Calamos Asset Management Inc. Q1 2009 Earnings Call Transcript

Calamos Asset Management Inc. (CLMS)

Q1 2009 Earnings Call

April 30, 2009 5:00 pm ET

Executives

John P. Calamos - Chairman of the Board, Chief Executive Officer

Cristina Wasiak - Senior Vice President, Chief Financial Officer

Mark Infanger - Vice President and Corporate Controller

Rick Smith - Treasurer

Analysts

Cynthia Mayer - BAS-ML

Robert Lee - Keefe, Bruyette & Woods

Craig Siegenthaler - Credit Suisse

Marc Irizarry – Goldman Sachs

[William Capp]

Presentation

Operator

This presentation may contain forward-looking statements relating to future events, future financial performance, strategies, executions, the competitive environment, and regulations. Forward-looking statements are based on information available at the time those statements are made and on management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause annual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.

Such risks and 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 retail distribution channels, damage to our reputation, fluctuations in the financial market, and the competitive conditions in the mutual fund asset management and broader financial services sectors.

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

(Operator Instructions) Mr. Calamos, you may begin your conference.

John P. Calamos

I'm John Calamos Sr., Chairman, Chief Executive Officer, and Co-Chief Investment Officer. I'd like to thank you for joining us on the Calamos asset management first quarter 2009 earnings call. We appreciate your interest and for taking the time to be with us today. Joining me today are Chris Wasiak, our CFO, Rick Smith, our Treasurer, and Mark Infanger, our Controller. I would like to start by discussing some central management themes and provide a high-level review of our financial results. Chris will then give greater detail on our financials. And before we open the call for Q&A, I'll come back to recap our investment performance and discuss our market outlook.

On slide four, some of the areas of focus and central themes are listed. While we continue to adapt to this difficult market environment, we believe that we have been successful in responding to the worse financial crisis since World War II.

We reduced our outstanding debt, we negotiated our debt covenants, we reduced our expense structure, and we effectively managed our corporate investment portfolio and for the first quarter of '09 we've generated net gains. You'll see that and Chris will discuss the non-operating income of $12.3 million which was generated during the first quarter.

Each of these actions has helped us to strengthen our capital structure, build liquidity, and provide us with stability that we need to re-grow our business. We believe that the efforts undertaken by our management team have been validated by S&P and that they affirmed our investment grade rating of triple B plus in the midst of one of the most difficult market environments in history.

While we're proud of the results today, we're not satisfied because we believe additional opportunities for improvement exist. We are committed to reducing capital project and streamlining the use of our IT resources. Our current focus is on replacing fixed expenses with a more variable structure where our middle and back office operation presents a potential of opportunity. We are committed to diversifying our distribution which remains a critical focal area.

We made significant investment in building our institutional distribution channel capabilities and are continuing to see these efforts bear fruit. Inflow into these strategies is grown in our pipeline remains very good. We have positioned the company for growth by expanding retirement platform participation and off-shore distribution. We recently put feet on the ground in Europe by hiring a Senior Vice President to focus on intermediary and retail markets in the U.K. and continental Europe.

I'll elaborate on our investment performance in market outlook shortly, but it's important for us the fact that every strategic decision we make revolves around doing what's best for our client and delivering superior, long-term risk-adjusted investment returns. We are focused on that as an investment shop and we're focused on the long-term in providing the returns to our investors.

Our long-term performance continues to be strong and is supported by the recent recognition that we received from Lipper Calamos Growth Fund ranked number one in the Lipper Equity Performance Analysis Service for the 15-year period ending 12-31-08 for the multi-cap growth category. Calamos Market Mutual Income Fund and the Calamos Convertible Fund both ranked number one in the Lipper Equity Fund Performance Review for the 10-year period 12-31-08 and the Equity Market Mutual Fund in the convertible security fund category.

The next slide, number five, we'll go over our financial results. As of March 31st of this year, assets under management were down 2% at $23.5 billion and down 43% from March 31st, 2008 a year ago. The year-over-year decline is primarily attributed to the stark decline in global financial markets which we experienced during the fourth quarter of '08.

