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EX-31.2 - CFO CERTIFICATION PURSUANT TO SECTION 302 - ANTHRACITE CAPITAL INCdex312.htm
EX-32.1 - CEO & CFO CERTIFICATION PURSUANT TO SECTION 906 - ANTHRACITE CAPITAL INCdex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:              to             

Commission File Number 001-13937

 

 

ANTHRACITE CAPITAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   13-3978906

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

40 East 52nd Street, New York, New York   10022
(Address of principal executive offices)   (Zip Code)

(Registrant’s telephone number including area code): (212) 810-3333

NOT APPLICABLE

(Former name, former address, and for new fiscal year; if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At October 30, 2009, 93,951,522 shares of common stock ($0.001 par value per share) were outstanding.

 

 

 


Table of Contents

ANTHRACITE CAPITAL, INC.

FORM 10-Q

INDEX

 

          Page
PART I – FINANCIAL INFORMATION   
Item 1.    Financial Statements    5
   Consolidated Statements of Financial Condition (Unaudited) At September 30, 2009 and December 31, 2008    5
   Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2009 and 2008    6
   Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) For the Nine Months Ended September 30, 2009    7
   Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2009 and 2008    8
   Notes to Consolidated Financial Statements (Unaudited)    10
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    60
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    105
Item 4.    Controls and Procedures    109
Part II – OTHER INFORMATION   
Item 1.    Legal Proceedings    110
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    110
Item 6.    Exhibits    111
SIGNATURES    114

 

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Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. Anthracite Capital, Inc. (the “Company”) cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

Factors that could cause actual results to differ materially from forward-looking statements or historical performance include, without limitation:

 

  (1) as a result of the Company’s liquidity position, current market conditions and the uncertainty relating to its ability to meet covenants in restructured agreements, substantial doubt about the Company’s ability to continue as a going concern;

 

  (2) the Company’s ability to meet its liquidity requirements to continue to fund its operations, including its ability to renew its existing secured credit facilities or obtain additional sources of financing, to meet amortization payments under the facilities and to service debt (including interest payment obligations not paid when originally due);

 

  (3) the Company’s ability to obtain amendments and waivers in the event that a lender terminates a facility before the maturity date or events of default occur under the Company’s debt obligations due to a covenant breach or otherwise;

 

  (4) the Company’s ability to maintain listing on the New York Stock Exchange (“NYSE”);

 

  (5) the introduction, withdrawal, success and timing of business initiatives and strategies;

 

  (6) changes in political, economic or industry conditions, the interest rate environment, financial and capital markets or otherwise, which could result in changes in the value of the Company’s assets and liabilities, including net realized and unrealized gains or losses, and could adversely affect the Company’s operating results;

 

  (7) the relative and absolute investment performance and operations of BlackRock Financial Management, Inc. (the “Manager”), the Company’s Manager;

 

  (8) the impact of increased competition;

 

  (9) the impact of future acquisitions or divestitures;

 

  (10) the unfavorable resolution of legal proceedings;

 

  (11) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to the Company or the Manager;

 

  (12) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and global financial and capital markets, specific industries, and the Company;

 

  (13) the ability of the Manager to attract and retain highly talented professionals;

 

  (14) fluctuations in foreign currency exchange rates;

 

  (15) the impact of changes to tax legislation and, generally, the tax position of the Company.

 

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The Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and the Company’s subsequent reports filed with the Securities and Exchange Commission (the “SEC”), including the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2009, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements.

 

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Table of Contents

Part I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

Anthracite Capital, Inc. and Subsidiaries

Consolidated Statements of Financial Condition (Unaudited)

(in thousands, except share data)

 

     September 30, 2009     December 31, 2008  

ASSETS

          

Cash and cash equivalents

      $ 297         $ 9,686   

Restricted cash equivalents

        38,939           23,982   

Securities held-for-trading, at estimated fair value:

          

Subordinated commercial mortgage-backed securities (“CMBS”)

   $ 208,628      $ 257,982   

Investment grade CMBS

     647,161        677,533   

Residential mortgage-backed securities (“RMBS”)

     11        787   
                  

Total securities held-for-trading

        855,800           936,302   

Commercial mortgage loans (net of loan loss reserve of $244,471 and $164,282 in 2009 and 2008)

        668,556           754,707   

Commercial mortgage loan pools, at amortized cost

        939,646           1,022,105   

Equity investments

        29,209           78,868   

Derivative instruments, at estimated fair value

        26,463           929,632   

Other assets (includes $31 and $384 at estimated fair value in 2009 and 2008)

        42,215           73,766   
                      

Total Assets

      $ 2,601,125         $ 3,829,048   
                      

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Liabilities:

          

Borrowings:

          

Secured by pledge of subordinated CMBS

   $ 172,873      $ 193,126   

Secured by pledge of investment grade CMBS

     22,038        84,997   

Secured by pledge of commercial mortgage loans

     152,090        167,625   

Secured by pledge of equity investments

     33,450        30,000   

Collateralized debt obligations (“CDOs”) (at estimated fair value)

     544,015        564,661   

Senior unsecured notes (at estimated fair value)

     14,040        18,411   

Senior unsecured convertible notes

     35,766        72,000   

Junior unsecured subordinated notes (at estimated fair value)

     14,073        5,726   

Junior subordinated notes to subsidiary trusts issuing preferred securities (“TruPS”) (at estimated fair value)

     1,030        12,643   

Secured by pledge of commercial mortgage loan pools

     923,036        1,004,388   
                  

Total borrowings

        1,912,411           2,153,577   

Distributions payable

        —             3,019   

Derivative instruments, at estimated fair value

        92,199           1,018,927   

Other liabilities

        59,680           34,920   
                      

Total Liabilities

        2,064,290           3,210,443   

Commitments and Contingencies

          

12% Series E-1 Cumulative Convertible Redeemable Preferred Stock, liquidation preference $23,375

        23,237           23,237   

12% Series E-2 Cumulative Convertible Redeemable Preferred Stock, liquidation preference $23,375

        23,237           23,237   

Stockholders’ Equity:

          

Preferred stock, 100,000,000 shares authorized;

          

9.375% Series C Preferred Stock, liquidation preference $57,500

        55,435           55,435   

8.25% Series D Preferred Stock, liquidation preference $86,250

        83,259           83,259   

Common Stock, par value $0.001 per share; 400,000,000 shares authorized; 93,951,522 and 78,371,715 shares issued and outstanding in 2009 and 2008

        94           78   

Additional paid-in capital

        810,236           797,372   

Distributions in excess of earnings

        (451,915        (331,613

Accumulated other comprehensive loss (“OCI”)

        (6,748        (32,400
                      

Total Stockholders’ Equity

        490,361           572,131   
                      

Total Liabilities, Mezzanine and Stockholders’ Equity

      $ 2,601,125         $ 3,829,048   
                      

The accompanying notes are an integral part of these consolidated financial statements.

 

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Anthracite Capital, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Income:

        

Interest from securities

   $ 35,732      $ 53,387      $ 129,936      $ 156,261   

Interest from commercial mortgage loans

     12,571        22,674        41,837        69,506   

Interest from commercial mortgage loan pools

     9,901        12,779        30,249        38,445   

Earnings (loss) from equity investments

     (2,604     3,067        (21,294     2,510   

Interest from cash and cash equivalents

     27        558        454        2,540   
                                

Total income

     55,627        92,465        181,182        269,262   
                                

Expenses:

        

Interest

     36,338        57,143        112,434        165,624   

Management and incentive fees

     2,001        3,432        6,391        22,591   

General and administrative expense

     2,318        2,025        11,284        5,706   
                                

Total expenses

     40,657        62,600        130,109        193,921   
                                

Other gains (losses):

        

Realized loss on securities and swaps held-for-trading and commercial mortgage loans, net

     (7,966     (5,005     (39,336     (14,840

Unrealized gain (loss) on securities held-for-trading

     34,794        (247,348     (16,265     (572,675

Unrealized gain (loss) on swaps classified as held-for-trading, net

     (3,116     (5,859     24,088        (811

Unrealized gain (loss) on liabilities

     (118,532     249,307        (71,870     656,538   

Realized gain on liabilities, net

     27,939        —          28,409        —     

Dedesignation of derivative instruments

     —          (7,084     (7,840     (7,084

Provision for loan losses

     5,532        (18,752     (98,999     (43,942

Realized and unrealized foreign currency gain (loss)

     7,585        7,273        11,946        (2,913
                                

Total other gains (losses)

     (53,764     (27,468     (169,867     14,273   
                                

Net income (loss)

     (38,794     2,397        (118,794     89,614   
                                

Dividends on preferred stock

     (4,656     (4,529     (13,714     (12,738
                                

Net income (loss) available to common stockholders

   $ (43,450   $ (2,132   $ (132,508   $ 76,876   
                                

Net income (loss) per common share, basic:

   $ (0.51   $ (0.03   $ (1.64   $ 1.11   
                                

Net income (loss) per common share, diluted:

   $ (0.51   $ (0.03   $ (1.64   $ 1.07   
                                

Weighted average number of shares outstanding:

        

Basic

     84,840,171        74,365,259        80,777,805        69,099,689   

Diluted

     84,840,171        74,365,259        80,777,805        81,724,651   

Dividend declared per share of common stock

   $ —        $ 0.31      $ —        $ 0.92   

The accompanying notes are an integral part of these consolidated financial statements.

 

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Anthracite Capital, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2009

(in thousands)

 

    Series C
Preferred
Stock
  Series D
Preferred
Stock
  Common
Stock,
Par Value
  Additional
Paid-In
Capital
  Distributions
in Excess

of Earnings
    Accumulated
Other
Comprehensive
Loss
    Comprehensive
Loss
    Total
Stockholders’
Equity
 

Balance at December 31, 2008

  $ 55,435   $ 83,259   $ 78   $ 787,678   $ (276,558   $ (32,400     $ 617,492   

Cumulative effect of change in accounting principle

          9,694     (55,055         (45,361
                                                       

Balance at January 1, 2009

  $ 55,435   $ 83,259   $ 78   $ 797,372   $ (331,613   $ (32,400     $ 572,131   

Net loss

            (118,794     $ (118,794     (118,794

Unrealized loss on cash flow hedges

              (931     (931     (931

Reclassification adjustments from cash flow hedges included in net income

              5,588        5,588        5,588   

Foreign currency translation

              13,155        13,155        13,155   

Dedesignation of derivative instruments

              7,840        7,840        7,840   
                     

Other comprehensive income

                25,652     
                     

Accumulated comprehensive loss

              $ (93,142  
                     

Issuance of common stock

        16     12,864           12,880   

Dividends on preferred stock

            (1,508         (1,508
                                                       

Balance at September 30, 2009

  $ 55,435   $ 83,259   $ 94   $ 810,236   $ (451,915   $ (6,748     $ 490,361   
                                                       

The accompanying notes are an integral part of these consolidated financial statements.

