VRTS

Business Context and Reporting Period

Company: VIRTUS INVESTMENT PARTNERS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 a spin-off from The Phoenix Companies, Inc. (PNX) on December 31, 2008. The business is heavily dependent on assets under management (AUM), which are sensitive to market volatility and investor flows.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by 45.2% ($45.2 million) compared to the prior year. This was primarily driven by a 29% decrease in AUM ($9.2 billion) due to market declines in late 2008/early 2009 and the exclusion of Goodwin Capital Advisers, Inc. (spun off in Dec 2008).
• Expense Reduction: Total operating expenses decreased by 56.3% ($56.3 million). Significant reductions occurred in employment expenses (down $16.5 million) and intangible asset amortization (down $11.3 million). The 2008 period included a $10.5 million non-cash intangible asset impairment charge not present in 2009.
• Improved Loss Position: While the company remained unprofitable, the net loss attributable to common stockholders narrowed by $2.6 million year-over-year, driven by aggressive cost-cutting measures that outpaced revenue declines.
• Asset Flows: Net outflows of $0.5 billion occurred in the first six months of 2009, compared to $6.5 billion in the same period of 2008, indicating a stabilization in investor redemptions despite market volatility.

Outlook, Risks, and Management Commentary

• Liquidity and Refinancing: Management is in the process of securing a new senior secured revolving credit facility (up to $30 million) to refinance the existing $18 million note payable maturing in December 2010. The existing note carries a 9% interest rate and strict covenants. Failure to close the new facility could lead to covenant breaches.
• Preferred Stock Dividends: The company has accrued $1.8 million in dividends on Series B Convertible Preferred Stock (held by Harris Bankcorp) for the first half of 2009. These were declared in August 2009 and are expected to be paid in Q3 2009. Payment is subject to EBITDA limitations under the debt agreement, for which a waiver was obtained.
• Market Risk: Management warns that continued volatility or declines in equity markets will negatively impact AUM and fee revenues. The company expects revenue decreases in the second half of 2009 compared to prior year periods absent significant economic improvement.
• Cost Structure: The company has reduced headcount by approximately 27% compared to the prior year to align costs with lower revenue levels. Further cost reductions are limited as fixed overhead remains.
• Tax Position: A valuation allowance of $108.6 million has been recorded against deferred tax assets, as management believes it is more likely than not that these assets will not be realized post-spin-off.

Investor Verification Checklist

• Debt Refinancing Status: Verify the successful closing of the new $30 million credit facility to ensure compliance with the existing note payable covenants and avoid default.
• AUM Trends: Monitor quarterly AUM reports to assess if market appreciation and net flows are sufficient to stabilize revenue streams.
• Preferred Dividend Payments: Confirm the payment of the accrued $1.8 million preferred dividend and monitor future quarterly dividend declarations against EBITDA constraints.
• Intangible Asset Valuation: Review future impairment tests for goodwill and intangible assets, as market conditions could trigger further non-cash charges.
• EBITDA Performance: Track Adjusted EBITDA (reported as negative $2.2 million for the six months ended June 30, 2009) as a key metric for debt service capability and dividend eligibility.