First quarter revenues were $59.6 million down 46% from first quarter of '08 and down 11% from the fourth quarter of '08. Operating income was $13.2 million in the current quarter. This compares to an operating income of $44.4 million in the first quarter of '08 and $21.4 million in the fourth quarter of '08. We believe that operating results are a better indication of our core business. Diluted earnings per share were $0.17 per share for the quarter versus earnings per share of $0.02 for the year earlier period and a net loss of $1.24 for the last quarter.

Page six discusses our flows trend. Flows improved substantially during the first quarter and continue to trend positively. During the quarter, our convertible fund and our two dedicated fixed income funds high yield had total return bond fund generated positive cash flows. Interest in the convertible fund was $624 million first quarter of '09 $979 million over the last two quarters remain strong as does the investor appetite for traditional fixed income products with a gain of $69 million.

Investor confidence appears to be returning as the interest in our equity funds has increased substantially over the recent term. Our investment into institutional distribution continues to bear fruit. We generated net inflows from our institutional clients during the first quarter. These sales are the results of efforts initiated several months ago as the typical lead time for institutional assets is much longer.

While we are happy with the recent production, our expectations remain high for the future as our [inaudible] flow remains very solid. The second quarter's off to a good start so far this month. We have generated positive net flow across all products.

Slide seven depicts our assets under management by asset class in line with the flows and defensive position of the asset class. Convertibles continue to comprise a greater portion of our AUM, nearly doubling from the percentage from the first quarter.

At this point, I'd like to turn it over to Chris for her review of the numbers.

Christina Wasiak

As John mentioned, AUM at the end of March was $23.5 billion which is down 2% from the end of 2008 and down 43% from a year ago. Average assets for the quarter were $23.1 billion which is a decrease of 9% compared to the $25.3 billion in the fourth quarter of '08 and a decrease of 45% compared to the $41.9 billion in the first quarter of 2008.

Equity strategies comprised 37% of our assets as of March 31 compared with 47% a year ago. Convertible strategy grew from 11% to 20% of our AUM. To recap the more detailed flow information just recently presented by John, net flows improved significantly from the fourth quarter. Net outflows decreased to $431 million compared to net outflows of $2.6 billion and $343 million in the fourth quarter and first quarter of 2008 respectively.

Mutual fund net redemptions for the quarter were $190 million compared with net redemptions of $2.1 billion and $449 million in the fourth and first quarters. This improvement was highlighted by net purchases into the Convertible, High Yield and Total Returns Bond Fund.

As we have previously discussed, the outflows reported for our Closed End Fund, for the current quarter represent a reduction of leverage used by the fund. Within separately managed accounts, net outflows were $241 million for the quarter compared to net redemptions of $490 million in the fourth quarter 2008, and net purchases of $106 million in the first quarter of 2008.

Turning to revenues on the next slide, total revenues were $59.6 million for the first quarter 2009 on management fee revenues of $42 million, both down 11% from the fourth quarter of 2008, and 46% from the first quarter 2008. These decreases were primarily attributable to our lower average assets under management. Our management fee rate for the first quarter 2009 was 73.7 basis points, which is down slightly, but in line with our future expectations.

I should note that two management fee waivers are set to expire during the second quarter of 2009 on two of our closed end funds. So you will see our management fee will increase by seven basis points on the Convertible Opportunities and Income Fund. Leading to an increase $450,000 of annual fee revenue. And our management fee will increase by two basis points on the Convertible and High Income Fund, leading to an increase of $175,000 of annual fee revenue.

On slide 11, you'll see that first quarter 2009 operating income was $13.2 million with a 38% decrease when compared to fourth quarter 2008 and a 70% decrease from the first quarter of 2008. Operating margin was 22.1% for the first quarter 2009 compared to the operating margin of 32.1% for the fourth quarter and 40.1% for the first quarter 2008.

So we're certainly not in favor of these depressed operating margins. We do believe that our margins have held up well relative to our peers. And believe that significant operating leverage exists in our business model to support asset growth.

