1313918--2/29/2008--Deerfield_Capital

related topics

{loan, real, estate}

{tax, income, asset}

{stock, price, share}

{investment, property, distribution}

{loss, insurance, financial}

{competitive, industry, competition}

{personnel, key, retain}

{debt, indebtedness, cash}

{system, service, information}

{provision, law, control}

{regulation, change, law}

{financial, litigation, operation}

{customer, product, revenue}

{operation, natural, condition}

{condition, economic, financial}

{cost, regulation, environmental}

{control, financial, internal}

{product, market, service}

{cost, operation, labor}

An increase in our borrowing costs relative to the interest we receive on our assets may impair our profitability and thus our cash available for distribution to our stockholders. Declines in the market values of our investments may adversely affect our financial results and credit availability, which may reduce our earnings and thus cash available for dividends. The current dislocations in the subprime mortgage sector, and the current weakness in the broader financial market, could adversely affect us and one or more of our lenders, which could result in increases in our borrowing costs, reductions in our liquidity and reductions in the value of the investments in our portfolio. We may not be able to pay cash dividends on our capital stock. DFR and DCM are the subject of information requests by the SEC in an investigation that could result in SEC proceedings against us or DCM. Current conditions in the credit markets have necessitated recent workforce reductions, which may harm our business. We may change our investment strategy without stockholder consent, which may result in riskier investments and our Board does not approve each investment decision made by management. We may be unable to complete securitization transactions. The use of CDO financings with over-collateralization requirements and other structural restrictions may reduce our cash flow. A decline in operating cash flow would impair our ability to maximize our dividend payout. Our future dividends, if any, may be substantially less and paid infrequently as compared to our dividend payments in the past. Rapid changes in the values of our RMBS and other real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the 1940 Act. We may enter into warehouse agreements in connection with our planned investment in the equity securities of CDOs or DCM s planned management of a CDO, and if the CDO investment is not consummated, the warehoused collateral will be sold, and we may be required to bear any loss resulting from such sale. Our business could be impaired if we are unable to attract and retain qualified personnel. Failure to procure adequate capital and funding would hurt our results and reduce the price of our stock and our ability to pay dividends. We may in the future issue shares of additional capital stock, to raise proceeds for a wide variety of purposes, which could dilute and therefore reduce the value of our existing outstanding capital stock. Future classes of capital stock may impose, and our currently outstanding Series A Preferred Stock and trust preferred securities do impose, significant covenants and obligations on us and our operations. Loss of our 1940 Act exemption would adversely affect us and reduce the market price of our shares and our ability to pay dividends. Failure to develop effective business continuity plans could disrupt our operations and cause financial losses. We could incur losses due to trading errors. We operate in a highly competitive market for investment opportunities. Terrorist attacks and other acts of violence or war may affect the market for our stock, the industry in which we conduct our operations and our profitability. Risks Related to Our Principal Investing Segment We may not realize gains or income from our investments. We will lose money on our repurchase transactions if the counterparty to the transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term or if we default on our obligations under the repurchase agreement. We remain subject to losses on our mortgage portfolio despite our strategy of investing in highly-rated and Agency RMBS. Changes in prepayment rates could reduce the value of our RMBS, which could reduce our earnings and the cash available for dividends. We have incurred substantial impairments of our assets and may incur significant impairments in the future. Our investment portfolio is heavily concentrated in adjustable-rate RMBS and we might not be able to achieve or sustain a more diversified portfolio. Legislation may be introduced that would prevent lenders from increasing the interest rates on adjustable-rate mortgages, which could negatively impact our net interest income and harm our operations. Our real estate investments are subject to risks particular to real property. The mortgage loans underlying our RMBS are subject to delinquency, foreclosure and loss, which could result in losses to us. Our Corporate Debt portfolio includes debt of middle market companies. We may invest in the equity and mezzanine securities of CDOs, and such investments involve various risks, including that CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of its debt securities and its expenses. Increases in interest rates could reduce the value of our investments, which could result in losses or reduced earnings and reduce the cash available dividends. Some of our investments are recorded at values based on estimates of fair value made by management, and there is thus uncertainty as to the value of these investments. The lack of liquidity in our investments may impair our results. A prolonged economic slowdown, a recession or declining real estate values could impair our investments and harm our operating results. Our interest rate hedging transactions may not completely insulate us from interest rate risk. