As of March 31, 2012, the Company maintained $186.3 million of unrestricted cash as compared to approximately $163.7 million reported as of December 31, 2011. In addition, as of March 31, 2012, the Company held an aggregate of $49.2 million of par value Class A-1, A-2 and B CDO securities previously issued by the Company’s CDOs that were available for re-issuance. The aggregate fair value of the repurchased CDO bonds was $39.3 million as of March 31, 2012.

A substantial portion of the Company’s cash flow is generated by distributions from its CDOs within the Gramercy Finance division. The Company's CDOs contain minimum interest coverage and asset overcollateralization covenants that must be satisfied for the Company to receive cash flow on certain of the interests in its CDOs retained by the Company and to receive the subordinate collateral management fees. During periods when these covenants are not satisfied for a particular CDO, cash flows from that CDO that would otherwise be paid to the Company as a subordinate bondholder, holder of the preferred shares and in respect of the subordinate collateral management fee are diverted from the Company to repay principal and interest on the senior-most outstanding CDO bonds. As of April 2012, the most recent distribution date, the Company’s 2005 CDO and 2006 CDO were in compliance with interest coverage and asset overcollateralization covenants; however, the compliance margins were narrow and relatively small declines in collateral performance and credit metrics from one or more assets could cause the CDOs to fall out of compliance. The Company’s 2005 CDO previously failed its overcollateralization test at the October 2011, April 2011 and January 2011 distribution dates and the Company’s 2007 CDO has failed its overcollateralization test beginning with the November 2009 distribution date. We cannot be certain that the CDO tests will continue to be satisfied and that we will continue to receive cash flows relating to the Company’s CDOs in the future, and believe that we may fail the overcollateralization test for the 2005 CDO and/or the 2006 CDO at the July 2012 distribution date. The following chart summarizes the CDO compliance tests as of the most recent distribution dates (April 25, 2012 for the Company’s 2005-1 and 2006-1 CDOs and February 19, 2012 for the Company’s 2007-1 CDO):
Cash Flow Triggers CDO 2005-1 CDO 2006-1 CDO 2007-1
Overcollateralization (1)
Current 118.27 % 106.72 % 84.11 %
Limit 117.85 % 105.15 % 102.05 %
Compliance margin 0.42 % 1.57 % -17.94 %
Pass/Fail Pass Pass Fail
Interest Coverage (2)
Current 361.57 % 464.92 % N/A
Limit 132.85 % 105.15 % N/A
Compliance margin 228.72 % 359.77 %   N/A
Pass/Fail Pass Pass N/A
(1)   The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by the Company. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies. For a defaulted security with a CUSIP that is actively traded, the lower of market value or the product of the security’s principal balance multiplied by the asset’s recovery rate as determined by the rating agencies is used for the overcollateralization ratio.


The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company.

On March 14, 2012, the 2007 CDO fell below the Class A/B overcollateralization test threshold of 89%, which constitutes an event of default under the operative documents for the 2007 CDO. Upon such an event of default, the reinvestment period of the 2007 CDO, which was scheduled to expire in August 2012, would have immediately ended and the Company would have lost its ability to reinvest restricted cash held by the 2007 CDO. An event of default also would have entitled the controlling class to direct the Trustee to accelerate the notes of the 2007 CDO and, depending on the circumstances, force the prompt liquidation of the collateral. In March 2012, a majority of the controlling class of senior note holders waived the related event of default and has waived each subsequent event of default, if any, related to the Class A/B overcollateralization test. The majority of the controlling class has reserved the right to revoke or extend such waiver at any time.

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