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Executives

Harris Oliner - Secretary

Chris A. Milner - Chief Executive Officer

James J. Lillis - Chief Financial Officer and Treasurer

Analysts

David Fick - Stifel Nicolaus

Anthracite Capital, Inc. (AHR) Q2 2009 Earnings Conference Call August 11, 2009 9:00 AM ET

Operator

Good morning, my name is Rachel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Anthracite Capital, Incorporated Second Quarter 2009 Earnings Conference Call. Our host for today's call will be Chief Executive Officer, Christopher A. Milner, Chief Financial Officer James J. Lillis and Harris Oliner, Corporate Secretary. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. Mr. Oliner you may begin your conference.

Harris Oliner

Thank you, Rachel. Good morning, this is Harris Oliner. I'm the Corporate Secretary of Anthracite. Before Chris and Jim make their remarks, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. We call to your attention the fact that Anthracite's actual results may differ from these statements.

As you know, Anthracite has filed with SEC reports which list some of the factors which may cause Anthracite's results to differ materially from these statements. Finally, Anthracite assumes no duty to update any forward-looking statements. Chris?

Chris A. Milner

Thank you, Harris and good morning everyone. Obviously the last quarter has seen a number of changes since we spoke last. The market place, if you calibrate it by what's going on the stock market seems to be recovering. The systemic risk that was extremely prevalent at or about the time of the last quarterly call seems to have abated somewhat significantly.

Having said all of that, the commercial real estate sector continues to deteriorate. It is a lagging sector as we know and simply having the economic market place become less negative is not enough to turn a sector like that. So we continue to see very tight lending conditions. We continue to see fundamentals weakening at the property level. The result of those two things is obviously falling valuations.

And one of the most important things I want to highlight in the context that our company and the sector of real estate lending broadly defines is that in this environment we are seeing the stigma of default marginally being eliminated from the considerations of borrowers all around the country and obviously from a lenders point of view that's one of the more negative trends that we see here, taken in context of course with increasing delinquencies. But I think that's stigma is a significant change in the way borrowers are looking at things and something we're concerned about in this market place.

Resulting increases in delinquencies as we outlined in our press release and our 10-Q filings has reduced the company's cash flow. This was to a degree contemplated in our restructuring of our secured lending relationships. We did anticipate obviously that the market place was on a negative trend and was likely to continue as such, although I will acknowledge the degree and speed of the increases in delinquencies in CMBS have been at least this early stage somewhat in excess of our expectations.

So we're seeing declines in cash flow. We have additionally added significantly to our loan loss provisions during the quarter, given the trends that are outlined in the likelihood that we will see continued losses so we are doing our level best to identify the opportunities for potential deterioration, loss provisions being established as a result of that across the board in the quarter, both specific reserves and general reserves as we outlined in our 10-Q filing.

Offsetting these trends to some degree, the company's made significant progress restructuring liabilities. As we disclosed we did close a major restructuring with the secured lenders among other things eliminating the mark-to-market provisions and the facilities and giving us some additional time to further amortize the balances of those facilities and realized on the underlying value of our assets.

In addition, we've completed a number of exchanges covering most of our trust preferred securities and junior unsecured bonds and we are beginning to see a number of holders of our senior convertible bonds come to us to engage in stock for bond exchange transactions and as we've disclosed in our various filings, those transactions are pursuing obviously in all instances of those types of transactions.

What we are attempting to do is reduce the interest expense burden on the company and so, that as we see lower interest revenue from our portfolio where we're able to continue to move forward with the amortization of the senior loans and to continue pushing forward in this very difficult market environment.

Another aspect of the business in this set of circumstances is obviously to aggressively manage our assets. Our asset management team is but completely engaged and very focused on minimizing the amount of loss that the company experiences as a result of default. We've covered the range of potential outcomes obviously in this environment, everything from taking back properties to restructuring and extending positions as well as executing on loans sales where those strategies are most appropriate for the circumstances.

And we continue to see that is we mentioned increasing so that, that work activity is increasing and we expected to be the likely scenario in the coming quarters as we move into -- we hope that the current economic environment in the second half of this year but as I mentioned then in the commercial real estate we'll it's got another six to may be in the 18 months of difficult challenges in the commercial real estate segment in our view.

In some, when you take this what I call negative events on the asset side of the equation and relatively more constructive things that we've been accomplishing on the liability side of the We still are safe to significant challenges without question. We do have more rime to realize upon our assets and manage through this part of the cycle. But as we've disclosed in our 10-Q there are significant challenges in front of us And we are looking forward to manage within those standpoints.

With that as a brief overview what I would like to do is to turn the call over to Jim Lillis who will review the financial results for the quarter and then we will come back and answer your questions.

Richard Shea by the way is not joining us today. He had a bit of a family situation. And so we will carry on without him. But I'll turn it over to Jim and we will like I said come back to your questions at the end.

James J. Lillis

Thanks Chris. As Chris mentioned that the commercial real estate market has continue to deteriorate in the second quarter of 2009. This impacted to the company's earnings during the second quarter as follows: due to rising delinquencies related to the company's CMBS interest income from securities declined by 5.1 million in the first quarter of 2009.