 

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Anthracite Capital, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

     For the Nine Months Ended
September 30, 2009
    For the Nine Months Ended
September 30, 2008
 

Cash flows from operating activities:

    

Net (loss) income

   $ (118,794   $ 89,614   

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

    

Principal payments received on securities held-for-trading

     37        118   

Purchase of securities held-for-trading

     —          (53,515

Sale of securities held-for-trading

     730        —     

Unrealized loss on securities held-for-trading

     16,265        572,675   

Net realized loss on sale of commercial mortgage loans

     9,079        —     

Unrealized loss (gain) on swaps classified as held-for-trading

     (24,088     811   

Realized loss on securities and swaps held-for-trading, net

     3,072        3,236   

Unrealized loss (gain) on liabilities

     71,870        (656,538

Realized gain on liabilities

     (30,835     —     

Earnings from subsidiary trust

     (269     (317

Distributions from subsidiary trust

     269        316   

Loss (earnings) from equity investments

     21,294        (2,510

Distributions of earnings from equity investments

     1,009        3,599   

Provision for loan loss

     98,999        43,942   

Discount accretion, net

     (23,621     (12,927

Amortization of finance costs

     2,176        2,505   

Unrealized and realized net foreign currency (gain) loss

     (3,974     28,528   

Non-cash management, incentive, and director fees

     6,794        11,934   

Disbursements from termination of interest rate swap agreements

     (5,447     (17,101

Amortization of terminated interest rate swaps from OCI

     5,588        4,577   

Dedesignation of cash flow hedges

     7,840        7,084   

Decrease (increase) in other assets

     28,005        (8,910

Decrease in other liabilities

     (8,666     (6,287
                

Net cash provided by operating activities

     57,333        10,834   
                

Cash flows from investing activities:

    

Proceeds from sale of securities

     65,869        74,272   

Principal payments received on securities

     32,494        56,968   

Funding of commercial mortgage loans

     —          (2,286

Repayments received from commercial mortgage loans

     31,214        19,341   

Proceeds from the sale of commercial loans

     4,299        —     

Repayments received from commercial mortgage loan pools

     74,202        7,639   

(Increase) decrease in restricted cash equivalents

     (9,594     16,086   

Increase in cash collateral

     22,915        —     

Investment in equity investments

     —          (35,538

Return of capital from equity investments

     381        —     
                

Net cash provided by investing activities

     221,780        136,482   
                

Cash flows from financing activities:

    

(Decrease) increase in borrowings under reverse repurchase agreements and credit facilities:

    

Secured by pledge of subordinated CMBS

     (22,520     (102,998

Secured by pledge of investment grade CMBS

     (63,741     (85,617

Secured by pledge of commercial mortgage loans

     (21,927     (39,556

Secured by pledge of equity investment

     3,450        30,000   

Repayments of borrowings secured by commercial mortgage loan pools

     (74,202     (9,157

Repayments of collateralized debt obligations

     (102,369     (44,885

Repurchase of collateralized debt obligations

     (3,295     —     

Dividends paid on preferred stock

     (4,529     (11,805

Proceeds from issuance of preferred stock, net of offering costs

     —          69,839   

Proceeds from issuance of common stock, net of offering costs

     —          59,327   

Dividends paid on common stock

     —          (61,141
                

Net cash used in financing activities

     (289,133     (195,993
                

Effect of exchange rate changes on cash and cash equivalents

     631        2,940   
                

Net decrease in cash and cash equivalents

     (9,389     (45,737

Cash and cash equivalents, beginning of period

     9,686        91,547   
                

Cash and cash equivalents, end of period

   $ 297      $ 45,810   
                

 

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     For the Nine Months Ended
September 30, 2009
   For the Nine Months Ended
September 30, 2008

Supplemental disclosure of cash flow information:

     

Cash paid for interest

   $ 109,090    $ 167,624
             

Series E-3 preferred stock conversion

   $ —      $ 23,289
             

Supplemental disclosure of non-cash investing and financing activities:

     

Transfer of non-U.S. mortgage loan from Anthracite International JV

   $ 26,201      —  
             

Incentive and director fees paid by the issuance of common stock

   $ 403    $ 9,257
             

The accompanying notes are an integral part of these consolidated financial statements.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(Dollar amounts in thousands, except share and per share data)

Note 1 ORGANIZATION

Anthracite Capital, Inc., a Maryland corporation (collectively with its subsidiaries, the “Company”), was incorporated in Maryland in November 1997, commenced operations on March 24, 1998 and has elected to be taxed as a real estate investment trust (“REIT”). The Company seeks to generate income from the spread between the interest income, gains and net operating income on its commercial real estate assets and the interest expense from borrowings to finance its investments. The Company’s primary activities are investing in high yield commercial real estate debt and equity. The Company combines traditional real estate underwriting and capital markets expertise to maximize the opportunities arising from the continuing integration of these two disciplines. The Company focuses on acquiring pools of performing loans in the form of commercial mortgage-backed securities (“CMBS”), issuing secured debt backed by CMBS and providing strategic capital for the commercial real estate industry in the form of mezzanine loan financing and equity.

The Company’s primary investment activities are conducted on a global basis in three investment sectors:

 

  1) Commercial Real Estate Debt Securities

 

  2) Commercial Real Estate Loans

 

  3) Commercial Real Estate Equity

The accompanying September 30, 2009 unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain prior year amounts have been restated or reclassified to conform to 2009 presentation required by the retrospective adoption of Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options (“ASC 470-20”) (formerly FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)). These consolidated financial statements should be read in conjunction with the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (the “SEC”).

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the statements of financial condition and revenues and expenses for the periods covered. Actual results could differ from those estimates and assumptions. Significant estimates in the consolidated financial statements include the valuation of the Company’s assets and long-term liabilities, credit analysis related to certain of the Company’s securities, and estimates pertaining to credit performance related to CMBS and commercial real estate loans.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Company’s consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations and realization of assets, liabilities and commitments in the normal course of business. There is substantial doubt that the Company will be able to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. The consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

Effect of Market Conditions on the Company’s Business & Recent Developments

During 2008 (particularly in the fourth quarter) and early 2009, global economic conditions deteriorated, resulting in disruptions in the credit and capital markets, significant reductions in the market value of assets and a severe economic downturn globally. Although the capital markets have shown recent signs of stabilizing after prolonged economic downturn and credit crisis, the Company’s assets linked to the U.S. and non-U.S. commercial real estate finance markets continue to be adversely affected as the market value of commercial real estate assets has not recovered and delinquencies have risen significantly for CMBS and commercial real estate loans. Liquidity and capital sources previously available to the Company began to decline during the second half of 2007, became scarce as 2008 progressed and are currently not available to the Company. Under normal market conditions, the Company relies on the credit and equity markets for capital to finance its investments and grow its business. However, based on the Company’s current liquidity situation, the Company is focused on negotiations with its secured lenders and unsecured noteholders to cure missed interest and amortization payments and continues to seek ways to refinance or restructure its indebtedness.

Current conditions in the commercial real estate market have had, and the Company expects will continue to have, an adverse effect on the Company and the commercial real estate loans and CMBS in which the Company has invested. These effects include:

 

   

Adverse impact on liquidity. As a result of a continued rise in delinquencies for commercial real estate loans and CMBS during 2009, the Company’s cash flow has been materially and adversely affected. This negative trend has continued into the fourth quarter of 2009 and the Company believes this negative trend will continue into the foreseeable future. As a result of the decline in the cash flows from the Company’s assets, the Company was unable to make the full September 30, 2009 amortization payments required under its secured bank facilities for two of its three secured bank lenders. Pursuant to amendments to its secured bank facilities with Bank of America, Deutsche Bank and Morgan Stanley which closed in May 2009, the Company is required to make payments to reduce the principal balances under the facilities by certain specified amounts as of the end of each quarter, commencing for the quarter ended September 30, 2009. The Company was only able to make the full required amortization payment under its facility with Morgan Stanley. In addition, separate and apart from the aforementioned amortization payment obligations, the Company was unable to make the entire amount of a monthly $1,250 amortization payment under its facility with Morgan Stanley due October 31, 2009. The Company has 90 days after the end of any applicable quarter to cure such aggregate amortization payment shortfall or an event of default will occur. During the cure period, all the cash flows from the Company’s assets are being diverted to a cash management account for the benefit of the Company’s secured bank lenders subject to limited exceptions approved by the secured bank lenders. In the event the secured bank lenders do not allow

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

 

the Company access to the diverted cash flows, the Company will not be able to make payments due on its unsecured debt and will be unable to pay general and administrative expenses. As a result, the Company may default on its obligations under its unsecured debt and be unable to continue as a going concern. In addition, the Company’s current projections show that even if the Company cures the aggregate amortization payment shortfall by December 29, 2009 (i.e. within the 90-day period), the Company will not be able to make the required amortization payments for the quarter ended December 31, 2009 and will need to cure such shortfall by March 31, 2010 to avoid an event of default. The Company continues to seek ways to refinance or restructure its unsecured indebtedness, thereby reducing its interest expense and increasing its cash flows. These efforts include the debt-for-equity exchanges and unsecured debt restructurings described in Note 11 of the consolidated financial statements, “Borrowings”. No assurance can be given that the Company will be able to continue to effect exchanges and debt restructurings or that this endeavor will be successful.

 

   

Negative operating results during the nine months ended September 30, 2009 and the year ended December 31, 2008. For the nine months ended September 30, 2009, the Company incurred a net loss available to common stockholders of $(132,508) driven primarily by significant net realized and unrealized losses, the incurrence of a $(98,999) provision for loan losses and a significant decline in interest income due to rising delinquencies on the Company’s CMBS and commercial real estate loans. For the year ended December 31, 2008, the Company incurred a net loss available to common stockholders of $(258,050), driven primarily by significant net realized and unrealized losses, the incurrence of a $(165,928) provision for loan losses and a loss from equity investments of ($53,630).

 

   

Substantial doubt about the ability to continue as a going concern. Substantial doubt continues to exist about the Company’s current ability to continue as a going concern. The Company’s independent registered public accounting firm issued an opinion on the Company’s December 31, 2008 consolidated financial statements that stated the consolidated financial statements were prepared assuming the Company will continue as a going concern and further stated that the Company’s liquidity position, current market conditions and the uncertainty relating to the outcome of the Company’s then ongoing negotiations with its secured bank lenders raised substantial doubt about the Company’s ability to continue as a going concern.