On the next slide, I'd like to provide a more detailed review of changes in our expense structure. Slide 12, total operating expenses of $46 million for the first quarter 2009 represented a 2% increase from the fourth quarter 2008 and a 30% decrease from the first quarter of 2008. Compensation expense was the primary driver of the expense increase from the previous quarter.

To look at compensation expenses, they increased to $18.1 million in the first quarter of 2009, from $14.5 million in the fourth quarter. This increase was largely attributable to adjustments to performance related compensation accrual which were unusually low in the fourth quarter of 2008. While we had adjusted our incentive accruals downward in the third quarter 2008, the final payouts for the year were even further reduced reflecting the collapse of the global financial market.

Similarly, there were also reductions in the final profit sharing amounts from the level that had been accrued through the third quarter. Additionally, as you compare quarter-over-quarter expenses, there are also some first quarter 2009 one-time expenses which have been incurred whose impact has exacerbated by the effect of the true up of incentive reductions that we did realize in the fourth quarter of 2008.

During the current quarter, we somewhat increased our incentive comp and performance related accruals from 2008 level. Although current accruals represent increases over the 2008 payouts, they remain significantly under our potential level, and are expected to fluctuate with changes in our business results as well as industry conditions.

Finally, note that first quarter compensation expenses also include the normal, incremental tax related costs of approximately $1 million, which is associated with our annual bonus payments that are made in February. We also recorded severance related expenses of nearly $800,000 during the first quarter. Neither of these expenses is expected to recur in the second quarter.

Certain operating expenses fluctuate with the changes in assets under management such as Distribution Expense and Supplemental Compensation Expense, which are expenses that we do report within Marketing and Sales Promotion Expense.

Specifically, Distribution Expenses up $12.5 million in the current quarter, decreased from $24.2 million the prior year quarter, and from $13.9 million in the fourth quarter. Marketing and Sales Promotion Expenses of $2.5 million in the current quarter decreased from $3 million in the prior year quarter, and Supplemental Compensation payments decreased with the assets under management.

Page 13, effective January 1, accounting guidance requires changes in the presentation and the terminology used to describe minority interests, which are now referred to as non-controlling interests. This change impacts the way that we present our Income Statement and also impacts comparability of non-operating activity to prior periods.

The table on this slide is presented in a format consistent with our historical presentation and met the non-controlling interest in partnership from our non-operating activity. Note however that this presentation does differ slightly from the required presentation that you'll see on the face of our income statement within our earnings release as well as other public filings.

Non-operating income was $12 million for the first quarter of 2009, compared to a net loss of $215 million for the fourth quarter of 2008, and the net loss of $42 million for the first quarter 2008. Our aggressive pre-payment of $400 million in outstanding debt during December 2008 lowered interest expense by $6.2 million from the prior quarter.

Investment in other income was $14.1 million during the recent quarter, reflecting net gains on the portion of our Investment portfolio that flows through the P&L. Keep in mind that not all changes in our Investment portfolio impact current earnings as approximately two-thirds of the change in value is recorded directly to equity.

Slide 14 discusses the sources of liquidity. In the current market environment a premium has been placed on liquidity and overall our financial position remains highly liquid. We continue to manage our liquidity in a portfolio of investments, which is comprised primarily of cash, investment securities and partnership investments. We expect returns from our portfolio to compliment our overall return for our shareholders.

As you can see on the table, investment securities decreased by $11 million since year end, which is a result of a net positive cash out of a portion of the options contract used to hedge our portfolio. This contributed to the increase in our cash position. And you can see that in the table as cash equivalents increase over the two periods. Investment Securities have decreased.

In part, the decrease in investment securities has been off set by the net market appreciation in the portfolio. Our total portfolio increased in value during the first quarter of 2009 by $27.2 million or 10%. And again, this is comprised of both market appreciations as well as additional cash generated through business operations.

Slide 15: Overall, our financial condition is very strong. This, coupled with our successful efforts to restructure our debt provides us the stability to weather the current economic conditions. However, because Calamos Holding is the borrower of debt, and because our ownership structure creates complexity, there is little transparency in determining Calamos Holding's compliance with the terms of its debt. So we thought it would be helpful to provide the current status of our covenant compliance.

