Calamos Asset Management, Inc. Q3 2008 Earnings Call Transcript

Oct.27.08 | About: Calamos Asset (CLMS)

Calamos Asset Management, Inc. (NASDAQ:CLMS)

Q3 2008 Earnings Call Transcript

October 27, 2008, 5:00 pm ET

Executives

Joe Poulos – IR

John P. Calamos, Sr. – Chairman, CEO and Co-Chief Investment Officer

Cristina Wasiak – SVP, CFO & Treasurer

Mark Infanger – VP and Corporate Controller

Analysts

Craig Siegenthaler – Credit Suisse

Marc Irizarry – Goldman Sachs

Cynthia Mayer – Merrill Lynch

Bill Katz [ph]

Prashant Bhatia – Citigroup

Operator

Good afternoon. My name is Jenny and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 investor relations conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) I will now turn the conference over to Mr. Joe Poulos.

Joe Poulos

Thank you. Good afternoon. From time-to-time, information or statements provided by us including those within this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, competitive environment and regulations. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith, belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performances or results to differ materially from those expressed in or suggested by the forward-looking statement. Such risks or uncertainties include, but are not limited to, loss of revenues due to contract terminations and redemptions, our ownership structure, catastrophic or unpredictable events, unavailability of third-party distribution channels, damage to our reputation, our interpretation of and positioning relative to the market, fluctuations in the financial market, and the competitive conditions in the mutual fund asset management and broader financial services sector.

For discussion concerning some of these and other risks, uncertainties and other important factors that could affect future results, the forward-looking information in management's discussion and analysis of financial condition and results of operations and where applicable risk factors in the company's annual and quarterly reports filed with the US Securities and Exchange Commission.

With me today is John Calamos, Chairman, Chief Executive Officer and co-Chief Investment Officer, Chris Wasiak, Chief Financial Officer and Mark Infanger, Vice President and Corporate Controller.

With that I would now like to pass the call over to John.

John P. Calamos, Sr.

Thank you, Joe. And thank you all for joining us on the Calamos Asset Management third quarter 2008 earnings call. We appreciate your interest in our company and for taking the time to be with us today.

I will review some of the overall numbers for the quarter and make some comments about our overall business, Chris Wasiak, our CFO will then give greater detail on our financials prior to opening the conference call to the Q&A session. Right before that Q&A session, I'd like to provide a brief overview of our investment performance in the current market outlook.

Going onto slide 5, as we have discussed in the past because of the volatility in non-operating earnings, we think it's important to reinforce operating results with the focus on current period earnings.

Operating income was $44.1 million in the current quarter, which contributed to $0.30 per share to diluted earnings. This compares to an operating income of $49.4 million in the third quarter of '07 which contributed $0.30 to earnings per share and $49.1 million in the second quarter of '08 which contributed $0.32 to earnings per share.

Non-operating loss was $51 million in the third quarter of '08 reducing diluted earnings per share by $0.35. Diluted loss per share was $0.05 for the current quarter versus diluted earnings per share of $0.32 for the year earlier period and $0.43 as adjusted last quarter.

Finally, we declared a regular quarterly dividend of $0.055 per share payable on November 26th '08 to shareholders of record on November 11th. We reduced our dividend this quarter as our AUM and income had declined. Further, we believe that it's prudent to conserve capital during this difficult time and Chris will elaborate on that in her section.

Onto slide number 6, as of September 30th of this year, our assets under management were $33.3 billion, down 28% from December 31st, '07, and down 29% from September 30th of '07. Third quarter revenues were $101.8 million, down 14% from third quarter '07 and down 9% from the second quarter of '08. The drop in assets under management is a result of asset depreciation from a decline in the financial market and some increase in net outflows.

On slide 7, we show the net flows trends as I indicated. We believe the net flow trends are reflecting the challenging market conditions in the third quarter. Net redemptions were $1.4 billion compared to net redemption of $199 million in second quarter of '08 and net purchases of $374 million, up from third quarter '07. The industry's overall is as we all know experienced unusual net outflows this quarter, and we are not immune.

On slide 8, again, we show the asset classes by product as well as by investment strategy. There has been very little change on the relative percentage in those various categories.