 

   

Other matters. Financial covenants in certain of the Company’s secured credit facilities include, without limitation, a covenant that the Company’s operating earnings (as defined in the applicable credit facility) will not be less than a specified amount at quarter end. The Company was in breach of this covenant at September 30, 2009. See Note 11 of the consolidated financial statements, “Borrowings”, for further discussion. In addition, the Company’s secured credit facility with BlackRock Holdco 2, Inc. (“Holdco 2”) requires the Company to immediately repay outstanding borrowings under the facility to the extent outstanding borrowings exceed 60% of the fair market value (as determined by the Company’s manager, BlackRock Financial Management, Inc. (the “Manager”)) of the shares of common stock of Carbon Capital II, Inc. (“Carbon II”) securing such facility. As of February 28, 2009, 60% of the market value of such shares was less than the loan balance. As of September 30, 2009, 60% of the fair market value of such shares declined to approximately $16,689 and outstanding borrowings under the facility were $33,450. On March 17, 2009, Holdco 2 waived the Company’s failure to repay borrowings in accordance with this covenant until April 1, 2009 and subsequently extended this waiver until January 22, 2010. Additionally, on October 30, 2009, the Company did not make interest payments due on such date on its outstanding

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

 

$13,750 aggregate principal amount of 7.22% senior unsecured notes due 2016, its outstanding $15,000 aggregate principal amount of 7.772%-to-floating rate senior unsecured notes due 2017 and its outstanding $37,500 aggregate principal amount of 8.1275%-to-floating rate senior unsecured notes due 2017. Under the indentures governing each of these notes, the failure to make an interest payment is subject to a 30-day cure period before constituting an event of default. Unless the secured bank lenders allow the Company to access some of the cash flow currently being diverted into the cash management account or the holders of these notes agree to a refinancing or agree to waive the defaults, the Company will not be able to make interest payments on these notes and events of default will occur on November 30, 2009. An event of default under these notes, absent a waiver, would trigger cross-default and cross-acceleration provisions in the Company’s secured bank facilities and its credit facility with Holdco 2 and, if any such debt were accelerated, would trigger a cross-acceleration provision in the Company’s convertible notes indenture. If such acceleration were to occur, the Company would not have sufficient liquid assets available to repay such accelerated indebtedness and, unless the Company was able to obtain additional capital resources or waivers, the Company would be unable to continue to fund its operations or continue its business.

 

   

Elimination of dividends. The Company’s Board of Directors (the “Board of Directors”) has not declared any dividend on the Common Stock and the Company’s preferred stock during 2009. The Board of Directors anticipates that the Company will only pay cash dividends on its preferred and common stock, if such cash is available, to the extent necessary to maintain its REIT status until the Company’s liquidity position has improved subject to the following restrictions. Pursuant to each indenture the Company entered into or amended in connection with the restructuring of its junior unsecured subordinated debt and senior unsecured notes in May 2009, July 2009 and October 2009, until the earlier of (i) four years after such indenture was entered into or amended and (ii) in the case of the junior unsecured subordinated indentures, the date on which all of the existing senior secured loans under the Company’s secured credit facilities are fully amortized, including certain deferred restructuring fees, or, in the case of the senior unsecured indentures, the date on which the outstanding aggregate principal amount of such senior secured loans is less than or equal to $4,000, the Company is prohibited from making payments on its capital stock, including its common stock, other than (a) with the consent of a majority of the holders of the notes issued under the indentures or (b) dividends or distributions reasonably necessary to maintain its REIT status; provided that such dividends or distributions, (A) to the extent paid to its common stockholders, are not in excess of $2,500 in the aggregate and are in the form of its common stock to the maximum extent permissible to maintain its REIT status (the “Permitted Distribution”), and (B) to the extent paid to the preferred stockholders, are in an amount no greater than that required to be distributed to such holders in order to make the Permitted Distribution to its common stockholders. To the extent the Company is required to and permitted to make distributions to maintain its qualification as a REIT in 2009, the Company may rely upon temporary guidance that was issued by the Internal Revenue Service (“IRS”), which allows certain publicly traded REITs to satisfy their net taxable income distribution requirements during 2009 by distributing up to 90% in stock, with the remainder distributed in cash. However, the terms of the Company’s preferred stock prohibit the Company from declaring or paying cash dividends on the Common Stock unless full cumulative dividends have been declared and paid on the preferred stock. In addition, the terms of the Company’s preferred stock require the Company to pay preferred stock dividends in cash only.

NYSE Listing

On September 15, 2009, the Company was notified by the New York Stock Exchange, Inc. (the “NYSE”) that the average per share price of the Company’s Common Stock was below the NYSE’s continued listing standard relating to minimum average share price (the “Price Condition”). Rule 802.01C of the NYSE’s Listed Company Manual requires that the average closing price of the Common Stock be no less than $1.00 per share over a consecutive 30 trading-day period.

Under the applicable rules and regulations of the NYSE, the Company had 10 business days from the receipt of the notice to notify the NYSE of its intent to cure the Price Condition deficiency. The Company has notified the NYSE that it intends to cure the Price Condition deficiency by effecting a reverse stock split, subject to stockholder approval. The notice provides that the Company must obtain stockholder approval by no later than its next annual meeting (scheduled on May 18, 2010) and must implement the reverse stock split promptly thereafter. If the Company has not cured the Price Condition deficiency by that date, the

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Common Stock will be subject to suspension and delisting by the NYSE. The Price Condition deficiency will be deemed cured if the Common Stock price at any time exceeds $1.00 per share and remains above $1.00 for the following 30 trading days.

The exact ratio of the reverse stock split will be determined based on the facts and circumstances at a later date.

The Common Stock will continue to be listed on the NYSE under the symbol “AHR” during this interim cure period, but will be assigned a “.BC” indicator by the NYSE to signify that the Company is not currently in compliance with the NYSE’s quantitative continued listing standards. The Company’s continued listing during this interim cure period is also subject to the Company’s compliance with other NYSE requirements and the NYSE’s right to reevaluate continued listing determinations, including if the Common Stock trades at levels viewed to be abnormally low over a sustained period of time. Although the Company intends to cure the Price Condition deficiency and to return to compliance with the NYSE continued listing requirements, there can be no assurance that it will be able to do so.

Short-form registration statements

The failure to file in a timely manner all required periodic reports with the SEC for a period of twelve months or to otherwise comply with eligibility requirements has made the Company ineligible to use a Registration Statement on Form S-3. While it is ineligible, the Company may use a Registration Statement on Form S-1, but may find raising capital to be more expensive and, if the SEC reviews any Registration Statement on Form S-1 of the Company, subject to delay.

CDO tests

In addition to the covenants under the Company’s secured credit facilities, four of the seven CDOs issued by the Company contain compliance tests which, if violated, could trigger a diversion of cash flows from the Company to bondholders of the CDOs. The Company’s three CDOs designated as its high yield (“HY”) series do not have any compliance tests.

Interest Coverage and Overcollateralization Tests (“Cash Flow Triggers”)

Four of the seven CDOs issued by the Company contain tests that measure the amount of overcollateralization and excess interest in the transaction. Failure to satisfy these tests would cause the principal and/or interest cash flow that would otherwise be distributed to more junior classes of securities (including those held by the Company) to be redirected to pay down the most senior class of securities outstanding until the tests are satisfied. Therefore, failure to satisfy the coverage tests could adversely affect cash flows received by the Company from the CDOs and thereby the Company’s liquidity and operating results. The trigger percentages in the chart below represent the first threshold at which cash flows would be redirected.

Generally, the overcollateralization test measures the principal balance of the specified pool of assets in a CDO against the corresponding liabilities issued by the CDO. However, based on ratings downgrades, the principal balance of an asset or of a specified percentage of assets in a CDO may be deemed reduced below their current balance to levels set forth in the related CDO documents for purposes of calculating the overcollateralization test. As a result, ratings downgrades can reduce the principal balance of the assets used in the overcollateralization test relative to the corresponding liabilities in the test, thereby reducing the overcollateralization percentage. In addition, actual defaults of an asset would also negatively impact

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

compliance with the overcollateralization tests. A failure to satisfy an overcollateralization test on a payment date could result in the redirection of cash flows.

During 2009, Anthracite Euro CRE CDO 2006-1 plc (“Euro CDO”) failed to satisfy its Class E overcollateralization and interest coverage tests. As a result of Euro CDO’s failure to satisfy these tests, each interest payment due to the Company, as the Euro CDO’s preferred shareholder, will remain in the CDO as reinvestable cash until the tests are satisfied. Since the Euro CDO’s preferred shares are pledged to one of the Company’s secured lenders, the cash flow available to pay down the lender’s outstanding balance has been reduced.

Weighted Average Life, Minimum Weighted Average Recovery Rate, the Moody’s Weighted Average Rating Factor, and Fitch Vector Model Test (“Collateral Quality Tests”)

Collateral quality tests limit the ability of the Company’s CDOs to trade securities within its portfolio. These tests apply to the Euro CDO, which is actively managed. If any one of these tests fails, then any subsequent trade will either have to maintain or improve the result of the failing test or the trade cannot be executed.

Of the above-mentioned collateral quality tests, the weighted average rating test and the vector model test have several implications to the CDO. These tests are primarily impacted when credit rating agencies downgrade the underlying CDO collateral. In addition to the Manager’s ability to trade securities in the portfolio, ratings downgrades by either Moody’s or Fitch of assets in the Company’s CDOs can negatively impact compliance with the overcollateralization tests when an asset is downgraded to Caa3 or below. The Company is permitted to actively manage the Euro CDO collateral pool to facilitate compliance with this test through end of February 2012, the reinvestment period. After the reinvestment period, there are limited circumstances under which trades can be executed. However, the Company’s ability to remain in compliance is limited by the amount of securities held outside of the Euro CDO and also by the Company’s inability to purchase new assets given its liquidity position.

The chart below is a summary of the Company’s CDO compliance tests as of September 30, 2009. During the first quarter of 2009, Fitch downgraded a significant number of the assets held in the Euro CDO portfolio. As a result, there were more assets rated CCC or lower, which have implications on the results of the over-collateralization tests. In addition, several assets were rated CC or lower, which places these assets into default according the CDO documents. The combination of these factors is causing the Euro CDO to fail the overcollateralization tests for all of its classes.

Because the failures of the overcollateralization tests were not cured by the May 15, 2009 payment date, any cash flows that remained after the payment of interest to the Class A and Class B senior notes were utilized to pay down the principal of the Class A notes. This redirection of cash flows will continue until the failures of the Class A through Class D overcollateralization tests are cured.