In December 2008, we restructured the debt covenant in concert with the debt prepayment in late December. The lowered debt, adjusted covenant and our first quarter performance put us well ahead of the requirement for each measure. The interest coverage ratio minimum is 3.0 and we currently exceed that measure by more than two times. The debt leverage ratio maximum is 3.0 and we are comfortably less than 1.0 times leverage.

The new covenant from the debt restructuring is the investment coverage ratio, which stipulates that we need to maintain cash and investments in excess of 1.175 times the amount of debt. Our quarter end measure is 2.41 times. Said another way, our investment portfolio would need to depreciate by nearly 60% from those levels to create a violation.

There are also two net worth covenants now in place. One is maintaining a minimum net worth covenant of $160 million, from which we currently have a surplus of more than $60 million. The other net worth covenant limits equity distribution to $5.3 million until holdings net worth exceeds $225 million. We are on track with our projections to the note holders to achieving that level.

One final note on slide 16 before I turn the presentation back over to John, here we present our diluted earnings per share calculation as reported and on a pro forma basis, so that you can visualize the impact of recent changes that were made to de-unitize the ownership of Calamos Holdings, LLC.

In our last call, we discussed the information statement that we filed pursuant to Reg 14-C, in which we revised the Class D voting rights and amended the ratio of Class A common stock that the Calamos family will received in exchange of its interest in Calamos Holdings.

As you may recall, these changes required the Calamos family to exchange its ownership interests in Calamos Holdings for Class A common stock based upon a fair value approach, ensuring that the [CAM] shareholders retained the value of their wholly owned assets such as the deferred tax assets established at the IPO. This change does not affect our operating results, but as you can see in the table, it does impact the calculation of our diluted shares outstanding and diluted earnings per share.

Under the fair value approach, the family's exchange of ownership will always be anti-diluted income or, in other words, increased earnings per share, and in accordance with the technical accounting rules, the exchange must therefore be excluded from the fully diluted share calculations. Therefore, going forward, our diluted shares outstanding will only reflect the impact of the long-term equity compensation awards.

With that, I'd like to turn the call back to John.

John P. Calamos

Thank you, Chris. First of all, let me just talk a little bit about the market overview and outlook, as some bullet points I've shown on slide 18. The current market environment during '09 feels closer to what I would consider a normal slow down environment than did the last half of '08. Systemic risk seems to be behind us and investors are looking for opportunities. Corporate bond issuance is very vibrant companies are able to access capital away from the banks.

We're seeing that, obviously, in convertible issuance, as well as straight corporate bond issuance. Liquidity is coming back. Mark-to-market is being eased the Fed Treasury is very aggressive in providing money to the system, so those are all positives, in a normal slow down environment. We're also seeing some of the dislocations of asset classes are correcting, like the convertible valuation gap seems to be closing as well. That affects us, in the sense of the opportunities that we see.

We've listed a few on page 19. Convertibles are widely discussed and there's a lot of interest in convertibles, as a defensive strategy. Calamos Investments, over the years, we have performed well in the most difficult market environments. It's been a keystone of our investment philosophy over the years, whether it's 1987 or 1990 or 2001, 2002 period, we've performed well, in the most difficult markets, not only on a relative basis, but very often on an absolute basis.

During the first part of 2009 that again has been the case, so we do kind of distinguish 2009 as a bit of a more normal slow down environment. We're seeing opportunities in the fixed income market, high yield, total return bond fund strategies are of interest to investors.

Growth valuations are very attractive here. They've posted strong results so we're seeing very good interest in there. The valuations still are very favorable, in those areas, so we're still positioned well there.

Our market neutral income fund offers a hedge strategy for what we feel will continue to be a volatile environment, and in many of these areas, our experience goes back many, many years into the 80s. We've been very active in communicating with clients and communicating with the financial advisory community, and we continue to focus on our distribution channels and discuss that with them.

