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Deerfield Capital Corp. Announces

CHICAGO, March 23 /PRNewswire-FirstCall/ -- Deerfield Capital Corp. (Nasdaq: DFR) ("DFR" or the "Company") today announced a definitive agreement to acquire Columbus Nova Credit Investment Management, LLC ("CNCIM"), a Charlotte-based investment manager specializing in leveraged loan credit products with $1.8 billion of assets under management ("AUM") from Bounty Investments, LLC ("Bounty") an investment vehicle managed by Renova U.S. Management LLC (" Columbus Nova"), a New York-based investment management firm, for $25.0 million of stock (at an implied price per share of $5.50) (the "Stock Consideration") and deferred payments totaling $7.5 million of cash payable over five years.  Additionally, Bounty has agreed to purchase $25.0 million in principal amount of senior subordinated convertible notes ("Convertible Notes") issued by the Company.  The proceeds from the Convertible Notes, along with DFR cash, will be used to repurchase and retire all of the $73.9 million in principal amount of the outstanding Series A and Series B Senior Secured Notes ("Senior Notes") for a total purchase price of $55.0 million plus accrued interest. The transactions, which are subject to closing conditions including stockholders approval, are expected to close during the second quarter of 2010.

Top Line Growth and Strengthened Balance Sheet

"These transactions are transformative for DFR.  In addition to achieving our goals of increasing AUM and growing top line revenue, these transactions strengthen our balance sheet, which will now be structured to facilitate our future growth and provides us with a valuable partner in Columbus Nova," said Jonathan Trutter, Chief Executive Officer of DFR. Trutter added, "These transactions follow solid 2009 financial performance which included four consecutive profitable quarters and continued improvements in our overall financial performance."

Commenting on the transaction with DFR, Andrew Intrater, Chief Executive Officer of Columbus Nova stated, "The agreement to invest in DFR demonstrates confidence in the ability to grow the business and deliver strong financial results.  We expect management to accelerate the Company's growth through new operating initiatives and acquisitions.  We are very confident that DFR is well positioned to benefit from this acquisition to become a premier asset manager."

The following highlights some of the significant benefits of the transactions to DFR:

  • An increase in collateralized loan obligation ("CLO") AUM by $1.8 billion, or 45.0 percent, which brings DFR's CLO AUM to $5.8 billion and total AUM to $11.0 billion, based on the Company's AUM information as of January 1, 2010.
  • Improved cash flows resulting from both top line revenue growth attributable to the CNCIM CLO management contracts and expected net interest expense savings from long-term debt.
  • Significantly strengthened DFR's capital structure:
    • $73.9 million in Senior Notes with a variable interest rate and increasing interest rate spread that mature in December 2012 are extinguished for $55.0 million, or an $18.9 million discount.
    • $25.0 million of Convertible Notes will be issued with a seven and one-half year maturity.  The Convertible Notes will be convertible at $6.05 per share, carry an initial interest rate of 8 percent and will be noncallable for 2 years.
    • $95.0 million of the $120.0 million of Trust Preferred Debt ("Trups") was exchanged for new Junior Subordinated Notes with less restrictive covenants and a fixed 1 percent per annum interest rate through at least 2012.  However, the closing of the Convertible Notes transaction is expected to result in the 1 percent per annum interest rate being extended through April 30, 2015, before returning to the original variable interest rate.  The original interest rates on the Trups was LIBOR plus 3.50 percent per annum on $25.8 million of Trups and LIBOR plus 2.25 percent per annum on $72.1 million of additional Trups, which have been exchanged for Junior Subordinated Notes.  Additionally, $25.8 million of Trups with an interest rate of LIBOR plus 3.50 percent per annum have not been exchanged at this time.  

Jonathan Trutter further commented, "The strategic transaction with Columbus Nova is expected to significantly improve DFR's revenue and cash flow while increasing financial flexibility and reducing leverage.  The result of these actions is a company better positioned to grow market share and increase shareholder value."