Additionally, the Euro CDO failed its interest coverage test for its preferred shares, which are held by the Company. This test is calculated in the same manner as the Class E overcollateralization test. Since the Euro CDO’s preferred shares are pledged to one of the Company’s secured lenders, the cash flow available to pay down the lender’s outstanding balance will be reduced. Below is a summary of each of the Company’s CDO compliance tests as of September 30, 2009.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Cash Flow Triggers

   CDO I     CDO II     CDO III     Euro CDO  

Overcollateralization

        

Current

   125.9   126.0   118.4   80.5

Trigger

   115.6   113.2   108.9   116.4

Pass/Fail

   Pass      Pass      Pass      Fail   

Interest Coverage/ Interest Reinvestment (Euro CDO)

        

Current

   206.5   168.8   305.3   80.5

Trigger

   108.0   117.0   111.0   116.4

Pass/Fail

   Pass      Pass      Pass      Fail   

Collateral Quality Tests

   CDO I     CDO II     CDO III     Euro CDO  

Weighted Average Life Test

        

Current

   N/A      N/A      N/A      3.25   

Trigger

   N/A      N/A      N/A      7.25   

Pass/Fail

   N/A      N/A      N/A      Pass   

Minimum Weighted Average Recovery Rate Test

         Moody’s   

Current

   N/A      N/A      N/A      25.1

Trigger

   N/A      N/A      N/A      18.0

Pass/Fail

   N/A      N/A      N/A      Pass   

Vector Model Test

         Fitch   

Pass/Fail

   N/A      N/A      N/A      Fail   

Weighted Average Rating Factor Test

         Moody’s   

Current

   N/A      N/A      N/A      2385   

Trigger

   N/A      N/A      N/A      2740   

Pass/Fail

   N/A      N/A      N/A      Pass   

Note 2 SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Developments

FASB Accounting Standards Codification (“Codification”)

In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 105-10, Generally Accepted Accounting Principles (“ASC 105-10”) (formerly Statement of Financial Accounting Standards (“SFAS”) 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles), which established the Codification and which supersedes all existing accounting standard documents and has become the single source of authoritative non-governmental GAAP. All other accounting literature not included in the Codification is considered non-authoritative. The Codification became effective for interim and annual periods ending after September 15, 2009. The Company has conformed its consolidated financial statements and related footnotes to the new Codification for the quarter ended September 30, 2009.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Convertible Debt Instruments

In May 2008, ASC 470-20 (formerly FSP APB 14-1) was issued. ASC 470-20 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. ASC 470-20 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective interest method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity and as long as the conversion option is “indexed to the Company’s own stock” as defined in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Entity (formerly Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock).

On January 1, 2009, the Company adopted ASC 470-20, which was required to be applied retrospectively. As a result of such adoption the Company was no longer eligible to elect the fair value option under ASC 825-10, Financial Instruments (“ASC 825-10”) (formerly SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”)) for its 11.75% Convertible Senior Notes due 2027 (the “convertible notes”). The Company elected the fair value option for the convertible notes on January 1, 2008 and had been reporting the change in fair value of such instruments in unrealized gains and losses on liabilities on the consolidated statements of operations. Accordingly, upon the adoption of ASC 470-20 on January 1, 2009, the ASC 825-10 opening retained earnings adjustment related to the convertible notes of $9,814 was reversed and net income for each of the quarters in the year ended December 31, 2008 was adjusted to exclude the following unrealized gains (losses) on the convertible notes:

 

     Unrealized gains (losses)
reversed upon adoption of
ASC 470-20
 

First quarter 2008

   $ 2,490   

Second quarter 2008

     (3,464

Third quarter 2008

     12,416   

Fourth quarter 2008

     33,784   
        

Total 2008

   $ 45,226   
        

In conjunction with the adoption of ASC 825-10, the Company also recorded all unamortized debt issuance costs (totaling $2,396) relating to the convertible notes as an adjustment to opening distributions in excess of earnings on January 1, 2008. Upon the adoption of ASC 470-20, the Company allocated those costs between debt ($2,097) and equity ($299) issuance costs. The adjustment to opening distributions in excess of earnings was reversed and $9,694 related to the equity component of the convertible notes, net of the equity issuance costs, was reclassified from senior unsecured convertible notes to additional paid-in-capital. Net income for each of the following quarters was adjusted to include additional interest expense related to the accretion of the convertible notes and the amortization of the reinstated debt issuance costs.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

     Additional interest expense
related to the adoption of
ASC 470-20

Third quarter 2007

   $ 117

Fourth quarter 2007

     350

First quarter 2008

     463

Second quarter 2008

     481

Third quarter 2008

     491

Fourth quarter 2008

     510
      

Total

   $ 2,412
      

Below is a summary of the balances related to the convertible notes on the September 30, 2009 and December 31, 2008 consolidated statements of financial condition following the adoption of ASC 470-20.

 

     September 30,
2009
    December 31,
2008
 

Principal amount of liability component (1)

   $ 39,019      $ 80,000   

Unamortized discount

     (3,253     (8,000
                

Carrying amount of liability component

   $ 35,766      $ 72,000   
                

Carrying amount of equity component

   $ 9,680      $ 9,694   
                

 

(1)

See Note 11 of the consolidated financial statements, “Borrowings” for a discussion of privately negotiated exchanges of convertible notes for common stock during 2009.

Below is a summary of the balances related to the convertible notes on the September 30, 2009 and 2008 consolidated statements of operations following the adoption of ASC 470-20.

 

     For the three
months ended
September 30,
    For the nine
months ended
September 30,
 
     2009     2008     2009     2008  

Coupon interest

   $ 1,928      $ 2,383      $ 6,471      $ 7,066   

Discount amortization – ASC 470-20 implementation

     383        386        1,209        1,121   

Amortization of issuance costs

     109        105        327        314   
                                

Total

   $ 2,420      $ 2,874      $ 8,007      $ 8,501   
                                

Effective interest rate

     15.4     15.4     15.4     15.4
                                

 

Maturity date (period through which discount is being amortized)

     September 1, 2012   

Conversion price per share, as adjusted

   $ 10.79   

Number of shares on which the aggregate consideration to be delivered upon conversion is determined

     —   (1) 

 

(1)

In accordance with ASC 470-20, the Company is required to disclose the conversion price and the number of shares on which the aggregate consideration to be delivered upon conversion is determined (principal plus excess value). The Company’s convertible notes require the entire principal amount to be settled in cash, and at its option, any excess value above the principal amount may be settled in cash or common shares. Based on the September 30, 2009 closing share price of the Company’s common shares and the conversion price in the table above, there was no excess value; accordingly, no common shares would be issued if these securities were settled on this date. The number of common shares on which the aggregate consideration to be delivered upon conversion at $10.79 per share is 3,617,393 common shares.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Company’s consolidated statements of operations for the three and nine months ended September 30, 2008, as originally reported and as adjusted for the adoption of ASC 470-20 is as follows:

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2008     2008
as adjusted
    2008     2008
as adjusted
 

Expenses:

        

Interest

   $ 56,652      $ 57,143      $ 164,189      $ 165,624   

Management and incentive fees

     3,432        3,432        22,591        22,591   

General and administrative expense

     2,025        2,025        5,706        5,706   
                                

Total expenses

     62,109        62,600        192,486        193,921   

Other gains (losses):

        

Realized loss on securities and swaps held-for-trading, net

     (5,005     (5,005     (14,840     (14,840

Unrealized loss on securities held-for-trading

     (247,348     (247,348     (572,675     (572,675

Unrealized loss on swaps held-for-trading

     (5,859     (5,859     (811     (811

Unrealized gain on liabilities

     261,723        249,307        667,980        656,538   

Dedesignation of derivative instruments

     (7,084     (7,084     (7,084     (7,084

Provision for loan losses

     (18,752     (18,752     (43,942     (43,942

Foreign currency loss

     7,273        7,273        (2,913     (2,913
                                

Total other gain

     (15,052     (27,468     25,715        14,273   
                                

Net income

     15,304        2,397        102,491        89,614   
                                

Dividends on preferred stock

     (4,529     (4,529     (12,738     (12,738
                                

Net income available to Common Stockholders

   $ 10,775      $ (2,132   $ 89,753      $ 76,876   
                                

Net income per common share, basic:

   $ 0.14      $ (0.03   $ 1.30      $ 1.11   
                                

Net income per common share, diluted:

   $ 0.14      $ (0.03   $ 1.23      $ 1.07   
                                

Weighted average number of shares outstanding:

        

Basic

     74,365,259        74,365,259        69,099,689        69,099,689   

Diluted

     74,748,560        74,365,259        81,724,651        81,724,651   

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Company’s Consolidated Statements of Financial Condition as originally reported and as adjusted for the adoption of ASC 470-20, is as follows:

 

     December 31,
2008
    December 31, 2008
as adjusted
 

Assets:

    

Other assets

   $ 72,087      $ 73,766   

Liabilities:

    

Total borrowings

     2,106,537        2,153,577   

Stockholders’ Equity:

    

Preferred stock

    

9.375% Series C Preferred Stock

     55,435        55,435   

8.25% Series D Preferred Stock

     83,259        83,259   

Common Stock

     78        78   

Additional paid-in capital

     787,678        797,372   

Distributions in excess of earnings

     (276,558     (331,613

OCI

     (32,400     (32,400
                

Total Stockholders’ Equity

   $ 617,492      $ 572,131   
                

Non-controlling Interests

In December 2007, the FASB issued ASC 810-10 (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51). ASC 810-10 establishes accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. In addition, consolidated net income should be adjusted to include the net income attributed to the non-controlling interests. The Company adopted ASC 810-10 on January 1, 2009. ASC 810-10 required retrospective adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of ASC 810-10 are applied prospectively. The adoption of ASC 810-10 did not impact the Company’s stockholders’ equity on the consolidated statements of financial condition.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued ASC 815-10, Derivatives and Hedging (“ASC 815-10”) (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities). This statement amends and expands the disclosure requirements of ASC 815, Derivatives and Hedging (“ASC 815”) (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”)). This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815-10 is effective for reporting periods beginning after November 15, 2008. The Company adopted this standard on January 1, 2009 and the consolidated financial statements include the additional disclosure requirements of ASC 815-10. See Note 16 of the consolidated financial statements, “Derivative Instruments and Hedging Activities” for further discussion.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Reverse Repurchase Agreements

In February 2008, the FASB issued ASC 860-10, Transfers and Servicing (“ASC 860-10”) (formerly FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions). ASC 860-10 addresses the accounting for the transfer of financial assets and a subsequent repurchase financing and is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those years and is applicable to new transactions entered into after the adoption date. ASC 860-10 focuses on the circumstances that would permit a transferor and a transferee to separately evaluate the accounting for a transfer of a financial asset and a repurchase financing under ASC 860, Transfers and Servicing (“ASC 860”) (formerly SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities).

ASC 860-10 states that a transfer of a financial asset and a repurchase agreement involving the transferred financial asset should be considered part of the same arrangement when the counterparties to the two transactions are the same unless certain criteria are met. The criteria in ASC 860-10 are intended to identify whether (1) there is a valid and distinct business or economic purpose for entering separately into the two transactions and (2) the repurchase financing does not result in the initial transferor regaining control over the previously transferred financial assets.

Fair Value Measurements

In September 2006, the FASB issued ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820) (formerly SFAS No. 157, Fair Value Measurements). ASC 820-10 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2 and 3, as defined below). Additionally, companies are required to provide enhanced disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. The Company adopted ASC 820-10 as of January 1, 2008. ASC 820-10 did not materially affect how the Company determines fair value, but resulted in certain additional disclosures.

In October 2008, the FASB clarified the application of ASC 820-10, which the Company adopted as of January 1, 2008, in a market that is not active and provided an example to illustrate key considerations in the determination of the fair value of a financial asset when the market for that asset is not active. The key considerations illustrated in the ASC 820-10 example include the use of an entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates, appropriate risk adjustments for nonperformance and liquidity risks, and the reliance that an entity should place on quotes that do not reflect the result of market transactions. The adoption by the Company of ASC 820-10 did not have a material impact on its financial statements or its determination of fair values as of September 30, 2009 and December 31, 2008.