I thought I'd just give you a quick update, as of yesterday, give you a sense of performance of some of our core investment products. Growth stocks, over the broad market, our growth fund is up 12.7%, 1500 basis points over the benchmark the S&P or 290 basis points over the Russell Midcap Growth and 780 points over the Russell 3000 growth, so it's come back very nicely.

Convertibles also are doing very well, and the convertible fund is up 9 1/2% year-to-date, as of yesterday. And even with the market correction, during the correction, the convertible fund was showing positive results, our growth and income strategies, the Calamos G&I Fund up 6.9%, 900 basis points over the S&P.

Global G&I up 6 1/2%, some 180 basis points over the [MSC World]. And also high yield, we're seeing good opportunities in high yield. Our high yield fund is up 15 1/2% year to date. Total return bond fund, one of our newer strategies showed good performance last year; it continues to perform well, up 1.7% year-to-date, 130 basis points over the Barclay Ag Bond Index.

And another new strategy, the emerging markets, our Evolving World Growth Fund is up 10.3%, 1165 basis points over the [MSC World]. So we feel that we're well positioned going forward. On slide 20, I won't go through all this, but on the mutual fund side, you can see the Calamos Growth Fund is the top 18% in moderate growth category.

Global Equity the 8%; our newer offerings top 5%, and total return bond fund, Evolving World, top 2%; and the Calamos Growth Fund, top [inaudible] in its category, one, three, five, ten year period. What's significant there, everybody's talking about the loss dictate in equities over the last ten years, for example.

S&P has returned nothing, in fact is in negative territory, where the Calamos Growth Fund is actually annualized out at almost 5% over that period of time and its beat the S&P in one year, three year, five year, and ten years. So, again, it shows it's defensive characteristics. Growth Fund, top 1% over the past ten years. I talked earlier about the Lipper Awards and the Growth and Income Fund, top 3% in both growth and growth of income top 1% over the last 15 years.

On page 21, Risk Adjusted Performance is shown. All the funds have good risk adjusted performance; these are our institutional strategies, on page 21. And on slide 22 shows the strategies from inception and on slide 23, it shows our mutual fund strategies, since inception against other corresponding benchmarks.

So at this point, we can open it up to Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Cynthia Mayer – BAS-ML

Cynthia Mayer – BAS-ML

Just circling back to the corporate portfolio, how hedged is that at this point or I guess I should say how hedged the part that actually runs through the income statement?

John P. Calamos

The portfolio remains hedged, Cynthia. So we continue to keep a hedged position in the portfolio and with, we're not making any market timing decision here at all. We continue to be focused on strengthening the balance sheet and making sure that we have ample room against our covenants. We have built up almost $100 million in cash on the balance sheet. So we're really focused on that. In this environment the hedge has produced some profits for us as well. So the hedge strategy we're utilizing here has worked well.

Cynthia Mayer - BAS-ML

So, the gains that you had in the first quarter, what were those composed of? Should we think of that as something that won't recur?

John P. Calamos

Well, I don't think we can, I guess I wish I could tell you every quarter we could lock in gains like that. A lot depends on the volatility of the market, other factors. So, I don't think that we can tell you that every quarter we can produce those gains but we do remain hedged in here.

Unidentified Corporate Participant

And the one thing to follow on Cynthia is we do have a bit of a disconnect as John had indicated. The portfolio is hedged in its entirety. We manage the portfolio in aggregate but 2/3 of that portfolio, the change, the gains etc. will run through OCI hitting equity only.

The other third will run through the P&L and because we don't elect hedge treatment, all of the hedges gains and losses run through the P&L. So as we start to release more information with the queue etc. you'll be able to better gauge the changes of the total portfolio, but as John indicated, it's difficult for us one to prognosticate, two determine where those changes in the portfolio will be seen, whether it's equity or income.

Cynthia Mayer - BAS-ML

And then also just to clarify something you said. You mentioned potentially outsourcing or making more variably your middle and back office operations. Is there any way you can give us a sense of what the impact on expenses would be of that?