On slide 9, I like to give you an overview of our response to these unprecedented market conditions. We have begun to take action to reduce the overall expense of the company to reflect the decrease in our asset base. We are balancing the reduction in expenses while still allowing the company to grow further. We are reviewing the outsourcing of operations and technology, which we feel will offer good reduction in near-term expenses as well as transforming fixed expenses to variable. This will allow us to a reduction in IT CapEx expenses.

On the growth side, as you know, we're primarily an equity high yield and convertible investment manager. In this unprecedented panic sell-off, there is few areas which have been left (inaudible). However, we feel that our products remain competitive and offer future growth opportunities for the company. We recently opened our convertible strategy to new investors and feel that that will be well received.

I'll turn it over to Chris Wasiak, our CFO to go over the financials. Chris.

Cris Wasiak

Thank you, John and good afternoon to everyone. As John mentioned, assets at the end of September were $33.3 billion, which is down 19% from June 30th, and down 29% from a year ago. Average assets for the quarter was $38.4 billion, a decrease of 11% compared to $42.9 billion recorded in the second quarter of 2008, and a decrease of 13% compared to the $44.2 billion in the third quarter of 2007.

Our asset mix strategy – I'm sorry our asset mix by strategy has changed slightly from previous quarter as equity markets including our strategies were driven down by recent market trend. Equity has fallen from 48% to 44% of our asset while our balance convertible high yield and alternative strategies have all seen slight increases in our asset mix.

To recap the more detailed flow information previously presented by John, for the quarter, we experienced net redemptions of $1.4 billion compared to net redemptions of $199 million in the second quarter 2008 and $374 million in net purchases in the third quarter of 2007. Mutual fund net redemptions for the quarter were $1 billion compared to net redemptions of $282 million in the second quarter, and net purchases of $511 million in the third quarter of '07.

Within our separately managed accounts, we had net redemptions of $360 million for the third quarter compared to net purchases of $83 million in the second quarter and net redemptions of $137 million from a year ago.

Turning to revenues on Slide 12, our total revenues of $101.8 million for the third quarter are down 9% over the second quarter of 2008, and down 14% over the third quarter of 2007. Management fee revenues were $71.5 million and 9% and 13% of the second quarter and third quarter 2007 respectively as you would expect the decrease for the period was due to lower average assets under management. Our management fee rates for the third quarter was 74 basis points which is up slightly from recent quarters and in line with our short-term expectations.

Operating income for the third quarter was $44 million, which is a 10% decrease when compared to the second quarter of 2008 and 11% decrease from the third quarter of 2007.

Total operating expenses were $58 million for the third quarter and 9% decrease from the second quarter and a 16% decrease from the third quarter 2007. Compensation and benefits expenses were the largest contributor for the expense savings and were down $3.5 million or 17% from the second quarter which was primarily reflective of reduced bonus level.

Distribution expenses following $3 million or 12% from the prior quarter also contributed significantly to the lower operating expenses. While operating margins decreased slightly in the third quarter of 2008 from an operating margin of 43.8% for the second quarter of 2008, it is still a very solid 43.3%, and up from the 41.7% reported for the third quarter of 2007.

Moving onto non-operating, our non-operating activities reduced income by $51 million in the third quarter, compared to increasing income by $17.1 million and $3.3 million in the second quarter of 2008 and third quarter of 2007 respectively. It is pretty evident in the table that cash and cash equivalents have led to a decrease in interest income.

However, our investment portfolio continues to generate a (inaudible) in earnings. More specifically, unrealized market appreciation, net of minority interest of $45.3 million in the current quarter primarily represents the change in value of our investments and consolidated partnerships in offshore funds which are consolidated for accounting reporting purposes. You can see from the table the extreme strain that the current market environment is having on our non-operating income.

Moving onto the next slide. This slide provides an overview of actual results from operating activities presented as a green line, non-operating activities presented as the pink line as well as the impact that the non-recurring one-time items had on our reported results, which is presented as the stacked box.

As previously stated, our non-operating activities are responsible for creating the volatility that we are experiencing in our earnings primarily the result of unrealized gains and losses generated by our investment portfolio that we believe are temporary in nature.

