VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Virtus is a multi-manager asset management firm providing investment management, distribution, and administrative services to retail and institutional clients. The company operates as a standalone public entity following its spin-off from The Phoenix Companies, Inc. (PNX) on December 31, 2008. Harris Bankcorp owns 100% of the Series B Convertible Preferred Stock.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Decline: Total revenues decreased by 32% ($14.4 million) for the three months and 42% ($59.6 million) for the nine months ended September 30, 2009, compared to 2008. This was primarily driven by a significant decrease in Assets Under Management (AUM) due to market declines in late 2008 and early 2009, and the exclusion of Goodwin Capital Advisers (spun off in Dec 2008).
• Operating Expenses: Operating expenses dropped significantly year-over-year. For the nine months ended Sep 30, 2009, expenses were $91.7 million compared to $589.6 million in 2008. The 2008 figure included a non-cash goodwill and intangible asset impairment charge of $432.2 million, which did not recur in 2009.
• Profitability: The company reported a net loss of $7.9 million for the nine months ended Sep 30, 2009, a substantial improvement from the $349.9 million net loss in the same period of 2008 (which included the massive impairment charges).
• Debt Restructuring: On September 1, 2009, the company entered into a new $30.0 million senior secured revolving credit facility, repaying the previous $18.0 million note payable in full.

Guidance, Outlook, Risks, and Unusual Items

• Market Outlook: Management notes that while equity markets rebounded in Q2 and Q3 2009, they remain substantially lower than pre-crisis levels. Continued volatility is expected, which may lead to decreased investment inflows and increased redemptions.
• Liquidity: The company believes its cash, marketable securities, and operating cash flows are sufficient to fund requirements for the next 12 months. However, liquidity is dependent on future operating performance and AUM levels.
• Debt Covenants: The new Credit Facility includes restrictive covenants, including a minimum consolidated net worth of $55 million, minimum AUM of $15.0 billion (excluding money market funds), and specific interest coverage and leverage ratios. The company was in compliance as of September 30, 2009.
• Preferred Stock Dividends: The company has $45.0 million of Series B Convertible Preferred Stock outstanding. Quarterly dividends of $0.9 million are cumulative and may be paid in cash or additional shares. $2.0 million was paid in the first nine months of 2009, with $0.9 million accrued as of period end.
• Unusual Items: The 2008 comparative periods were heavily impacted by $432.2 million in goodwill and intangible asset impairments. No such impairments occurred in the 2009 periods.

Investor Verification Checklist

• Covenant Compliance: Verify continued compliance with the new Credit Facility covenants, specifically the $15.0 billion minimum AUM and interest coverage ratios, given market volatility.
• AUM Trends: Monitor net flows and market appreciation/depreciation impacts on AUM, as fee revenue is directly correlated to asset levels.
• Preferred Stock Dividends: Confirm the Board's decision on the payment method (cash vs. shares) for the accrued $0.9 million dividend, as cash payments impact liquidity.
• Deferred Tax Assets: Review the $108.6 million valuation allowance on deferred tax assets; changes in future profitability could materially impact the realization of these assets.
• Related Party Transactions: Note the ongoing financial relationship with Harris Bankcorp, including sub-advisory fees and the earn-out agreement on Insight Funds.