Cristina Wasiak

In short-term Cynthia that's obviously going to be an increase to the expenses as we go through the transition process and over the long-term typically that is a 6 to 12 month process from when you initiate the program. And then going forward, we'll see, we expect to see a slight reduction in the expenses but more importantly we'll start seeing a variability with the expenses as our other investments, I'm sorry, as our AUM varies then the expense associated with the operation should also be varying with that.

Cynthia Mayer - BAS-ML

And in terms of the headcount reductions you've had. Are those pretty much in the numbers by now or was there only a part of that in the first quarter?

Cristina Wasiak

Only a part of that, the last reduction of course was in January so you won't see the full impact of that reduction until the second quarter numbers.

Cynthia Mayer - BAS-ML

And last question is on closed end funds. Can you go over again what the deleveraging amounted to and if the markets come back is there any chance here that you would re-leverage?

John P. Calamos

Yes. We have the capability of doing that. Obviously what we're focused on that is to make sure that we're delivering the distribution to the common shareholders. So as you know Cynthia there are different ratios there that we need to abide by. As you can see in last fourth quarter and third quarters, we did reduce the leverage in those and it was a lot less in the first quarter of this year. So we do have the capability to leverage it up if we think it's opportunistic at this point. But most of the leveraging we hope has occurred already.

Cristina Wasiak

And the specific amount that we reported for the first quarter was $70 million.

Operator

Your next question comes from Robert Lee.

Robert Lee - Keefe, Bruyette & Woods

I have a quick question on comp. I mean Chris you went through some of the moving pieces there in this quarter relative to last quarter, but even so the sequential increase seems pretty large definitely compared to what a lot of your competitors experienced in the quarter-to-quarter. This kind of begs the question when you talk about bigger accruals for performance, are your performance accruals tied at all to earnings of the company or are they more driven away from that? Whether it's, I don't know, assets or some dollar amount based on how much you're beating a benchmark?

Cristina Wasiak

We have a couple of different components that we use. We have the corporate scorecard that we use that has six different metrics associated with it that is kind of a basis for calculations for the comp accrual. But I would remind you that the fourth quarter 2008 really did see, in our case, significant credit as we took in the full year impact of decreasing the compensation accruals.

We had been accruing in the first couple of quarters at a very high level and then dropped that dramatically. And when you're looking at the fourth quarter and you have that full year impact of that drop, I think that's a lot of why you're seeing this bigger increase into the first quarter.

Robert Lee - Keefe, Bruyette & Woods

Okay. And could you maybe talk a little about, let me try to understand it correctly, were you're looking to move some of your expense space to more variable. What kind of more corporate expenses that have the actual flexibility to tie to assets under management? I understand there's some kind of administrative, fund administrative fee that may be asset based that really wouldn't affect your corporate P&L. So could you maybe go through a little bit of what some of those things may be?

John P. Calamos

Well I think what we're referring to is having our own back office as there is a high level of fixed expenses associated with our own back office that is not variable, the head count and other factors like that. So as we go to outsourcing, that part of our business, what we think we gain is to make that a much more variable expense.

And it has another additional focus for us here. Instead of focusing on the back office functions, we'll be able to focus more of our resources more on the investment parts of our business and the other core parts of our business. We think it will position us much better in the future.

Operator

Your next question comes from Craig Siegenthaler.

[Beva Botcka] for Craig Siegenthaler - Credit Suisse

This is actually [Beva Botcka] for Craig. I just wanted to talk about the convertible fund. How much of the improvement in the flows in this quarter was actually driven by the convert's fund?

Cristina Wasiak

We don't release that detail of information at this point, we don't break down our funds slope by fund. I'm trying to…

Unidentified Corporate Participant

So, I think if you reflect on John's comments, John had indicated in his commentary that the Calamos Convertible Funds contributed about $624 million in the first quarter to the net flow.

[Beva Botcka] for Craig Siegenthaler - Credit Suisse

Thank you and I guess the next big question and this is kind of a big picture, what impact do you see if the recent broker-dealer consolidation to your distribution strategy? Do you see yourself moving to a kind of more independence or concentrating your efforts with a couple of broker dealers?

