Deerfield Dumps Dividend Obligation

In its recently filed 10-K, Deerfield Capital (DFR) revealed that it has suffered an "exacerbated" strain on liquidity during the first quarter of 2008 (henceforth dubbed the "UBS flu", see this article for explanation) and resulted in the "acceleration of our strategy to decrease investment in AAA-rated non-Agency RMBS and to seek to liquidate other assets to significantly reduce leverage in our balance sheet in an effort to support liquidity needs." DFR dumped $2.8 billion in agency RMBS and $1.3 billion in non-agency RMBS -- over half of its December 31 balance sheet.

Not surprisingly, the asset sales will significantly affect Deerfield's future taxable earnings. The Company warned in the 10-K that:

In connection with REIT requirements, we have historically made regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock. As discussed, we recently sold the vast majority of our AAA-rated non-Agency RMBS portfolio and significantly reduced our Agency RMBS holdings at a significant net loss. We therefore expect our future distributions in 2008 and perhaps thereafter, to be substantially less than amounts paid in prior years.

Additionally, we may pay future dividends less frequently and distribute only that amount of our taxable income required to maintain our REIT qualification. Furthermore, we may elect to make future dividends in the form of stock rather than cash. We may not have adequate liquidity to make these or any other distributions. Any future distributions we make will be at the discretion of our Board and will depend upon, among other things, our actual results of operations.

In other words, Deerfield expects to have a net operating loss carry forward from the asset sales, meaning that there is no dividend obligation and DFR may elect not to pay a dividend at all until the NOL is used up.

Disclosure: none