626,303                1,627,637
CLO Principal Paydown                                          (574,026 )               (986,438 )
CLO Calls, Redemptions and Sales                                (53,961 )               (219,102 )
Fund Subscriptions                                               60,000                  182,597
Fund Redemptions                                                      -                  (10,354 )
Other (1)                                                       (41,268 )                (52,557 )
Total loan-based AUM - Ending Balance                        12,386,681               12,386,681
Total CDOs                                                    1,325,535                1,325,535
Total Fee Earning AUM - Ending Balance                 $     13,712,216          $    13,712,216

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 June 30, 2013, total AUM decreased by $0.7 billion primarily as a result of decreases in AUM of legacy CDOs of $0.8 billion and CLOs of $0.7 billion offset by increases in post 2011 CLOs and other loan-based products of $0.7 billion. During the quarter we sponsored the issuance of one new CLO with AUM of approximately $0.6 billion. This increase was partially offset by the calls and redemptions of one CLO and two CDOs, as well as declines in AUM from certain CLOs which have reached the end of their contractual reinvestment periods.

During the six months ended June 30, 2013, total AUM decreased 0.6 billion primarily as a result of decreases in AUM of legacy CDOs of $1.1 billion and legacy CLOs of $1.3 billion offset by increases in post 2011 CLOs and other loan-based products of $1.8 billion. During the first half of the year we sponsored the issuance of three new CLOs with AUM of approximately$1.6 billion and increased our other loan based products by $0.2 billion. This increase was partially offset by the calls and redemptions of three CLO and three CDOs, 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. As expected, CDO AUM continued to decline during the three and six months ended June 30, 2013. We do not expect to issue new CDOs and 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 table summarizes select details of the structure of each of the CLOs we manage:

                                                                                          Termination of
                                                      June 30, 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       $         403,370         01/14            01/15          2023
CIFC Funding 2012-I, Ltd. ("CIFC
CLO 2012-I")                           07/12                 453,183         08/14            08/16          2024
CIFC Funding 2012-II, Ltd.
("CIFC CLO 2012-II")                   11/12                 730,587         12/14            12/16          2024
CIFC Funding 2012-III, Ltd.
("CIFC CLO 2012-III")                  01/13                 502,397         01/15            01/17          2025
CIFC Funding 2013-I, Ltd. ("CIFC
CLO 2013-I")                           03/13                 503,691         04/15            04/17          2025
CIFC Funding 2013-II, Ltd.
("CIFC CLO 2013-II")                   06/13                 626,303         07/15             7/17          2025
Total Post 2011 CLOs                                       3,219,531
Legacy CLOs
Forest Creek CLO Ltd.                  05/03                  11,432         07/07            07/08          2015
Navigator 2003 CLO, Ltd. (4)           12/03                  11,431         02/07            11/08          2015
Navigator 2004 CLO, Ltd. (4)           10/04                  50,200         01/11            01/11          2017
Market Square CLO Ltd.                 05/05                  49,302         07/07            04/11          2017
Navigator 2005 CLO, Ltd. (4)           07/05                 110,086         10/11            10/11          2017
Hewett's Island CLO III, Ltd.          08/05                  79,347         08/09            08/11          2017
Marquette Park CLO Ltd.                12/05                 143,908         04/10            01/12          2020
Bridgeport CLO Ltd.                    06/06                 480,045         10/09            07/13          2020
CIFC Funding 2006-I, Ltd.              08/06                 390,822         10/10            10/12          2020
Columbus Nova 2006-I, Ltd.             08/06                 366,935         10/09            10/12          2018
Navigator 2006 CLO, Ltd. (4)           09/06                 322,972         09/10            09/13          2020
CIFC Funding 2006-I B, Ltd.            10/06                 363,646         12/10            12/12          2020
Burr Ridge CLO Plus Ltd.               12/06                 282,479         06/12            03/13          2023
CIFC Funding 2006-II, Ltd.             12/06                 543,433          3/11            03/13          2021
Columbus Nova 2006-II, Ltd.            12/06                 482,140         02/10            02/13          2018
Hewett's Island CLO V, Ltd.            12/06                 287,659         12/09            12/12          2018
CIFC Funding 2007-I, Ltd.              02/07                 396,185         05/11            11/13          2021
CIFC Funding 2007-II, Ltd.             03/07                 592,083         04/11            04/14          2021
Columbus Nova 2007-I, Ltd.             03/07                 478,731         05/10            05/13          2019
Hewett's Island CLO VI, Ltd.           05/07                 359,548         06/10            06/13          2019
Schiller Park CLO Ltd.                 05/07                 407,975         07/11            04/13          2021
Bridgeport CLO II Ltd.                 06/07                 491,690         12/10            09/14          2021
CIFC Funding 2007-III, Ltd.            07/07                 438,076         07/10            07/14          2021
Primus CLO II, Ltd.                    07/07                 366,476         10/11            07/14          2021
CIFC Funding 2007-IV, Ltd.             09/07                 405,210         09/10            09/12          2019
Columbus Nova 2007-II, Ltd.            11/07                 432,805         10/10            10/14          2021
Total Legacy CLOs                                          8,344,616
Total CLOs                                         $      11,564,147


Explanatory Notes:
_________________________________


(1) CLOs are generally callable by equity holders (or the subordinated note holders of the CLO) 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 these CLOs through the completion of the GECC transaction. See "Item1 - Condensed Consolidated Financial Statements - Note 4" for further details.


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