John P. Calamos

Actually, it's actually broadening out our distribution rather than narrowing it. Very often you do have financial advisors that we've literally done business with for 10 or 20 years and as they move to independent sources it's really opening up other distribution channels. So we're more focused today on a broader array of distribution channels that we were say a year ago or two years ago.

[Beva Botcka] for Craig Siegenthaler - Credit Suisse

Okay. And last question is a little more specific. What is the total debt at the holding company level right now?

Cristina Wasiak

One hundred and twenty five million.

Operator

Your next question comes from Marc Irizarry.

Marc Irizarry – Goldman Sachs

Just in terms of the gains that you had in other income, it sounds like the hedge, so the hedge is flowing through the P&L but the actual investment gain or loss is flowing through equity. Can you just confirm that? And also then was there an offsetting loss in the other, in the equity account? Can you just run through that again?

Cristina Wasiak

What flows through the P&L is the any real live gain or loss whether it's on the hedge or not. In this quarter you see the real live gain on the hedge. There also, all the unrealized gain/loss associated with the hedge will always flow through the P&L. So you'll a piece of that. You'll also see any impact on our CFS Security as well as the unrealized gain or loss on any hedge or partnership. Those pieces are all flowing through the P&L. What's flowing through the balance sheet is simply the unrealized gain or loss on the remainder of the portfolio.

Marc Irizarry – Goldman Sachs

And can you just break the…

Cristina Wasiak

It will be little bit clearer Marc when we publish in the queue because there'll be more details there.

Marc Irizarry – Goldman Sachs

Okay so in the queue you'll give a little more disclosure as what were unrealized versus realized and what the components were?

Cristina Wasiak

Yes. Absolutely.

Marc Irizarry – Goldman Sachs

And then are you at all concerned about the volatility, I mean obviously the goal here is to lower the inherent volatility of the investments via some of the hedges but it's creating a bit more earnings volatility. What are your thoughts on that?

John P. Calamos

Well the hedge is set up to really protect the balance sheet at this point. Remember Marc that part of the corporate investments here was to see new products. And new products or even current products especially one only products there is an inherent volatility in those. So the hedge is really set up to dampen that volatility.

Marc Irizarry – Goldman Sachs

Okay John. And then could you just give a little more color on the convertible market? What your seeing out there right now? Incentives to institutional demand, you know we're hearing from some others that the activities many be focused on fixed income, I presume that's something that you're seeing, and the convertible strategy as well?

John P. Calamos

Yes we are seeing, there is as much interest in convertible today than I've seen in a very, very long time. You do have a couple interesting convertibles. One is institutional money may be a little bit hesitant to rebounds to equities. But they still want to have equity participation. So we're seeing them look at convertibles as a defensive equity strategy. They're still a fixed income but they have equity participation.

We think that's a very valid way of looking at it. We manage towards that investment objective. So the interest is very high on that side, mainly from the institutional market but even somewhat from the retail market. The other thing about convertibles in general is that there were almost no issues through from September '08 to maybe the middle of January this year.

We had a couple of new issues in January and February picked up the pace, March picked up the pace, good pace here in April. I think there was three new issues yesterday. So issuance is picked up quite a bit. I think it's probably $7 or $8 billion year-to-date, as is corporate bond issues as you know, so a lot of refinancing going on.

The debt spreads as to were they're at today are wide as you know. So the advantage of issuing a convertible to lower your debt coupon is very good in today's market. And typically when those debt spreads were high, we've seen a lot of convertible issuance and we hope that issuance continues in here. So a lot, and it's a good cross section of companies, right across the board, in different sectors and different industries.

Operator

Your next question comes from [William Capp].

[William Capp]

I just want to back to margin for a second. Now John, I guess from some of your prepared remarks you mentioned that the models built for significant addition of assets which would imply some nice margin expansion, then also heard Chris talk about the next 6 to 12 months or so in terms of maybe some dampening effects against that. As you look at the business, I guess the theoretical question I have is as assets rebuild are you able to get back to the 40% margin level that you enjoyed just a couple of years ago?

