Business Context and Reporting Period
Company: Cohen & Company Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: July 29, 2010
Reporting Period: Events occurring on July 29, 2010, and subsequent dates through August 2010.
This filing details the entry into a Master Transaction Agreement (MTA) and a Services Agreement with ATP Management LLC regarding the sale of Collateral Management and Administration Agreements for various Alesco Preferred Funding CDOs. It also discloses the creation of a new credit facility and a tender offer for subordinated notes.
Key Financial Metrics and Agreements
Asset Sale (Master Transaction Agreement)
- Total Aggregate Base Purchase Price: $9.5 million for all Assigned Assets.
- Initial Closing Payment: $5.4 million paid immediately for CDO Agreements X through XVII.
- Retained Management Fees: Approximately $450,000 allocated to the Seller at the Initial Closing.
- Contingent Payments (Earnout): Seller entitled to 50% of "Excess Base Case Revenues" over seven 12-month periods (2010–2017). ATP pays 75% of estimated quarterly excess, retaining a 25% holdback subject to offset.
Services Agreement
- Total Potential Fees: Up to $23.0 million over approximately three years ($13.6 million for Alesco X–XVII; up to $9.4 million for Alesco I–IX if assigned).
- Monthly Service Fees (Initial Assignments): $378,285 per month for Alesco X through XVII.
- Term: Until February 22, 2013, or earlier termination.
Debt and Liquidity (Credit Facility)
- New Facility Amount: $14.6 million secured credit facility with TD Bank, N.A. (expires September 2012).
- Structure: $13.3 million term loan capacity; $1.3 million letters of credit.
- Drawdowns: $9.3 million drawn on July 30, 2010. Up to $4.0 million available for a second draw contingent on asset sales.
- Interest Rates: LIBOR + 4.5% (min 1.5% LIBOR) or Base Rate + 2.75%.
- Upfront Costs: $250,000 fee for new facility; $450,000 paid to terminate previous facility.
Tender Offer
- Target: $9.5 million principal balance of unsecured subordinated promissory notes due June 20, 2013.
- Offer Price: $0.80 per $1.00 principal amount, plus accrued interest.
- Expiration: August 26, 2010.
Material Changes Versus Prior Period
The filing does not provide comparative financial statements (revenue, profit, or cash flow) for the prior period. However, it discloses significant structural changes:
- Asset Base: Transfer of management rights for 17 Alesco CDOs to ATP, reducing direct management control but creating a revenue stream via the Services Agreement.
- Debt Structure: Replacement of a $30 million revolving credit facility (expiring May 2011) with a smaller $14.6 million term facility (expiring September 2012).
- Liability Reduction: Initiation of a tender offer to retire $9.5 million in subordinated debt at a discount (80 cents on the dollar).
Guidance, Outlook, Risks, and Contingencies
Outlook and Contingencies
- Earnout Thresholds: Future payments depend on ATP collecting management fees exceeding specific thresholds ranging from $4.89 million to $7.82 million annually over the next seven years.
- Second Draw Contingency: The remaining $4.0 million of the credit facility is contingent on the sale of remaining CDO Agreements (Alesco I–IX) by September 30, 2010.
- Termination Risks: The MTA may be terminated if 50% of Assigned Assets are not closed by August 31, 2010 (extendable to October 1, 2010).
Risks and Indemnification
- Indemnification: Seller and Cohen indemnify ATP for breaches, retained liabilities, and specific U.S. federal income tax issues (effectively connected income). ATP indemnifies Seller for assumed liabilities and breaches.
- Holdback Offset: ATP may offset the 25% holdback on earnout payments if Regulated Banks prepay applicable notes between 2013 and 2017.
- Covenants: The new credit facility requires maintenance of minimum net worth, cash flow to debt service coverage ratios, and maximum funded debt to cash flow ratios.
- Verify the status of the tender offer for the $9.5 million in subordinated notes (acceptance rate and final payment date).
- Confirm whether the remaining CDO Agreements (Alesco I–IX) were sold to ATP to trigger the $4.0 million second draw on the credit facility.
- Monitor the "Excess Base Case Revenues" reported by ATP to determine if the $9.5 million base purchase price will be supplemented by earnout payments.
- Review the company's ability to meet the new financial covenants (net worth and coverage ratios) under the $14.6 million TD Bank facility.
- Assess the impact of the Services Agreement fees ($23 million potential) on future cash flows versus the loss of direct management fee revenue.