Fair Value Accounting

ASC 825-10 (formerly SFAS 159) permits entities to elect to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected will be reported in other gain (loss) on the consolidated statements of operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis, is applied to an entire instrument and is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option will be reported separately on the consolidated statements of financial condition from those instruments measured using

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

another measurement attribute. The Company adopted ASC 825-10 as of January 1, 2008 and elected to apply the fair value option to the following financial assets and liabilities existing at the time of adoption:

 

  (1) all securities which were previously accounted for as available-for-sale;

 

  (2) investments in equity of subsidiary trusts;

 

  (3) certain unsecured long-term liabilities, consisting of all senior unsecured notes, junior unsecured subordinated notes and TruPS; and

 

  (4) all CDO liabilities.

Upon adoption, with an adjustment to opening retained earnings, total stockholders’ equity increased by $350,623 ($343,205 subsequent to the adoption of ASC 470-20), all of which relates to applying the fair value option to the Company’s long-term liabilities. The Company recorded all unamortized debt issuance costs relating to debt for which the Company elected the fair value option on January 1, 2008 as an adjustment to opening distributions in excess of earnings. Subsequent to January 1, 2008, all changes in the estimated fair value of the Company’s securities held-for-trading, CDO liabilities, senior unsecured notes, junior unsecured subordinated notes and TruPS are recorded in other gains (losses) on the consolidated statements of operations.

The adoption of ASC 470-20 on January 1, 2009 required the Company to bifurcate the convertible notes into a debt and an equity component and revise the 2008 and 2007 consolidated financial statements to reverse the fair value option elected previously for such instruments.

Fair Value Measurements, Disclosures and Impairments of Securities

In April 2009, the FASB amended current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Under ASC 320-10, Investments – Debt and Equity Securities (“ASC 320-10”) ( formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), an other-than-temporary impairment is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity does not intend to sell a security and it is not more likely than not that the entity will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated into the credit loss component, which is recorded in earnings, and the remainder of the impairment charge, which is recorded in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.

ASC 820-10 provides additional guidance on determining when the volume and level of activity for an asset or liability has significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820-10 expands the required quantitative and qualitative disclosures about fair value of financial instruments to interim reporting periods for publicly traded entities. See Notes 4 and 12 to the consolidated financial statements, “Fair Value of Financial Instruments”.

The Company adopted the statements outlined above in the second quarter 2009. The adoption of these ASCs did not have a material impact on its consolidated financial statements.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Variable Interest Entities

The consolidated financial statements include the financial statements of the Company and its subsidiaries, which are wholly owned or controlled by the Company or entities which are variable interest entities (“VIEs”) in which the Company is the primary beneficiary under ASC 810-10 (formerly FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003 (“ FIN 46R”)). ASC 810-10 requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs the majority of the VIE’s expected losses and/or the majority of the expected returns. All intercompany balances and transactions have been eliminated in consolidation.

The Company considers the CMBS where it maintains the right to control the foreclosure/workout process on the underlying loans its controlling class CMBS (“Controlling Class”). The Company has analyzed the governing pooling and servicing agreements for each of its Controlling Class CMBS and believes that the terms are industry standard and are consistent with the qualifying special-purpose entity (“QSPE”) criteria. As a result, the Company does not consolidate these entities.

In June 2009, the FASB amended the consolidation guidance applicable to variable interest entities. The amendments will significantly change the principles of consolidation and change the way entities account for securitizations and special purpose entities as a result of the elimination of the QSPE concept. This amendment is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The Company is currently evaluating the impact of adopting on its consolidated financial statements but expects that it could result in a significant gross up to the Company’s statement of financial condition and statement of operations.

Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities

In December 2008, the FASB issued ASC 860, Transfers and Servicing (“ASC 860”) and ASC 810-10, Consolidation (“ASC 810-10”) (formerly FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities). ASC 860 and ASC 810-10 require public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets. They also require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about its involvement with variable interest entities. These statements were effective for reporting periods ending after December 15, 2008. The adoption of the additional disclosure requirements of ASC 860 and ASC 810-10, which are shown in Note 10 of the consolidated financial statements, did not materially impact the Company’s consolidated financial statements.

Investment Companies

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued ASC 946-10, Financial Services – Investment Companies (“ASC 946-10”) (formerly Statement of Position (“SOP”) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies). This ASC provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the “Guide”). Entities that are within the scope of the Guide are required, among other things, to carry their investments at fair value, with changes in fair value included in earnings. On February 14, 2008, the FASB decided to indefinitely defer the effective date of this SOP.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Subsequent Events

In May 2009, the FASB issued ASC 855-10, Subsequent Events (“ASC 855-10”) (formerly SFAS No. 165, Subsequent Events). ASC 855-10 establishes general standards governing accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855-10 also provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions occurring after the balance sheet date. The Company adopted ASC 855-10 effective June 30, 2009, and the adoption had no impact on the Company’s consolidated financial statements. The Company has reviewed subsequent events occurring through November 9, 2009, the date that these consolidated financial statements were issued and determined that no subsequent events occurred that would require accrual or additional disclosure other than as disclosed in Note 11 of the consolidated financial statements, “Borrowings”.

Note 3 NET INCOME (LOSS) PER SHARE

Net income per share is computed in accordance with ASC 260-10, Earnings per Share (formerly SFAS No. 128, Earnings Per Share). Basic income per share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period plus the additional dilutive effect of common stock equivalents. The dilutive effect of outstanding stock options is calculated using the treasury stock method, and the dilutive effect of the convertible notes and cumulative convertible redeemable preferred stock is calculated using the “if converted” method.

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
     2009     2008     2009     2008

Numerator:

        

Numerator for basic earnings per share

   $ (43,450   $ (2,132   $ (132,508   $ 76,876

Interest expense on the convertible notes

     —          —          —          7,066

Dividends on Series E convertible preferred stock

     —          —          —          3,343
                              

Numerator for diluted earnings per share

   $ (43,450   $ (2,312   $ (132,508   $ 87,285
                              

Denominator:

        

Denominator for basic earnings per share—weighted average common shares outstanding

     84,840,171        74,365,259        80,777,805        69,099,689

Assumed conversion of convertible notes

     —          —          —          7,416,680

Assumed conversion of Series E convertible preferred stock

     —          —          —          4,952,748

Dilutive effect of stock based incentive fee

     —          —          —          255,534
                              

Denominator for diluted earnings per share—weighted average common shares outstanding and common stock equivalents outstanding

     84,840,171        74,365,259        80,777,805        81,724,651
                              

Basic net income (loss) per weighted average common share:

   $ (0.51   $ (0.03   $ (1.64   $ 1.11
                              

Diluted net income (loss) per weighted average common share and common share equivalents:

   $ (0.51   $ (0.03   $ (1.64   $ 1.07
                              

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Total anti-dilutive shares related to the convertible notes and Series E convertible preferred stock excluded from the calculation of diluted net income (loss) per share were 11,896,867 and 14,623,326 for the three and nine months ended September 30, 2009. Total anti-dilutive interest expense related to the convertible notes and Series E convertible preferred stock excluded from the calculation of diluted net income (loss) per share was $4,099 and $6,970 for the three and nine months ended September 30, 2009.

Total anti-dilutive stock options excluded from the calculation of diluted net income (loss) per share were 10,000 for the three and nine months ended September 30, 2008. Total anti-dilutive shares related to convertible notes and Series E convertible preferred stock excluded from the calculation of diluted net income per share were 7,416,680 and 6,239,323, respectively, for the three months ended September 30, 2008.

Note 4 FAIR VALUE DISCLOSURES

The Company adopted ASC 820 as of January 1, 2008, which requires, among other things, enhanced disclosures about financial instruments that are measured and reported at fair value. Financial instruments include the Company’s securities classified as held-for-trading, long-term liabilities as well as derivatives accounted for at fair value.

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

ASC 820 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Instruments are categorized based on the lowest level input that is significant to the valuation. The three levels defined by the ASC 820 hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date. Level 1 assets include highly liquid cash instruments with quoted prices such as agency securities, listed equities and money market securities, as well as listed derivative instruments. The Company does not include any financial instruments in Level 1.

Level 2 – Pricing inputs other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability, either directly or indirectly. Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Instruments that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives. The Company has determined that the following instruments are Level 2: interest rate swaps, foreign currency swaps and foreign currency forward contracts.

Level 3 – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments in this category generally include assets and liabilities for which there is little, if any, current market activity. The Company’s investments in this category include investment grade CMBS, subordinated CMBS and all of the Company’s long-term liabilities (except the convertible notes as a result of the adoption of ASC 470-20). The fair values of certain assets are determined by references to index pricing. However, for certain assets, index prices for identical or similar assets are not available. In these cases and for CDO liabilities, management uses broker quotes as being indicative of fair values, but management ultimately determines the fair values recorded in the consolidated financial statements. Broker quotes are only indicative of fair value, and do not necessarily represent what the Company would receive in an actual trade for the applicable instrument. The Company has classified these assets and liabilities as Level 3 as of September 30, 2009 due to the lack of current market activity. The Company believes that it may be appropriate to transfer these assets and liabilities to Level 2 in subsequent periods if market activity returns to normalized levels and observable inputs become available.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The Company’s financial assets that were classified as Level 3 due to market inactivity consist primarily of commercial real estate securities. The Company’s financial liabilities that were classified as Level 3 consist primarily of long-term liabilities used to finance the commercial real estate securities. Market activity for commercial real estate securities and long-term liabilities declined dramatically from 2007 to 2009 due to the ongoing turmoil in the credit markets. New issuance volume for commercial real estate securities was a record $230 billion in 2007. For the year ended 2008, new issuance volume for commercial real estate securities was $12.2 billion, a 95% decline from prior year activity. The secondary market activity for CMBS and long-term liabilities that were

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

used to finance such securities similarly declined significantly in 2008 and through the third quarter of 2009 with minimal trading activity for investment grade commercial real estate securities and no trading activity for non-investment grade CMBS. Based on the guidance in ASC 820-10, the Company determined there were very few transactions for similar assets and liabilities and no specific transactions for the Company’s assets and liabilities and prices among brokers who make a market in this sector have varied significantly. The Company concluded that the market was inactive based on the items above as well as the fact that transactions for these assets and liabilities did not occur with sufficient frequency and volume to provide pricing information at the measurement date and on an ongoing basis. The Company continues to monitor the activity of the market to determine if the market becomes active. If in the future transactions for these assets and liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis, the Company will re-evaluate the classification of these financial instruments as Level 3.

The estimated fair value of the Company’s commercial real estate securities and related long-term liabilities is determined by reference to index pricing and market prices provided by dealers who make a market in these financial instruments. The Company uses index pricing for these assets and secured liabilities because this is the method most commonly used by the market for these types of assets and liabilities.

A decline in trading volume as noted above has resulted in reduced liquidity for the Company’s financial instruments. The quotes received from these dealers are only indicative of estimated fair value and do not necessarily represent what the Company would receive in an actual trade. The Company performs an additional analysis to validate the prices received from dealers. This process includes analyzing the securities based on vintage year, rating and asset type and then comparing the prices to market information available for securities of similar type, vintage year and rating.