With respect to net income, our net loss for the quarter was $800,000, compared to net income of $8.7 million as adjusted for the second quarter of 2008 and $7.1 million for the third quarter of 2007. We reported a loss of $0.05 per diluted share for the third quarter 2008, down $0.48 per share as adjusted from the second quarter of 2008 and down $0.37 per share from the third quarter of 2007.

Finally, on slide 17, I'd like to focus on our investment portfolio which provides significant source of liquidity and contributes to changes in net worth. Even in the current market environment, our financial position remains highly liquid. Our investment portfolio, which is comprised primarily of cash, investment securities and partnerships, investments and offshore funds was valued at more than $787 million at quarter-end.

It is important to understand that unrealized gains and losses on our investment portfolio not only create volatility in earnings which I previously discussed, but also impacts stockholders equity as a component of accumulated other comprehensive income. As John alluded to earlier, with respect to the dividend reduction, we do monitor our net worth to prudent levels. During the fourth quarter in an attempt to protect our net worth and future earnings we initiated a series of hedges on our investment portfolio among other things.

It is unlikely that our hedges will receive hedge accounting treatment. This is an important distinction because while generally a positive influence on the portfolio the hedges will likely create additional volatility in our fourth quarter earnings.

Now I'd like to turn the call back over to John for discussion of our investments performance and market outlook.

John P. Calamos, Sr.

Thank you, Chris. On slide 19, just as a review, we show all our institutional strategies in our out look from one year ago now to ten years. I guess the point here is, once the market can begin to look beyond its nose and we hope that begins to happen soon, I think the long-term performance becomes important.

And even with these turbulent markets in here, we remain competitive within our peer group, so its track record will continue to be important going forward, and as you can see by the chart, we still remain competitive on a risk adjusted basis. So there's no doubt that this current market environment can't look very far, can't even look sometimes beyond the next ten minutes, but we continue to feel that this is temporary, and as markets calm down, this longer term track record position us well for future growth.

On page 20, just some talking point on our overall outlook. We all know what's going on here. It's hard not to know. We like most were surprised by the reaction, collapse of the banking system in here. The credit market this location, even though we have little to do in those areas from a sector point of view, obviously, the macro factors took down everything.

Looking longer term, we hope that the government action in here seems to bring back the banking system and calm the markets down. We've had a long-term history of a really resilient US economy. The global factors are still in place and the valuations we're seeing here are just unbelievable to, to us in here. So it is a time to look at valuations and think beyond the current crisis.

Some of the portfolio positioning that we're doing in here we continue to look for very clean balance sheets. On the growth side, many of the companies we own have a lot of cash on their balance sheet. Growth is not being priced into this market at all. As I said earlier, the market just cannot look beyond this current crisis and so growth has been taken out of this, out of this market completely, setting up a very extreme valuations, prices we haven't seen for a very, very long time.

The other area that has been very difficult here is a convertible area, and because of the deleveraging of the hedge funds, convertible prices are the cheapest that we've seen, that I've ever seen them and I've been doing this for 40 years, so it's a very difficult market environment.

Our opportunities as we layout some talking points on, on slide 21, we do have competitive performance. We've had a history of going through difficult markets well. We are reopening up our convertible fund to both our mutual fund clients and our institutional investors it's been closed for a number of years. We seem to be getting a good response from that so we're pleased about that.

As you know, our growth fund, the growth stocks, as I mentioned earlier, the valuations to us are very, very cheap in here, and look very, if we can look beyond this current crisis, look to be a buy in here.

I think investors as we've come through this crisis will focus on longer term records. Term track records and some of the success we've had over the years, and we've been very proactive in communicating with our clients in the financial advisor community. We do have increasing distribution opportunities in new channels here that we will attempt to take advantage of.

At this point, I'd like to open it up to the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from Craig Siegenthaler.

Craig Siegenthaler – Credit Suisse

Hi, good afternoon.

John P. Calamos, Sr.

Hi, Craig.

Craig Siegenthaler – Credit Suisse

I'm just looking here at your margins, which are very high versus peers, and I'm also just thinking of the fact you started expense initiative which was reducing fixed expenses about three quarters ago. I'm just wondering in October we just seen the markets drop over 20% which impact everyone, so how can, expenses be further reduced to kind of keep up with their client of AUM?

John P. Calamos, Sr.