Convertible Notes

The following summarizes some of the principal terms of the Convertible Notes:

  • Interest Rate:
    • Years 1-2: Fixed interest rate of 8 percent per annum
    • Year 3: Fixed interest rate of 9 percent per annum
    • Year 4: Fixed interest rate of 10 percent per annum
    • Thereafter: Fixed interest rate of 11 percent per annum
    • The Company may elect, in its sole discretion, to pay 50 percent of the interest in payments in-kind, which will result in the fixed interest rate increasing by 2 percent per annum for years 1 – 4 and 1 percent per annum thereafter
  • Maturity:  7.5 years
  • Conversion Features:  Convertible into common stock of the Company at the option of the holder at a conversion price of $6.05 per share, subject to adjustment.
  • Redemptions: Two year no redemption period, after which the Company can redeem at 100 percent of the principal amount plus a specified premium.  The Company is not required to make a mandatory redemption of the Convertible Notes.

Stockholders Agreement

Bounty, through its manager Columbus Nova, will have the right to appoint directors to the Company's board of directors ("Board") as described below. In connection with the issuance of the Stock Consideration, which would represent approximately 41.3 percent of the outstanding common stock, the Company has agreed to increase the size of its board of directors to nine members, three of which will be designated by Bounty for so long as it owns at least 25 percent of the outstanding common stock. So long as Bounty owns at least 5 percent of the outstanding common stock, the Company will adopt, and continue to maintain, a majority voting bylaw requiring that, in uncontested elections, each nominee for election to the Board must be elected by a majority of the votes cast at a meeting called for the election of directors. The Board will establish a strategic committee of the Board (the "Strategic Committee"), which will continue to exist for so long as Bounty owns at least 25 percent of the outstanding common stock. The Strategic Committee will initially consist of four members: two directors designated by Bounty and two directors designated by those independent directors of the Company not designated by Bounty. The Strategic Committee will report and make recommendations to the board regarding implementing certain strategic initiatives.

Trust Preferred Securities Exchange

On March 4, 2010, as previously disclosed on Form 8-K filed with the Securities and Exchange Commission on March 10, 2010, the Company entered into an exchange agreement (the "Exchange Agreement"), with Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX Ltd., to exchange $95.0 million of the $120.0 million aggregate outstanding principal amount of Trups previously issued by the trusts, for $95.0 million aggregate outstanding principal amount of junior subordinated notes issued by the Company (the "Trust Preferred Exchange"). The Trust Preferred Exchange was consummated on March 4, 2010. An aggregate of $25.0 million in principal amount of Trups issued by Trust I was not exchanged and remains outstanding.

The new junior subordinated notes (the "New Subordinated Notes") issued by the Company in connection with the Trust Preferred Exchange are governed by a junior subordinated indenture (the "New Indenture"), dated March 4, 2010. Pursuant to the New Indenture, the New Subordinated Notes bear a fixed interest rate of 1 percent per annum commencing on April 30, 2010, payable quarterly through April 30, 2015 or an earlier date upon which certain specified events occur (the "Modification Period"). Thereafter, the New Subordinated Notes will be subject to a variable interest rate equal to LIBOR plus 2.58 percent per annum, payable quarterly on the then outstanding principal amount of the New Subordinated Notes until maturity on October 30, 2035. The Company may redeem the New Subordinated Notes on or after October 30, 2010 at par for cash or replacement securities acceptable to the holders.

The New Indenture contains certain restrictive covenants including, among other things, (i) a covenant that all asset management activities be conducted by the Company and its subsidiaries and which permits the Company to sell equity and material assets of DCM provided, however, that all asset management fees and proceeds from equity and asset sales remain subject to the limits on restricted payments set forth in the New Indenture, (ii) a debt covenant that permits DFR and DCM to incur indebtedness provided that the proceeds of such indebtedness remain subject to the limits on restricted payments set forth in the New Indenture and (iii) a restricted payments covenant that restricts the ability to pay dividends or make distributions in respect of equity securities, subject to a number of exceptions and conditions. If the Company fails to enter into a Credit Enhancing Transaction (as defined in the New Indenture) within certain time periods, then the Modification Period will terminate and certain exceptions to the restricted payments covenant will no longer be available to the Company. Consummation of Bounty's purchase of Convertible Notes will satisfy this requirement. The New Indenture contains other agreements, covenants, events of default and conditions that are similar to the agreements, covenants, events of default and conditions contained in the indentures for the Trups. Unlike the indentures for the Trups, the New Indenture does not contain a covenant requiring the Company to maintain a minimum net worth.

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