The Company utilizes this process to validate the prices received from dealers, and adjustments are made as deemed necessary by management to capture current market information. The spread information available in the market captures the illiquidity in the market for these assets and liabilities which are evidenced by the difference between the present value of the loss-adjusted cash flows for a particular security and the price received from the dealer for this security. Over the past eighteen months, the Company has continued to see declines in the prices received from dealers for these assets and liabilities and continued to see market information indicating that spreads for these assets and liabilities have continued to widen as a result of market illiquidity.

Senior and junior unsecured notes and TruPS. The estimated fair values of these liabilities are determined based on market data points obtained by the Company including the pricing of the convertible notes and the prices of the Company’s CMBS securities. The Company then applied a weighted calculation of these market data points to calculate prices for the senior and junior unsecured notes.

Regarding the pricing of the convertible notes, the fair value of the convertible notes is determined by reference to the mid-point of bid/ask prices obtained from the primary dealer in this market. The bid/ask prices represented the prices at which the dealer was willing to buy or sell the note on the measurement date of September 30, 2009. Trading in these notes is done over-the-counter and therefore requires direct communication with the dealer to execute the transaction. The dealer utilizes a model to publish their bid/ask price, which considers, among other things (i) anticipated cash flows, (ii) current market credit spreads and (iii) market transactions of similar securities. The Company adopted ASC 470-20 on January 1, 2009, which was required to be applied retrospectively. As a result of such adoption

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

the Company was no longer eligible to elect the fair value option under ASC 825-10 for the convertible notes. See Note 2 to the consolidated financial statements, “Significant Accounting Policies”, for further discussion.

The following table summarizes the valuation of our financial instruments by the above ASC 820 pricing observability levels as of September 30, 2009. Assets and liabilities measured at fair value on a recurring basis are categorized below based upon the lowest level of significant input to the valuations.

 

     Assets at Fair Value as of September 30, 2009
     Level 1    Level 2    Level 3    Total

Subordinated CMBS

   $ —      $ —      $ 208,628    $ 208,628

Investment grade CMBS

     —        —        647,161      647,161

RMBS

     —        —        11      11

Derivative instruments

     —        26,463      —        26,463

Investments in equity of subsidiary trusts(1)

     —        —        31      31
                           

Total

   $ —      $ 26,463    $ 855,831    $ 882,294
                           

 

(1)

Included as a component of other assets on the consolidated statements of financial condition.

 

     Liabilities at Fair Value as of September 30, 2009
     Level 1    Level 2    Level 3    Total

Senior unsecured notes

   $ —      $ —      $ 14,040    $ 14,040

Junior unsecured subordinated notes

     —        —        14,073      14,073

TruPS

     —        —        1,030      1,030

CDOs

     —        —        544,015      544,015

Derivative instruments

     —        92,199      —        92,199
                           

Total

   $ —      $ 92,199    $ 573,158    $ 665,357
                           

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The following table presents the changes in Level 3 assets for the three months ended September 30, 2009:

 

     Subordinated
CMBS
    Investment grade
CMBS
    RMBS     TruPS  

Balance at July 1, 2009

   $ 188,385      $ 625,999      $ 15      $ 271   

Net sales

     (681     (10,584     —          —     

Net transfers in (out)

     10,620        (10,620     —          —     

Gains (losses) included in earnings

     10,073        42,111        (4     (240

Gains (losses) included in OCI (1)

     231        255        —          —     
                                

Balance at September 30, 2009

   $ 208,628      $ 647,161      $ 11      $ 31   
                                

Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 (2)

   $ 3,290      $ 31,972      $ (4   $ (240
                                

Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 (3)

   $ 5,427      $ 3,748      $ —        $ —     
                                

 

(1)

The Company has a foreign subsidiary that has the Euro as its functional currency. Losses in OCI represent the currency translation adjustments for this subsidiary.

(2)

Recorded in “unrealized loss on securities-held-for trading” in the consolidated statement of operations.

(3)

Recorded in “foreign currency gain (loss)” in the consolidated statement of operations.

The following table presents the changes in Level 3 assets for the nine months ended September 30, 2009:

 

     Subordinated
CMBS
    Investment grade
CMBS
    RMBS     TruPS  

Balance at January 1, 2009

   $ 257,982      $ 677,533      $ 787      $ 384   

Net sales

     (2,096     (96,240     (794     —     

Net transfers in (out)

     27,945        (27,945     —          —     

Gains (losses) included in earnings

     (75,070     94,225        18        (353

Losses included in OCI (1)

     (133     (412     —          —     
                                

Balance at September 30, 2009

   $ 208,628      $ 647,161      $ 11      $ 31   
                                

Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 (2)

   $ (107,141   $ 47,056      $ (26   $ (353
                                

Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 (3)

   $ 19,068      $ 10,211      $ —        $ —     
                                

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

 

(1)

The Company has a foreign subsidiary that has the Euro as its functional currency. Losses in OCI represent the currency translation adjustments for this subsidiary.

(2)

Recorded in “unrealized loss on securities-held-for trading” in the consolidated statement of operations.

(3)

Recorded in “foreign currency gain (loss)” in the consolidated statement of operations.

The following table presents the changes in Level 3 liabilities for the three months ended September 30, 2009:

 

     CDOs     Senior
unsecured
notes
    Junior
unsecured
subordinated
notes
    TruPS  

Balance at July 1, 2009

   $ 434,718      $ 15,015      $ 11,975      $ 2,748   

Paydowns

     (12,343     —          —          —     

Net transfers in (out)

     —          —          4,268        (4,268

Gains (losses) included in earnings

     122,042        (975     (2,170     2,550   

Losses included in OCI (1)

     (402     —          —          —     
                                

Balance at September 30, 2009

   $ 544,015      $ 14,040      $ 14,073      $ 1,030   
                                

Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains relating to liabilities still held at September 30, 2009 (2)

   $ (123,869   $ (975   $ (4,362   $ 2,550   
                                

Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at September 30, 2009 (3)

   $ —        $ —        $ 2,983      $ —     
                                

 

(1)

The Company has a foreign subsidiary that has the Euro as its functional currency. Gains (losses) in OCI represent the currency translation adjustments for this subsidiary.

(2)

Recorded in “unrealized gain on liabilities” in the consolidated statement of operations.

(3)

Recorded in “foreign currency gain (loss)” in the consolidated statement of operations.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The following table presents the changes in Level 3 liabilities for the nine months ended September 30, 2009:

 

     CDOs     Senior
unsecured
notes
    Junior
unsecured
subordinated
notes
    TruPS  

Balance at January 1, 2009

   $ 564,661      $ 18,411      $ 5,726      $ 12,643   

Paydowns

     (105,664     —          —          —     

Net transfers in (out)

     —          —          11,534        (11,534

Gains (losses) included in earnings

     83,516        (4,371     (3,187     (79

Losses included in OCI (1)

     1,502        —          —          —     
                                

Balance at September 30, 2009

   $ 544,015      $ 14,040      $ 14,073      $ 1,030   
                                

Amount of total losses for the period included in earnings attributable to the change in unrealized gains relating to liabilities still held at September 30, 2009 (2)

   $ (85,444   $ (4,371   $ (9,199   $ (79
                                

Amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at September 30, 2009 (3)

   $ —        $ —        $ 520      $ —     
                                

 

(1)

The Company has a foreign subsidiary that has the Euro as its functional currency. Gains in OCI represent the currency translation adjustments for this subsidiary.

(2)

Recorded in “unrealized gain (loss) on liabilities” in the consolidated statements of operations.

(3)

Recorded in “foreign currency gain (loss)” in the consolidated statements of operations.

Assets measured at fair value on a nonrecurring basis

Certain assets are measured at fair value on a nonrecurring basis, meaning that the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The following table presents the asset carried on the consolidated statements of financial condition by caption and by level within the ASC 820 valuation hierarchy as of September 30, 2009, for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2009:

 

     Level 1    Level 2    Level 3    Carrying
Value

Commercial mortgage loans (1)

   $ —      $ —      $ 61,594    $ 61,594
                           

Total assets at fair value on a nonrecurring basis

   $ —      $ —      $ 61,594    $ 61,594
                           

 

(1)

The Company recorded a provision for loan loss in the amount of $98,999 for the nine months ended September 30, 2009. See Note 6 of the consolidated financial statements, “Commercial Mortgage Loans”.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Fair Value Option

On January 1, 2008, the Company adopted ASC 825-10, which provides an option to elect fair value as an alternative measurement for selected financial assets or liabilities not previously recorded at fair value. The fair value option was elected for these assets and liabilities to align the measurement attributes of both the assets and liabilities while mitigating volatility in earnings from using different measurement attributes.

The following table presents information about the eligible instruments for which the Company elected the fair value option and for which a transition adjustment was recorded as of January 1, 2008. These amounts are adjusted to reflect the Company’s adoption of ASC 470-20 on January 1, 2009, which, because of the retrospective application, prevented the Company from electing the fair value option under ASC 825-10 for the convertible notes. See Note 2 of the consolidated financial statements, “Significant Accounting Policies”.

 

     Carrying Value
at January 1,
2008
    Transition
Adjustment to
Retained Earnings
(Distributions in
Excess of Earnings)
    Carrying Value at
January 1, 2008 (After
Adoption of ASC
470-20 and ASC 825-10)
 

Securities held-for-trading (1)

   $ 2,284,334      $ (227,635   $ 2,284,334   

Liability issuance costs

     32,741        (32,741     —     

Senior unsecured notes

     (162,500     48,027        (114,473

Junior unsecured subordinated notes

     (73,103     28,269        (44,834

Investments in equity of

subsidiary trusts

     5,477        (2,342     3,135   

TruPS

     (180,477     77,165        (103,312

CDOs

     (1,823,328     224,827        (1,598,501
            

Cumulative effect of the adoption of the fair value option

     $ 115,570     
            

 

(1)

Prior to January 1, 2008, the majority of the Company’s securities were classified as available-for-sale and carried at fair value. Accordingly, the election of the fair value option for these securities did not change their carrying value and resulted in a reclassification from OCI to opening distributions in excess of earnings.