We continue to look at our expense side, and we have found some areas that we think will position us better in the future by taking a large part of our expense and making it more variable. So that that is actually a new initiative. Some of the expense control that we took earlier, three quarters or earlier this year, I should say, did not include that, so the new initiative is really on the reduction of CapEx, and really taking the operation and the IT side of the business and looking to make that more variable.

Craig Siegenthaler – Credit Suisse

Got it. And just another question. I think you mentioned on maybe Chris's your comments on the hedges, on the investment portfolio, just looking at how that, that line is tracked in the past, with the FD [ph] markets being weak in the fourth quarter, I would assume that line was probably going to be weak again. When you said that hedge added volatility, does that mean volatility on the upside or is that additional negative volatility based on where that should be?

Chris Wasiak

It will be volatility to the upside.

Craig Siegenthaler – Credit Suisse

Got it. All right. Great. Thank you very much for taking my questions.

Operator

Your next question is from Marc Irizarry from Goldman Sachs.

Marc Irizarry – Goldman Sachs

Great. John. Can you just go through the, this expenses in a little more detail in terms of, how we should be thinking about the next several quarters and then how your thinking about sort of managing, sort of what will be near-term pressure on the business with longer term sustainability?

Cris Wasiak

Yes, I think the way to look at expenses is that, relative to the fourth quarter – relative to the third quarter, you will not see much change other than as we continue to evaluate the incentive comp, which everybody on the street is doing relative to, relative to performance. Going forward into 2009 we really are looking to right size any of the infrastructure given the new asset levels, that's really the way, and in this instance, I really do mean the right size, I don't mean necessarily downsize. We're looking across all of the different functional areas and saying at these lower asset levels trying to position ourselves for, if you will, the regrowth of the market. We look – like many of our competitors look at the different functional areas and say okay, when it comes to areas such as IT which John mentioned, have we gotten a little ahead of ourselves in terms of the projects and initiatives that we should be scaling back on some of those. And trying to differentiate, if you will, as we look at kind of a near-term, the near-term expenses and again primarily in the infrastructure areas. So that's where we would expect to be talking about some changes as we go, heading into 2009.

Marc Irizarry – Goldman Sachs

Okay. That's great. That's really helpful. In terms of a convertible strategy, can you just remind us how big that strategy is, and where do you expect to see the greatest traction near-term from that strategy, in terms of is it going to be more on the institutional side, or are you seeing maybe some demand potentially on the fund side?

John P. Calamos, Sr.

I think we'll see, I think we'll see it on both sides, both the fund side and the institutional side. Remember, the use of convertibles in our strategies, the pure convertible strategy is what we're opening up at this point, but convertibles are used throughout many of our other blended products. We're seeing valuations that are quite frankly, unheard of where the optionality in the convertible is, is not even priced in. You're getting it for free. So we're anxious to obviously get some new money to take advantage of these opportunities from what looks to be the foreselling by the leveraged convertible – people, so that's why we're opening up the strategy.

Marc Irizarry – Goldman Sachs

And just, John, just in terms of the size, can you just size the strategy for us?

John P. Calamos, Sr.

Yes, I think the convertible fund is around $700 million or $800 million at this point, so that's the fund we're opening up. On the institutional side, I think convertibles represent I think on that pie chart represents 13%.

Mark Infanger

Yes, the number that we've disclosed, Marc, in the earnings release, is $4.2 billion and as John alluded to that's the pure convertible strategy, so there are other convertibles embedded in the balance and alternatives, but if you look at purely the strategies that we've opened, it's the $4,167,000,000.

Marc Irizarry – Goldman Sachs

Great, thanks.

Operator

Your next question is from Cynthia Mayer.

Cynthia Mayer – Merrill Lynch

Hi, good afternoon. Can you talk a little about closed ends and give us an update on any deleveraging and what the outlook might be for deleveraging?

John P. Calamos, Sr.

Cynthia, what we've done is, as you may know, we've refinanced about 80% of the closed end fund from the auction re-preferred to other forms of financing. We have slightly deleveraged some of the funds as, I have to keep within the commitments in the regulations. So I don't know what your question is. Even at the current rates, it's accretive to the common shareholders to remain leverage, so we have remained levered on our closed end funds right now. So we don't have any, we don't have any plans to deleverage at this point.