Interest income from commercial mortgage loans declined 2.4 million from the first quarter of 2009 due primarily due three additional loans being placed on a non-accrued status as a result of credit issue.

Also as a result credit issue the company recorded a loan loss reserve of 48.6 million in the second quarter of 2009, 36.1 million relates to forward specific loans and 15.5 million relates to an increase in the company's general loan loss reserve.

The company's 26% equity investment in Carbon II generated a loss of 6.6 million in the second quarter of 2009 primarily due to 18.2 million increase in Carbon II loan loss reserve related to loans in this portfolio. Chris also mentioned restructuring and I wanted to speak to the financial impact of that as well.

The restructuring of the company's unsecured debt reduced interest expense during the second quarter of 2009 and will result in ongoing reduced expense until the earlier of 2013 or until the senior secured facilities are repaid. The new unsecured debt has a coupon rate of 75 basis points compared with a coupon rate of 7.5 to 7.8% for the entire debt.

For accounting purposes the new unsecured debt was issued at a discount to par which will result in appreciation of interest expense. As a result the effective interest rate of approximately 4.5% will be reflected in the GAAP statement in future period.

Finally, the legal costs of will be restructuring both the secured, non-secured debt is also the increase in the company's general administrative expenses during the second quarter of 2009.

With that I will turn back to Chris.

Chris A. Milner

Okay. Thank you, Jim. With that why don't we go ahead and open up the lines for question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Joshua Barber with Stifel Nicolaus.

David Fick - Stifel Nicolaus

Good morning,, it's Dave Fick with Josh.

Chris Milner

Hi, Dave.

David Fick - Stifel Nicolaus

Can you walk us through the status of your CDO OCIC test and what's cash flowing and what's not and what's caused the cash flow diversion?

Chris Milner

Sure, one of my reference charts is on page seven in the press release David. What we do there is we provide each of the CDOs cash flow through the company's retained interests in the fourth quarter of '08, the first quarter of '09 and the second quarter of '09. You can first from the bottom the Euro CDO has tripped some of its OCIC tests and I think that there's some disclosure of significance in the 10-Q explaining that.

That particular CDO has stopped flowing cash as of the second quarter. That is an active managed transaction. So there is some prospect of that being resolved with its; it's not something that's cash flowing at the moment. If you look at the next three moving up HY 1 to N3, those are transactions that aren't burdens from the issuer's perspective by tests that can divert cash flow. So we are slowly looking there at the collateral performance in terms of whether or not those three CDOs cash flow.

You can see that -- it's not a whole lot of trend to the numbers although I will tell you, in the last couple of months we are seeing the credit performance in those HY series lost somewhat as you would expect given the delinquencies in the underlying CMBS trust. And then finally CDOs I, II and III are subject to the various SN&C tests (ph) and we have a chart just above that which gives you the various cushion with respect to each of those and I would say in a broad generalization that given those transactions are populated with more seasons collateral '98 through 2004 in aggregate, we've got a little more cushion then we would if there were more new issue deals.

David Fick - Stifel Nicolaus

Okay. Thank you for that disclosure. That's better then we have seen from your peers. Facing that rating agency downgrades would impact in terms of either your restructured delinquencies with your vendors were the availability of the CDO cash flow?

Chris Milner

I think for the most part because as I just mentioned is one end of the cycle. We did a basically the increased leverage in the transactions, and started moving towards CDO structure that had less rating agency dependence, the HY series. We don't have as much of that exposure as we would if they were more actively structured deals.

The one place where it is prevalent is in the Euro CDO because that market is really focused on shorter investments we really had to go with the active structure and therefore deal with the rating agency issues. As it has a lot to do already with that's why that particular transaction is, is shutdown away from the CDO towards the restructurings. We really don't have any rating agency dependency in terms of the way that the secured lender transaction was structured.

What we effectively did there was linked off each individual lender's assets providing them with a 100% cash flow street buffer, better collateral. And then establishing a amortization schedule that we would try to meet in the context of the performance of the collateral as we disclosed in the 10-Q there is, is not our projection some potential but one or more of those amortization targets will not be met at the first hurdle in September.

What that means is that we have to utilize other cash flow at the company level beyond during the assets to bring any individual lender in to compliance. And we have got another full quarter to do that. So, it's not as not meeting a target on September 30 triggers and immediate benefit of it all, it simply means that we have to utilize some of the CDO cash flow to meet those obligations, that's rating agencies specifically driven.

David Fick - Stifel Nicolaus

Okay, I'll jump back. Thank you.

Chris Milner

Thank you, Dave.

Operator

At this time there are no further questions. Gentlemen, are there any closing remark?

Chris Milner

The market price continues to struggle in the face of difficult conditions regarding commercial real estate assets. We are as we have been in the past working very diligently to maximize the recovery of our assets and restructure to the best of our ability our liabilities to be consistent with the cash flows we see in the future. We will continue to do so and we'll report back to you in the coming quarter additional results. We thank for your participation.

Operator

This concludes today's teleconference. You may now disconnect.

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