Note 5 SECURITIES HELD-FOR-TRADING

Upon adoption of ASC 825-10 as of January 1, 2008, the Company elected the fair value option for all of its securities that were previously classified as available-for-sale. As a result, all securities are now classified as held-for-trading. This reclassification adjustment did not result in a change to the Company’s intent as it relates to these securities. For the nine months ended September 30, 2009 and September 30, 2008, respectively, $(16,265) and $(572,675) were recorded as unrealized loss on the securities and included in unrealized gain (loss) on securities held-for-trading on the consolidated statements of operations. The estimated fair value of securities held-for-trading at September 30, 2009 and December 31, 2008 is summarized as follows:

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Security Description

   September 30,
2009
   December 31,
2008

U.S. Dollar Denominated:

     

CMBS:

     

Investment grade CMBS

   $ 456,639    $ 433,225

Non-investment grade rated subordinated CMBS

     131,645      143,400

Non-rated subordinated CMBS

     14,710      22,280

CMBS interest only securities (“IOs”)

     2,764      4,085

Credit tenant leases

     17,220      20,175

Investment grade REIT debt

     130,834      155,864

CDO investments - investment grade

     2,106      1,920

CDO investments - non-investment grade

     9,024      24,176
             

Total CMBS

     764,942      805,125
             

RMBS:

     

Residential CMOs

     11      387

Hybrid adjustable rate mortgages (“ARMs”)

     —        400
             

Total RMBS

     11      787
             

Total U.S. dollar denominated

     764,953      805,912
             

Non-U.S. Dollar Denominated:

     

Investment grade CMBS

     37,598      62,264

Non-investment grade rated subordinated CMBS

     48,332      59,854

Non-rated subordinated CMBS

     4,917      8,272
             

Total non-U.S. dollar denominated

     90,847      130,390
             

Total securities held-for-trading

   $ 855,800    $ 936,302
             

At September 30, 2009, an aggregate of $855,800 in estimated fair value of the Company’s securities held-for-trading was pledged to secure its collateralized borrowings. At December 31, 2008, an aggregate of $904,491 in estimated fair value of the Company’s securities held-for-trading was pledged to secure its collateralized borrowings.

The CMBS held by the Company consist of subordinated securities collateralized by adjustable and fixed rate commercial and multifamily mortgage loans. The CMBS provide credit support to the more senior classes of the related commercial securitization. The Company generally does not own the senior classes of its below investment grade CMBS. Cash flows from the mortgages underlying the CMBS generally are allocated first to the senior classes, with the most senior class having a priority entitlement to cash flow. Then, any remaining cash flow is allocated generally among the other CMBS classes in order of their relative seniority. To the extent there are defaults and unrecoverable losses on the underlying mortgages, resulting in reduced cash flows, the most subordinated CMBS class will bear this loss first. To the extent there are losses in excess of the most subordinated class’ stated entitlement to principal and interest, the remaining CMBS classes will bear such losses in order of their relative subordination.

At September 30, 2009, the reported yield based upon the adjusted cost of the Company’s entire subordinated CMBS portfolio was 22.2% per annum. The reported yield of the Company’s investment grade securities was 10.0%. The Company’s yields to maturity on its subordinated CMBS and other securities are based upon a

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

number of assumptions that are subject to certain business and economic uncertainties and contingencies. Examples of these uncertainties include, among other things, the rate and timing of principal payments (including prepayments, repurchases, defaults, liquidations and related expenses), the pass-through or coupon rate, and interest rate fluctuations. Additional factors that may affect the Company’s yields to maturity on its Controlling Class CMBS include interest payment shortfalls due to delinquencies on the underlying mortgage loans, the timing and magnitude of credit losses on the mortgage loans underlying the Controlling Class CMBS that are a result of the general condition of the real estate market (including competition for tenants and their related credit quality), and changes in market rental rates. As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter these assumptions, no assurance can be given that the yields to maturity, discussed above and elsewhere in this report, will be achieved.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Note 6 COMMERCIAL MORTGAGE LOANS

The following table summarizes the Company’s commercial real estate loan portfolio by property type at September 30, 2009 and December 31, 2008:

 

     Loan Outstanding     Weighted Average Yield  
     September 30, 2009     December 31, 2008     September 30,     December 31,  

Property Type

   Amount     %     Amount     %     2009     2008  

U.S.

            

Retail

   $ 52,495      7.4   $ 52,584      6.8   7.5   9.6

Office

     44,726      6.3        45,227      5.9      10.3      10.3   

Multifamily(1)

     39,526      5.6        77,083      9.9      7.3      10.3   

Storage

     31,703      4.5        31,989      4.1      9.2      9.1   

Hotel

     12,801      1.7        12,481      1.6      13.3      13.0   

Other Mixed Use

     3,941      0.5        3,984      0.5      9.0      8.5   
                                        

Total U.S.

     185,192      26.0        223,348      28.8      8.9      10.1   
                                        

Non-U.S.

            

Retail(2)

     253,525      35.8        256,069      33.0      7.3      9.1   

Office(3)

     194,169      27.4        202,797      26.1      7.8      9.1   

Multifamily(4)

     15,039      2.1        36,903      4.8      5.0      9.0   

Storage

     41,364      5.8        37,304      4.8      4.4      9.5   

Industrial(5)

     12,549      1.8        12,359      1.6      5.8      10.7   

Hotel

     3,080      0.5        2,794      0.4      10.0      11.0   

Other Mixed Use

     4,039      0.6        4,166      0.5      6.5      10.3   
                                        

Total Non-U.S.

     523,765      74.0        552,392      71.2      7.2      9.3   
                                        

Total

   $ 708,957      100.0   $ 775,740      100.0   7.6   9.5
                                        

General loan loss reserve

     (40,401       (21,033      
                        

Total

   $ 668,556        $ 754,707         
                        

 

(1)

Net of a loan loss reserve of $124,264 at September 30, 2009 and $98,664 at December 31, 2008.

(2)

Net of a loan loss reserve of $9,092 at September 30, 2009 and $299 at December 31, 2008.

(3)

Net of a loan loss reserve of $61,542 at September 30, 2009 and $17,614 at December 31, 2008.

(4)

Net of a loan loss reserve of $7,862 at September 30, 2009 and $1,434 at December 31, 2008.

(5)

Net of a loan loss reserve of $1,310 at September 30, 2009 and $239 at December 31, 2008.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

As of September 30, 2009, the Company’s loans had the following maturity characteristics:

 

Year of initial maturity *

   Number of
loans
maturing
   Current
carrying value
    % of total  

2010

   2    $ 13,238      1.9

2011

   15      248,824      35.1   

2012

   16      123,831      17.5   

2013

   8      160,990      22.7   

2014

   3      45,161      6.4   

Thereafter

   11      116,913      16.4   
                   

Total

   55    $ 708,957      100.0
                   

General loan loss reserve

        (40,401  
             

Total

      $ 668,556     
             

 

* Does not include potential extension options.

Activity for the nine months ended September 30, 2009 was as follows:

 

     Book Value  

Balance at January 1, 2009

   $ 754,707   

Transfer of non-U.S. mortgage loan from Anthracite International JV

     26,201   

Proceeds from the sale of mortgage loans

     (4,299

Loss from the sale of mortgage loans

     (9,079

Proceeds from repayment of mortgage loans

     (31,214

Provision for loan loss - specific

     (78,789

Provision for loan loss - general

     (18,356

Foreign currency impact

     26,070   

Discount accretion, net

     3,315   
        

Balance at September 30, 2009

   $ 668,556   
        

The Company recorded a provision for specific loan losses of $80,643 for the nine months ended September 30, 2009. This provision relates to six loans with an aggregate principal balance of $190,017 and accrued interest of $732 (€501). The first is a $32,760 (€22,412) mezzanine loan secured by a portfolio of properties located throughout Germany, which required a provision totaling $24,926 (€18,613) that includes accrued interest of $732 (€501). The second is a $46,901 (€32,087) junior mezzanine loan secured by a portfolio of office buildings in the Netherlands, which required a provision totaling $22,965 (€17,297). The third is a $23,600 loan secured by a portfolio of apartment complexes in San Francisco, which required a provision of $5,300. The fourth is a $20,500 mezzanine loan secured by an apartment complex located in New York City, which required a provision totaling $7,800. The fifth is a $25,000 loan secured by a portfolio of apartment complexes in Washington DC, which required a provision totaling $12,500. The sixth is a $41,256 (€28,244) loan secured by a portfolio of retail assets in Germany, which required a provision totaling $7,152 (€5,099). The loans are in various stages of resolution and due to the estimated reduction in value of the underlying collateral below the principal balance of the loans, the Company does not believe that the full collectability of the loans is probable.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Company recorded an additional general loan loss reserve of $18,356 for the nine months ended September 30, 2009. The Company’s formula-based general reserve calculation (as more fully described in the Company’s 2008 Annual Report on Form 10-K for the year ended December 31, 2008) resulted in a decrease of $5,532 for the general loan loss provision for the three months ended September 30, 2009.

Changes in the reserve for loan losses were as follows:

 

     General    Specific     Total  

Reserve for loan losses, December 31, 2008 (including accrued interest of $1,645)(1)

   $ 21,033    $ 144,895      $ 165,928   

Reserve for loan losses- specific

     —        80,643        80,643   

Reserve for loan losses- general

     18,356      —          18,356   
                       

Provision for loan losses for nine months ended September 30, 2009

     18,356      80,643        98,999   
                       

Charge-off(2)

        (24,217     (24,217

Foreign currency gain

     1,012      6,122        7,134   
                       

Reserve for loan losses, September 30, 2009 (including accrued interest of $2,187 and loan related expenses of $1,186)(1)

   $ 40,401    $ 207,443      $ 247,844   
                       

 

(1)

Accrued interest is included in other assets on the consolidated statements of financial condition.

(2)

For the nine months ended September 30, 2009, the Company incurred a charge-off of $24,217 related to a realized loss on one loan.

Note 7 COMMERCIAL MORTGAGE LOAN POOLS

During the second quarter of 2004, the Company acquired subordinated CMBS in a trust establishing a Controlling Class interest. This Controlling Class CMBS did not qualify as a QSPE because the special servicer has more discretion over sales of defaulted loans than is typically permitted to qualify as a QSPE. Over the life of the commercial mortgage loan pools, the Company reviews and updates its loss assumptions to determine the impact on expected cash flows to be collected. A decrease in estimated cash flows will reduce the amount of interest income recognized in future periods and would result in an impairment charge recorded on the consolidated statements of operations. An increase in estimated cash flows will increase the amount of interest income recorded in future periods.

Note 8 IMPAIRMENTS - CMBS

The Company updates its estimated cash flows for securities subject to ASC 325-40, Investments – Other: Beneficial Interests in Securitized Financial Assets (“ASC 325-40”) (formerly EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets), on a quarterly basis. The Company compares the yields resulting from the updated cash flows to the current accrual yields. An impairment is required if the updated yield is lower than the current accrual yield and the security has an estimated fair value less than its adjusted purchase price. The Company carries these securities at their estimated fair value on its consolidated statements of financial condition.

During 2008, the market value of the Company’s CMBS declined significantly. Due to changes in the timing and extent of credit losses expected, the Company increased the loss assumptions on its Controlling Class CMBS from 1.3% to 1.8% of the total underlying loan pools over the course of the year. For the year ended

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

December 31, 2008, changes in loss assumptions on the Company’s 2005 through 2007 vintage Controlling Class CMBS required an impairment totaling $456,620.

The Company increased loss assumptions on its Controlling Class CMBS to 3.5% of underlying collateral at September 30, 2009 from 1.8% of underlying collateral at December 31, 2008. This increase in loss assumptions required an impairment of $696,234 for the nine months ended September 30, 2009.

As a result of the adoption of ASC 825-10 on January 1, 2008, the Company will no longer be required to make an adjustment to OCI in stockholder’s equity for other-than-temporary impairment because the changes in fair value are recorded in the statement of operations. However, because the Company records interest income as a separate line item in the consolidated statements of operations, the Company does assess securities for other-than-temporary impairment in order to adjust the amount of interest income recorded on such securities.