Cynthia Mayer – Merrill Lynch

Okay. I guess my question really was the degree of deleveraging and whether it was, a significant in terms of having an impact on your assets under management or whether it was pretty insignificant? How much you would – how many assets under management you'd have to take out?

John P. Calamos, Sr.

I think it's pretty insignificant at this point. I mean, what's much more reflective is the decrease in NAV due to just the dislocation and high yield in the convertible markets. That's the mark-to-market on those are what's really hit the AUM on the closed end fund side.

Cynthia Mayer – Merrill Lynch

Got it. Okay. And can you talk a little about maybe the use of the cash that belonging to the public investors from the deferred taxes and the IPO? I'm wondering whether given the cut in the dividend, whether this would be a time to maybe deploy that cash for share buy backs or dividend – dividend it out separately and if not what the, what do you think that might eventually be used for?

Cris Wasiak

We actually contributed that cash down to holdings in the third quarter. You'll see that detail in the information on that when we file the Q. The rationale for doing that was to offset the – we're trying to conserve our net worth, okay, and again, this is, this is back during the third quarter and we're looking at the impact of the share buy backs over the course of 2008, and we're looking to offset the negative impact on net worth of the share buy backs with contributions from the public share holdings as also as an equal contribution from CFP.

Cynthia Mayer – Merrill Lynch

I'm sorry. Go contribution for what?

Cris Wasiak

Calamos Family Partners, who is the other partner in Calamos holdings

Cynthia Mayer – Merrill Lynch

I see. So you dividended it down on a pro rata basis, basically.

Cris Wasiak

We did capital contributions from the two primary partners in Calamos holdings, CAM, the public company as well as Calamos Family Partners, so they both get equal capital contribution.

Cynthia Mayer – Merrill Lynch

Right, okay. And so the way you're viewing that basically is paying back previous share buy backs?

Cris Wasiak

Yes, we're trying to preserve the net worth of the operating company.

Cynthia Mayer – Merrill Lynch

Okay. So and then in terms of that cash that's the public shareholder cash from the deferred taxes, that then goes back to increase, it will, it will begin to stack up again, because you still have a few years of that to go right?

Cris Wasiak

Yes.

Cynthia Mayer – Merrill Lynch

15, actually it's 15 years right?

Cris Wasiak

Correct.

John P. Calamos, Sr.

Correct.

Cynthia Mayer – Merrill Lynch

Right. Okay. And then in terms of the dividend cut how confident are you that you won't have to cut it again, and I guess just –

John P. Calamos, Sr.

We're as confident as we are, what's going to happen tomorrow on the market. Obviously, what we're doing there is conserving some capital in what is, what is, as we all know a panic, a turbulent panic market in here, so it seemed to us prudent to, to conserve some capital in these times and hopefully, as the markets look beyond this period and calm down, we'll have better visibility on what to do in future dividends.

Cynthia Mayer – Merrill Lynch

Got it. And is there any thought on sort of changing what your investment portfolio is invested in. I guess the hedging is the answer to that, right?

John P. Calamos, Sr.

Yes, the hedging is the answer. We did this past quarter, I guess it was, 3 months, 4 months ago, we did set up two new funds, and so, obviously, that was before this big market drop, so our timing there was not looking back obviously we didn't, we didn't forecast this kind of turbulent panic market environment, so we don't, we don't expect to make anymore changes at this point.

Cynthia Mayer – Merrill Lynch

And is the portfolio totally hedged or could you give any color on how hedged it is?

Cris Wasiak

It's – I think at this point I just tell you it's not a perfect hedge, it's not a complete hedge, it's a color and we think we're – every indication we have so far that was doing pretty well on that front.

Cynthia Mayer – Merrill Lynch

And when did you put that into place?

Cris Wasiak

Beginning of October.

Cynthia Mayer – Merrill Lynch

Okay. Great. Thank you.

Operator

The next question is from Bill Katz [ph].

Bill Katz

Just coming back to the expenses for a moment, just sort of curious, as you think about the fact that your assets are probably down, almost 30%, it's October, what do you think a reasonable margin might be on the operating side? And if you don't want to answer it that way, maybe another way to think about it, how much percentage points of cost can you take out moving simply from fixed to variable is my first question?