John P. Calamos

Well I think we're set up for a good leverage in the business from a margin point of view should the assets rebound. So and we feel that with the actions we're taking, through the outsourcing project and that our expenses will be variable but. If the question is do we have leverage if the assets were to increase substantially, the answer is yes we do.

[William Capp]

Then you mentioned that you're seeing some positive flows in April. I was writing as quickly as I could but I may not be keeping up quite right, could you sort of walk through were you're seeing the volume, is it retail versus institutional and maybe break it down from there?

John P. Calamos

Well we're seeing much more activity on the institutional side then we're seeing on the retail side, which as you know is very typical at this part of the market cycle. Institutional, we're seeing a lot of investors looking at opportunities. You know there is kind of a saying you should not let any crisis go unattended in the sense of looking for opportunities.

So there is a search among institutional investors looking for asset classes that are undervalued and we're finding that our pipeline on the institutional side remains very, very good. So the flows are really more on the institutional side. And as you may recall about a year ago or maybe a year and a half we did strengthen our institutional distribution efforts by really expanding that part of our business and that's proven to be very valuable in this market environment.

[William Capp]

So just to box in your comments, you mentioned you were positive in all categories. So is it that the institutional business is offsetting attrition elsewhere or you're seeing inflows, not only institutional bucket but also in the retail SMA and other categories within that?

John P. Calamos

Yes. Well there is still kind of a flow of funds and gross sales and redemptions and that, but we're seeing positive flows more on the institutional side.

Cristina Wasiak

Bill, one comment on your, when I talk about the 6 to 12 months of incremental expense that would be starting from the point and time when actually kick off the project. We have not done that. So I don't want you guys when you start building your models and setting your expectations to think that will be second quarter impact.

[William Capp]

You have a sense of when that might be?

Cristina Wasiak

No. I think we'll be able to tell you probably in our next call up, we'll be able to tell you when.

Operator

Your last question comes from Robert Lee.

Robert Lee - Keefe, Bruyette & Woods

I had a question just on the balance sheeting and capital. Understanding that you're looking to protect the balance sheet I mean considering that it would seem to me that's mainly because of the net worth covenant in your debt which for an asset manager seems kind of misplaced to some degree since it's not balance sheet-driven companies, so cash flow generative.

I mean would – it seems like you're going through a lot of machinations, if that's the right word, to meet that whether it's hedging the portfolio and putting the volatility in the income statement. If that's what's causing you to go through all this would it be simpler or I don't know if lenders would do it actually, get rid of the net worth covenant?

John P. Calamos

I think what's going on, as we all learned in this period that covenants matter a lot and when you're in a period where banks and others would rather call a loan than negotiate, I think our action that we took the fourth quarter would be proactive and that helped us a lot. So you're right about how you're looking at that, but we're in a mode of both protecting the balance sheets, strengthening the balance sheet and really grinding out a return on our investments as well. So we're not – we hopefully will in a hedged way continue to grind out an investment on the portfolio.

Robert Lee - Keefe, Bruyette & Woods

And maybe as a follow-up on the capital front, I mean you obviously are very cash flow generative. Assuming, looking ahead, making forward-looking statements a couple of quarters from now, assuming cash flow is here or greater if the markets continue to rebound, how are you thinking about the use of your excess cash flow? Well, obviously your dividend payout ratio is still relatively high, but would you consider to go back to some incremental share repurchases? I mean what's kind of your own cash flow priority once you kind of work through this period?

John P. Calamos

Well at this point I think we have to get there to decide among those various choices. Right now we continue to strengthen the balance sheet. As I mentioned we do have almost $100 million in cash and we will continue to look at ways that we can utilize that capital. I think what we saw last year was because we had a very liquid portfolio we were able to pay down the debt and maintain our BBB plus rating and do all those factors.

So we are focused on really making sure that we continue to have a strong balance sheet in here, but still trying to grind out a return that makes sense in a cautious fashion.

Robert Lee - Keefe, Bruyette & Woods

Well, thanks for taking my question.

John P. Calamos

I want to thank you all for participating in our call today. If you do have any questions feel free to contact us. Thank you very much.

Operator

This does conclude today's conference call. You may now disconnect.

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