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs. Our derivative contracts could expose us to unexpected economic losses. Our dependence on the management of other entities may adversely affect our business. Our due diligence may not reveal all of an issuer s liabilities and may not reveal other weaknesses in its business. Risks Related to the Merger We may not have uncovered all risks associated with acquiring Deerfield, and significant liabilities may arise after completion of the Merger. The Merger may subject our performance to significant risks that are associated with DCM s business to which we have not historically been subject. DCM s business may be harmed by it becoming our subsidiary. Our ownership of Deerfield might jeopardize our 1940 Act exemption or limit our ability to implement our investment strategy and thus reduce our earnings and ability to pay dividends. Our status as a proprietary account of DCM might restrict DCM s management of our investing. We may not be able to realize the projected economic benefits of the Merger. We have always been externally managed and we may not be able to successfully transition to an internally managed company. We incurred additional indebtedness in order to consummate the Merger and our increased leverage could adversely affect our financial health. Risks Related to Our Investment Management Segment The income from Deerfield and DCM will be subject to federal, state and local income tax, and our ownership of Deerfield and DCM may jeopardize our REIT qualification and may limit our ability to conduct our investment strategy. DCM s revenues fluctuate based on the amount or value of client assets, which could decrease for various reasons including investment losses and withdrawal of capital. DCM s performance fees may increase earnings volatility, which could depress our stock price. Poor investment performance could lead to a loss of clients and a decline in DCM s revenues. DCM derives much of its revenues from contracts that may be terminated on short notice. DCM will lose investment advisory fee income if investors in its investment funds redeem their investments. DCM has experienced and may continue to experience declines in and deferrals of management fee income from its CDOs due to defaults, downgrades and depressed market values with respect to the collateral underlying such CDOs. DCM could lose management fee income from the CDOs it manages or client AUM as a result of the triggering of certain structural protections built into such CDOs. DCM faces risks from prolonged dislocations in the markets in which it participates. The loss of key portfolio managers and other personnel could harm DCM s business. DCM may need to offer new investment strategies and products in order to continue to generate revenue. Changes in the fixed income markets could adversely affect DCM. Changes in CDO spreads could make it difficult for DCM to launch new CDOs. DCM may be unable to increase its AUM in certain of its investment vehicles, or it may have to reduce such assets, because of capacity constraints. DCM depends on third-party distribution channels to market its CDOs and anticipates developing third-party distribution channels to market its investment funds. The fixed income alternative asset management industry is highly competitive, and DCM may lose client assets due to competition from other asset managers that have greater resources than DCM or that are able to offer services and products at more competitive prices. DCM s failure to comply with investment guidelines set by its clients or the provisions of the management agreement and other agreements to which it is a party could result in damage awards against DCM and a loss of AUM, either of which could cause our earnings to decline. DCM could lose client assets as the result of adverse publicity. Changes in laws, regulations or government policies affecting DCM s businesses could limit its revenues, increase its costs of doing business and materially and adversely affect its business. Complying with REIT requirements may cause us to forgo otherwise attractive opportunities. Failure to qualify as a REIT would subject us to federal income tax, which would reduce the cash available for dividends. Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders. Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular corporations. Stockholders will have phantom income if we make a taxable distribution of our stock in order to satisfy the 90% distribution requirement. Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares. Our ownership of and relationship with our TRSs is limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax. Our foreign TRSs could be subject to federal income tax at the entity level, which would greatly reduce the amounts those entities would have available to distribute to us. We may lose our REIT status if the IRS successfully challenges our characterization of our income from our foreign TRSs. Complying with REIT requirements may limit our ability to hedge effectively. The tax on prohibited transactions will limit our investment transactions, including certain methods of securitizing mortgage loans that would be treated as sales for federal income tax purposes. We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock or Series A Preferred Stock. If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain. Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders. Risks Related to the Series A Preferred Stock An active trading market for the Series A Preferred Stock may not develop, and holders of our Series A Preferred Stock may be unable to resell their shares of Series A Preferred Stock at or above the purchase price. Conversion of the Series A Preferred Stock will dilute the ownership interests of our existing common stockholders. We may not be able to pay the redemption price of our Series A Preferred Stock upon the earlier of a change in control or December 20, 2014. We may not issue preferred stock that is on par with, or senior to, the Series A Preferred Stock without the consent of the holders of 80% of the shares of Series A Preferred Stock, which limits the flexibility of our capital structure. The market price of common stock holders of our Series A Preferred Stock receive upon conversion may be less than the effective price paid for the shares of Series A Preferred Stock. The shares of our Series A Preferred Stock will rank junior to all of our and our subsidiaries liabilities in the event of a bankruptcy, liquidation or winding up of our assets. Our issuance of additional common stock or preferred stock may cause our common stock price to decline, which may negatively impact an investment in our Series A Preferred Stock. Holders of our Series A Preferred Stock may not receive common stock upon the conversion of the Series A Preferred Stock to the extent the receipt of such common stock would cause a violation of our ownership limitations. Holders of shares of our Series A Preferred Stock have limited voting rights, and will have no rights as a common stockholder unless and until they acquire shares of our common stock upon conversion.

Full 10-K form ▸

1313918--2/29/2008--Deerfield_Capital_Corp.