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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good day, ladies and gentlemen, and welcome to the Alesco Financial Fourth Quarter 2007 Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in its earnings release and during this call contains forward-looking statements, which involve a number of risks and uncertainties.
Alesco Financial cautions readers that any forward-looking information is not a guarantee of future performance, and that actual results could differ materially from those contained or implied in the forward-looking information. Factors that may affect future results are contained in Alesco Financial's filings with the SEC, which are available at the SEC's website at www.sec.gov.
At this time, all participants have been placed in a listen-only mode. Following the formal remarks, the call will be open to questions. I would now like to turn the call over to Jay McEntee, President and CEO. Sir, please begin.
JAY MCENTEE, PRESIDENT AND CEO, ALESCO FINANCIAL INC.: Thank you, operator, and good morning, everyone. Thank you for joining us. Also representing the Company with me this morning is John Longino, our Chief Financial Officer, as well as several other members of the Company's management team. First, I would like to apologize for the delay in accessing this call. It took us longer than it should to bring all callers into the call. We will address this in the future and try to make it better.
Before beginning with our discussion about the performance of our company, let me first make a few observations about the public markets and the financial services sector. I must once again report that general market conditions have not improved. In fact, if anything, they have worsened since our last call.
The negative environment is reflected in our stock price, as well as that of our peer group of public companies. The fact is, that the Financial Services sector is in a state of upheaval as evidenced by recent headlines. To some extent, we are seeing the results of this in the banking sector, and we will have seen this impact in a few of our TruPS issuers, as I will detail later in this call.
In addition, the continued ratings downgrades of our ABS portfolios have impacted our Kleros Real Estate transactions, as I will discuss further, including the potential impact of this on our REIT status in future periods. That being said, as I will detail on this call, the reality is that our TruPS and mid-market loan portfolios have performed well and the Company is well positioned for the future.
AFN had over $80 million of unrestricted cash at December 31, and after paying the Q4 '07 dividend and posting an additional $20 million of cash deposit to extend the middle market loan warehouse, still had over $40 million of unrestricted cash. As of December 31, we also had unrealized value in our CDS portfolio of $67 million.
Subsequent to year-end, we received $54 million in cash security against our unrealized CDS positions. This cash security was received on margin calls by us, not on us, but by us against the swap counterparty. This puts our unrestricted cash balance as of today, net of the payment of the Q1 dividend declared yesterday, at approximately $100 million in cash.
To sum up, while our performance as a company has been negatively affected by this market, our non-ABS assets are performing more or less to plan, and our liquidity is excellent. As announced yesterday, we have declared a cash dividend for the quarter ending March 31, 2008 of $0.25 per common share. We expect our adjusted earnings for the first quarter to cover this dividend.
With that, let's go through the performance of the Company in more detail. First, I will update the status of the TruPS in mid-market loan warehouses and at-risk cash deposits discussed on our last call. Second, I will provide an overview of our fourth quarter performance.
Next, I will provide you with information on our current portfolio, and I will discuss where we see opportunities for our company going forward. Then, I will hand it over to John Longino, who will discuss additional details on our results for the fourth quarter.
As for the TruPS and middle market loan warehouses and cash deposits, I am pleased to report that we have resolved those matters in the manner we expected to at the time of our last call. As you may recall, we had $30 million of at-risk cash deposited on an expiring TruPS warehouse, which still had about $53 million of TruPS assets after the majority of the assets had been moved over the Alesco XVII securitization.
We were able to close this warehouse and get back our $30 million cash deposit. However, we did need to purchase directly on to our balance sheet $29 million of trust-preferred securities at par, which although performing, we were not able to place into existing deals due to CDO concentration limits. These assets are reported as of December 31, on a mark to market value of approximately $25 million, about 84% of par value and have a weighted average spread of LIBOR plus 250.
We also had two warehouses containing $176 million of middle market loan assets supported by $20 million of first-loss cash deposits. These warehouses were due to expire this month, and really walking away from them would likely have resulted in the loss of most, if not all, of our $20 million cash deposit. Instead, we are able to combine these warehouses into a new $200 million facility, which does not expire until May of 2009.
As we had anticipated, we needed to post an additional $20 million of first-loss cash deposit to secure this extension. The $40 million of cash deposited on the middle market loan warehouse represents our only warehouse exposure as of today. And again, it is without recourse to us and does not expire until May of 2009, and it does not require the contribution of additional capital as a result of mark to market or otherwise.
With respect to the results for the fourth quarter, I am happy to report that we have adjusted earnings of $0.53 per share. This amount includes $17.5 million attributable to net gains realized on our CDS positions during the quarter. I will talk about the status of our CDS positions a bit later.
As I mentioned previously, the significant headwinds in the business climate in which we operate have negatively impacted perception of our company. We continue to have confidence in both our ability to survive in the current tumultuous market and to grow in the future. Importantly, we have no short-term recourse repo or repo-like indebtedness which might subject us to liquidity challenges.
It is worth noting again that, as of the end of the year, we had unrestricted cash of $80 million. Following the January dividend distribution and the extension of the middle market loan warehouse, we still had unrestricted cash of over $40 million. In addition, we subsequently received $54 million of cash representing margin against the $67 million of unrealized CDS gains. Our total cash on hand today is approximately $100 million, again net of the Q1 '08 dividend to be paid in April.
It should come as no surprise that the currently extremely erratic adjustments to our GAAP book value and GAAP earnings experienced in the third quarter have continued through the end of 2007. As a reminder, this relates to the requirement that we mark to market our TruPS and MBS securities portfolios.
The aggregate negative OCI and earnings adjustments recorded against AFN's book equity through December 31, 2007 related to these marks is approximately $2.9 billion, of which $2 billion relates to our MBS portfolio, and $900 million to our trust-preferred portfolio.
We indicated that we expected that the negative impact on our equity would be mitigated to some extent upon the adoption of FAS 159 effective as of January 1, 2008. We have calculated that the expected adjustment will increase our GAAP book value by $2.7 billion, bringing total shareholders' equity to approximately $272 million or $4.58 per share under GAAP.
We expect that there will be significant correlation between future changes and fair value of our assets and liabilities, due to the match-funded non-recourse nature of these investments.
We continue to believe that it is very important to understand the Company's adjusted book value. We measure our adjusted book value by looking at the capital we initially invested in each asset class, and reducing those amounts for any permanent impairments in the value of those investments.
We have calculated AFN's adjusted book value in a table included in our Q1 -- our Q4 earnings release. Total capital of $645 million has been reduced by net cumulative impairments and losses recorded through the income statement of $137 million, resulting in adjusted invested capital of $508 million.
Deducting recourse financing, which consists of our trust-preferred debt and our convertible debt, yields a net adjusted invested capital of approximately $320 million or $5.40 per share at December 31. Note that adjusted book value does not reflect unrealized temporary gains or losses that affect our GAAP equity or book value per share.
Now, let's move on to our current portfolio and ongoing investment strategy. With respect to the overall strength of our portfolio, as we have detailed in the past, we have lived up to our commitment to investors to minimize interest rate risk and minimize funding risk by having long-term non-recourse match-funding of our assets.
As of December 31, Alesco Financial held approximately $3.9 billion par value trust preferred in banks, and approximately $1.2 billion par value trust preferred in insurance companies. …