Cris Wasiak

We do look at it on an operating margin side, and as Craig does noted earlier, our operating margins have always been at the top end of our peer group. We're expecting the entire peer group margins to slide down, so we expect our margins in 2009 to, we're looking at kind of more of the low-to-mid 30s, which we believe would still be middle of the pack. Since that's the 40s we're very much at the top of our peer group.

Bill Katz

Okay. That's actually good enough, thank you. And then just on the convertible a little bit of a narrow question here, I'm sorry, on the closing fund. Given the hit in the asset value and what seems to be the ratios that are probably pushing the high end of what's appropriate under the 1940s act. Are you still waiving the management fees or would those be passed along as savings to the investors?

Cris Wasiak

I don't, I – we haven't waived the management fees on the closed end funds.

Bill Katz

I think you have some management fees expiring as you go from this year to next. So I was wondering if you're going to keep at holding company level or keep it to the fund level back to the investors.

John P. Calamos, Sr.

There were fee waivers that are set to expire, Bill.

Bill Katz

All right.

John P. Calamos, Sr.

There's been no determination on how to proceed with those. Recently we had both VHY and CHI in June and July respectively reduce of the fee waiver, which in effect increased our fee –

Bill Katz

Right.

John P. Calamos, Sr.

– which you see happen in the quarter, but as we go forward, there has not been any conversation to contemplate making changes to those.

Bill Katz

So we should assume that still be waived, you would still recoup that into your revenue stream?

John P. Calamos, Sr.

At this point, that's our expectation, yes.

Bill Katz

Okay. And then just coming back to hedges for a moment. Excuse me, the question. Just when you stay doesn't qualify the hedge account. Just sort of walk me through the next step of the implications of that and I guess just following on the prior question, is this a potentially a one for one situation here? Is it 75%, I mean, it's such a wide band given the volatility of this line the last couple of quarters, a little guidance would be helpful?

John P. Calamos, Sr.

Unfortunately I don't know that we've got a lot of guidance to give. The hedge is being evaluated on a daily basis. The investment management team continues to evaluate its effectiveness. With respect to the accounting side, the reason that we made the distinction was under hedge accounting, you may actually change of your hedge with the value of the assets so it's running through the P&L your hedge goes through your P&L effectively offsetting that. If it runs through other comprehensive income the hedge runs through other comprehensive income. The way that we designed the hedge was with the expectation that all of those changes will run through the current period P&L, so as the market value decreases, the increase value of the hedge will run through the P&L in the fourth quarter and vice versa.

Bill Katz

Okay. That's what I thought you were getting too. Okay. So the last question is, given that you're sort of feel like the convert is going to be some of this net worth (inaudible) activity, if you look at your trends away from that, it's deteriorating pretty rapidly. Just sort of curious where you're seeing the stress points particularly the mutual fund side, and to less extent on the separate account. Little more detail on where the attrition is coming from?

John P. Calamos, Sr.

I'm sorry, Bill, I didn't understand where do we see the redemptions coming from, is that what you said?

Bill Katz

Right. What products, what distributions channels in particular you see it?

John P. Calamos, Sr.

Yes, primarily, the growth strategy and our G&I strategy, growth and income strategy, which is a convertible strategy, but those have been the two primary areas that we've seen some redemptions. We have not seen very much on the institutional side at all.

Bill Katz

Thanks for answering my questions. Just one more if I may. On the institutional side specifically to the retained managed account or separately managed account, are you thinking about that strategically any different today, given what seem to be some pretty intense consolidation on the distribution side, and implication it might have for the economics on that business?

John P. Calamos, Sr.

We have, gee, I think we have, I forget how many, 100, 200 distribution agreements across the country. We, in looking at the consolidation in the, what's going on out there, I don't think we're going to be impacted severely on that. There is movement from FAs from one firm to another, and I think we're focused on that as well, so periods like this we actually end up expanding our distribution agreements rather than narrowing them. So we tend to want to give all the financial advisors a high level of service in these times and continue to focus on them and very often our relationships with them as they move from one firm to another, we follow them at other firms, and that's been, that's been going on for many, many years.

Bill Katz

Okay. Thank you

Operator

Your next question is from Prashant Bhatia.

