Business Context and Reporting Period
This Form 8-K was filed by Alesco Financial Inc. (formerly Sunset Financial Resources, Inc.) on November 17, 2006. The report details the creation of a direct financial obligation through a term secured financing utilizing an on-balance sheet collateralized debt obligation (CDO) structure.
Key Financial Metrics
Financing Structure: The company issued $986,000,000 in principal amount of commercial collateralized debt obligations ("KRE CDO III") through indirect subsidiaries. The capital structure includes five classes of senior secured notes and two classes of unsecured subordinated notes.
Collateral Assets: The Issuer purchased a diversified portfolio of asset-backed securities, commercial mortgage-backed securities, and residential mortgage-backed securities with an aggregate outstanding principal balance of approximately $1,000,000,000.
Internal Holdings: An indirect subsidiary, Alesco Financial Holdings, LLC, purchased 100% of the Subordinated Notes and Preferred Shares for an aggregate price of $30,000,000.
Interest Rates: At issuance, the weighted-average stated interest rate for investment grade Secured Notes was one-month LIBOR plus 30.41 basis points. Interest payments are payable monthly beginning in March 2007.
| Class | Principal Amount | Percentage of Total | Ratings (S&P/Moodys) | Maturity Date |
|---|---|---|---|---|
| Class A-1A Notes | $815,000,000 | 81.50% | AAA/Aaa | Dec-2046 |
| Class A-1B Notes | $75,000,000 | 7.50% | AAA/Aaa | Dec-2046 |
| Class A-2 Notes | $45,000,000 | 4.50% | AA/Aa2 | Dec-2046 |
| Class A-3 Notes | $25,000,000 | 2.50% | A/A2 | Dec-2046 |
| Class A-4 Notes | $10,000,000 | 1.00% | --/A3 | Dec-2046 |
| Class B Notes | $11,000,000 | 1.10% | BBB-/Baa3 | Dec-2046 |
| Class C Notes | $5,000,000 | 0.50% | BB/Ba2 | Dec-2046 |
| Preference Shares | $14,000,000 | 1.40% | NR | Dec-2046 |
Material Changes
The filing reports a significant expansion of the company's debt obligations and asset base. The company has entered into a new $986 million financing arrangement and acquired approximately $1 billion in collateral debt securities. This represents a new on-balance sheet CDO structure not previously disclosed in prior comparable periods.
Outlook, Management Commentary, and Risks
Management Commentary: The transaction was structured to utilize a diversified portfolio of newly issued and secondary market securities. The Collateral Manager, Strategos Capital Management, LLC (an affiliate of Cohen & Company), will provide advisory services.
Fees and Compensation: The Collateral Manager receives a subordinated advisory fee of 0.05% per annum of the average monthly asset amount and an upfront structuring fee of 0.10% of the principal balance of underlying collateral expected to be owned by the 90th day following closing.
Risks and Contingencies: The Subordinated Notes and Preferred Shares represent non-recourse obligations of the Issuer and Co-Issuer and are not secured by assets pledged under the Indenture. The filing does not provide specific quantitative risk factors beyond the standard nature of CDO structures.
Key Facts for Investor Verification
- Verify the credit ratings (AAA to BB) assigned to the various note classes by S&P and Moody's.
- Confirm the composition of the $1 billion collateral portfolio, specifically the mix of asset-backed, commercial mortgage-backed, and residential mortgage-backed securities.
- Review the terms of the Collateral Advisory Agreement with Strategos Capital Management, LLC, noting the affiliate relationship with Cohen & Company.
- Monitor the cash flow coverage given the monthly interest payments starting in March 2007.
- Assess the impact of the $30 million internal purchase of subordinated notes and preferred shares on the company's liquidity.