Prashant Bhatia – Citigroup

Hi. Just on the below the line investment income, how much of that was realized versus unrealized? Was it all unrealized? The loss there?

Cris Wasiak

In the third quarter, yes, it's all unrealized.

Prashant Bhatia – Citigroup

Okay.

John P. Calamos, Sr.

There's a little bit of dividend income and interest income that runs through there, but for the most part the big push is on the unrealized gain.

Prashant Bhatia – Citigroup

Okay. And then in terms of managing the hedge, say, this quarter where you have a gain, will you trade around the hedge to maybe lock in the positive cash flow by closing it out and/or are you just going to leave the hedge in place indefinitely?

John P. Calamos, Sr.

We'll make those decisions as we go along. We haven't made a determination at this point. We're watching it very closely, but we have not made a determination.

Prashant Bhatia – Citigroup

Okay. And then, it might be too early, but how much of investor interest have you seen since you've opened up the convert product? That's a pretty well-known product across the industry. Have you seen a lot of demand already?

John P. Calamos, Sr.

We're seeing good interest, we're, we're talking to both institutional investors, so I think, I think there's good interest in this kind of a market environment, the valuations are just unbelievable to us, unprecedented. You would think typically what happens in convertibles is higher volatilities translate into higher option values, what you have going on here is option values have actually declined to zero in here, even with high volatility, so the convertibles are in some cases even trading below their investment value. So you have no option value, so you get the option for free, and then you're buying convertibles at, at below their investment value. So I think as we present this to investors, it offers to us a good opportunity. What could happen in here is if the markets calm down and return to any semblance of normalcy, you could see that option value gaining in here without the stocks increasing in value, and of course, if the stocks were to increase, then you have a double plus there. You'd have increasing value because stocks are increasing as well as convertibles going back to normal values. As we track this over the years, we've seen this occur other times, never to this decrease in our evaluation, but typically it's come back in a couple quarters, two or three quarters so we're one of the reasons we're open to convertible fund is really to take advantage of this what we feel is a dislocation.

Prashant Bhatia – Citigroup

Okay. That sounds like there is a fair amount of marketing going on at present?

John P. Calamos, Sr.

Yes.

Prashant Bhatia – Citigroup

Okay. And then in terms of the headcount, can you just give us a feel for where do you think headcount will settle once you're through with the cost cutting?

John P. Calamos, Sr.

No. We're evaluating that as we go along here. So there's no, there's no specific determination at this point.

Prashant Bhatia – Citigroup

Okay. And then on the debt side, are there any covenants in place that have a minimum requirement for AUM or any kind of market sensitive type requirement that you see maybe an issue or is that really not the case?

Cris Wasiak

There are no AUM requirements. There's a classic interest coverage debt leverage and net worth covenants in there, and at the end of September, we have met all of our debt covenant requirements.

Prashant Bhatia – Citigroup

And non-operating or the non-cash flow investment losses wouldn't count against you in that case anyway right?

Cris Wasiak

It would, it's a factor in the net worth calculation.

Prashant Bhatia – Citigroup

Okay.

Cris Wasiak

(inaudible) OPI.

Prashant Bhatia – Citigroup

Okay. And then in terms of the –

Cris Wasiak

Remember, the debt is not at the public company. The debt is, the debt itself is holdings.

Prashant Bhatia – Citigroup

Yes, I was looking from a debt coverage point of view, just saying they don't penalize you for non-cash flow related losses, is that correct? In the way your covenants are structured?

John P. Calamos, Sr.

Correct.

Prashant Bhatia – Citigroup

Okay. And then in terms of the buy back, again, I know you're conserving cash on the one hand with the dividend, but is there – should we just consider that on hold right here or would you use some of the money being saved from the dividend to potentially buy back?

John P. Calamos, Sr.

No. We're, we're not considering a buy back at this point.

Prashant Bhatia – Citigroup

Okay. Thank you.

John P. Calamos, Sr.

Okay.

Operator

Gentlemen, do you have any closing remarks?

John P. Calamos, Sr.

Yes. Thank you all for joining us this afternoon, and if you do have questions feel free to give us a call. Thank you all.

Operator

Thank you for attending today's conference. You may now disconnect.

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