Note 9 EQUITY INVESTMENTS

The following table is a summary of the Company’s equity investments for the nine months ended September 30, 2009:

 

     Carbon I     Carbon II     Dynamic India
Fund IV *
   AHR JV     AHR Int’l
JV
    Total  

Balance at December 31, 2008

   $ 1,713      $ 39,158      $ 9,350    $ 448      $ 28,199      $ 78,868   

Equity earnings (loss)

     (3     (21,308     —        32        (15     (21,294

Foreign currency translation

     —          —          —        —          (773     (773

Distributions of earnings

     —          —          —        —          (1,009     (1,009

Return of capital

     —          —          —        (181     (26,402     (26,583
                                               

Balance at September 30, 2009

   $ 1,710      $ 17,850      $ 9,350    $ 299      $ —        $ 29,209   
                                               

 

* The Company neither controls nor has significant influence over the Dynamic India Fund IV and accounts for this investment using the cost method of accounting.

At September 30, 2009, the Company owned approximately 20% of Carbon Capital, Inc. (“Carbon I”). The Company also owned approximately 26% of Carbon Capital II, Inc. (“Carbon II,” and collectively with Carbon I, the “Carbon Funds”). The Company has pledged its interest in Carbon II as collateral under a revolving credit agreement (see Note 11 of the consolidated financial statements, “Borrowings,” for further details). The Carbon Funds are private commercial real estate income opportunity funds managed by the Manager (see Note 15 of the consolidated financial statements, “Transactions with the Manager and Certain Other Parties,” for further details).

The Company entered into a $50,000 commitment on July 20, 2001 to acquire shares of Carbon I. On July 12, 2005, the investment period expired, and Carbon I has been in liquidation since that time.

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Company entered into an aggregate commitment of $100,000 to acquire shares of Carbon II. The final obligation to fund capital of $13,346 was called on July 13, 2007. Summarized financial information for Carbon II is as follows:

 

     For the three months
ended September 30,
    For the nine months
ended September 30,
 
     2009     2008     2009     2008  

Total income (loss)

   $ (5,143   $ 13,313      $ (5,751   $ 39,756   

Total expenses

     2,125        4,454        7,205        11,060   

Provisions for loan losses

     (3,592     (1,757     (70,983     (20,368

Income (loss) from continuing operations

     (10,860     7,102        (83,939     8,328   

Net income (loss)

   $ (10,860   $ 6,784      $ (84,153   $ 7,047   

On December 22, 2005, the Company entered into an $11,000 commitment to indirectly acquire shares of Dynamic India Fund IV. At September 30, 2009, the Company’s capital commitment was $11,000, of which $9,350 had been drawn.

The Company is committed to invest up to $5,000, for up to a 10% interest, in Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB. As of September 30, 2009, the carrying value of the Company’s investment of AHR JV was $299. The other member in AHR JV is managed by or otherwise associated with an affiliate of Credit Suisse. AHR JV is managed by the Manager (see Note 15 of the consolidated financial statements, “ Transactions with the Manager and Certain Other Parties” for further details).

On June 26, 2008, the Company invested $30,872 in RECP Anthracite International JV Limited (“AHR International JV”). AHR International JV invests in investments backed by non-U.S. real estate assets and is managed by the Manager. See Note 15 of the consolidated financial statements, “Transactions with the Manager and Certain Other Parties” for further details. The other shareholder in AHR International JV, RECP IV Cite CMBS Equity, L.P. (“RECP”), is managed by or otherwise associated with an affiliate of Credit Suisse. RECP holds the Company’s 12% Series E Cumulative Convertible Redeemable Preferred Stock. Moreover, one of the Company’s directors, Andrew Rifkin, was appointed by RECP. In January 2009, in connection with the amendment and extension of the Company’s credit facility with Morgan Stanley, the Company transferred its entire interest of $26,201 in Anthracite International JV’s sole investment consisting of a non- U.S. commercial mortgage loan, to AHR Capital MS Limited, a wholly owned subsidiary of the Company, which then posted the asset as additional collateral under the facility. In connection with the above transaction, there was residual cash of $201 that was transferred to the Company from Anthracite International JV.

Note 10 SECURITIZATION TRANSACTIONS, TRANSFER OF FINANCIAL ASSETS, QUALIFIED SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES

Securitization Transactions

The Company has completed seven securitization transactions related to commercial real estate securities and loans. The Company achieved sale treatment for transfers to two of these special purpose entities (“SPEs”), Anthracite 2004-HY1 Ltd. (“CDO HY1”) and Anthracite 2005-HY2 Ltd. (“CDO HY2”), which

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

also qualify as QSPEs as they meet the necessary criteria regarding the types of assets they may hold and the range of discretion they may exercise in connection with the assets they hold. The determination of whether a SPE meets the criteria to be a QSPE requires considerable judgment, particularly in evaluating whether the permitted activities of the SPE are significantly limited and in determining whether derivatives held by the SPE are passive and nonexcessive.

The portfolios of CDO HY1 and CDO HY2 consist primarily of non-investment grade CMBS. The Company’s non-investment grade CMBS include the first loss position and as a result, the Company controls the foreclosure/workout process for the underlying collateral. The following table presents the total assets (unpaid principal amount) as of September 30, 2009 and December 31, 2008 of CDO HY1 and CDO HY2 to which the Company has transferred assets and received sale treatment:

 

     September 30, 2009    December 31, 2008

Investment grade CMBS

   $ 56,618    $ 57,087

Investment grade REIT debt

     37,885      42,885

CMBS rated BB+ to B

     139,490      165,081

CMBS rated B- or lower

     512,410      502,740
             

Total

   $ 746,403    $ 767,793
             
     Cash flows received on retained interests
     For the nine months
ended September 30, 2009
   For the year ended
December 31, 2008
   $ 8,049    $ 14,442
             

The key economic assumptions used to determine the estimated fair value of the retained interests at September 30, 2009 and December 31, 2008 are the underlying projected future cash flows to be received. Those cash flows include estimates of future credit losses on loans that comprise the underlying collateral for the retained interests. Once a set of cash flows has been determined, a discount rate is applied to those cash flows to calculate the net present value of the cash flows. There has been a great degree of instability in the current markets and making such estimates has been difficult. The Company reviews the market data and specific loan criteria to determine the best estimate for these assumptions using specific underlying collateral data as well as information on particular borrowers.

The discount rate used to net present value the cash flows is determined by reference to yields on non-investment grade CMBS because the underlying collateral for the retained interest is a pool of non-investment grade CMBS. The discount rate for the retained interest is typically higher than the yield on the non-investment grade CMBS to reflect the market perception that the retained interest has increased risk as compared to a single non-investment grade security.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The following table sets forth the weighted average key economic assumptions used in measuring the fair value of the Company’s retained interests and the sensitivity of this fair value to immediate adverse changes in those assumptions:

 

     September 30,
2009
    December 31,
2008
 

Fair value of retained interest

   $ 5,024      $ 16,176   

Weighted average life (years)

     0.2        3.9   

Anticipated credit losses

    

Impact of the Company’s loss assumptions

   $ 1,085      $ 13,120   

Impact of doubling the Company’s loss assumptions

   $ 296      $ 10,953   

Discount rate

     120.5     95.7

Impact of 10% increase in discount rate

   $ 1,016      $ 11,989   

Impact of 20% increase in discount rate

   $ 952      $ 11,037   

When measuring the fair value of the retained interests, the Company estimates credit losses and the timing of losses for each loan underlying the CMBS. The securities comprising the retained interests are predominately first loss CMBS with the lowest or no ratings assigned by the credit rating agencies. These securities not only absorb the first losses of all the mortgages underlying each transaction, they are also the last to receive principal payments, if any. Therefore, any cash from principal paydowns received will not flow to the benefit of the owners of these securities. In the current environment prepayments of mortgages have virtually halted. The Company does not believe it is reasonable to project that prepayments of underlying mortgages will have any significant effect on the cash flows of these securities and therefore on the value or cash flows on the retained interests. At September 30, 2009 and December 31, 2008, the amortized costs of the retained interests were $3,765 and $14,259, with an estimated fair value of $5,024 and $16,176, respectively, based on key economic assumptions.

These sensitivities are hypothetical and changes in fair value based on a variation in key assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. This non-linear relationship exists because the Company applies its key assumptions on a loan-by-loan basis to the assets underlying the CMBS collateral. The Company reviews all major assumptions periodically using the most recent empirical and market data available and makes adjustments where warranted.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Transfer of Financial Assets Accounted for as a Secured Borrowing

The transfer of financial assets accounted for as secured borrowings consists of the five Company securitization transactions in which the Company was the transferor of CMBS and commercial mortgage loans. The following table presents information about the assets transferred in connection with the secured borrowings that continue to be recognized in the Company’s statements of financial position as of September 30, 2009 and December 31, 2008:

 

     September 30,
2009
   December 31,
2008

Assets:

     

Investment grade CMBS

   $ 458,415    $ 443,469

Investment grade REIT debt

     130,834      155,773

CMBS rated BB+ to B

     104,937      120,935

CMBS rated B- or lower

     22,538      13,022

CDO investment

     2,106      1,920

Credit tenant lease

     17,219      20,175
             

Total (at estimated fair value)

     736,049      755,294

Commercial mortgage loans (at amortized cost)

     427,669      439,286
             

Total

   $ 1,163,718    $ 1,194,580
             

Liabilities:

     

CDOs (at estimated fair value)

   $ 544,015    $ 564,661
             

The assets above are restricted solely to satisfy the related liabilities of the specific entity.

Qualified Special Purpose Entities

In addition to the retained interest described above, the Company also holds interests in 38 U.S. and Canadian dollar denominated Controlling Class CMBS that were purchased in connection with the Company’s commercial real estate investing activities and qualify as QSPEs. The estimated fair value of the U.S. and Canadian dollar denominated Controlling Class CMBS that qualify as QSPEs were approximately $296,165 and $312,477 as of September 30, 2009 and December 31, 2008, respectively. The underlying collateral for the Company’s U.S. and Canadian dollar denominated Controlling Class CMBS is comprised of 4,312 commercial mortgage loans with a total balance of $56,106,168. The Company maintains the right to control the foreclosure/workout process of the underlying loans.

The Company also holds interests in eight European and two Japanese Controlling Class CMBS in which it maintains the right to control the foreclosure/workout process of the underlying loans. The estimated fair values of the European Controlling Class CMBS that qualify as QSPEs were approximately $18,303 and $35,875 at September 30, 2009 and December 31, 2008, respectively. The underlying collateral for the European Controlling Class CMBS is comprised of commercial mortgage loans with a total outstanding balance of $7,801,369 at September 30, 2009. The estimated fair values of the Japanese Controlling Class CMBS that qualify as QSPEs were approximately $0 and $4,845 at September 30, 2009 and December 31, 2008, respectively. The underlying collateral for the Japanese Controlling Class CMBS is comprised of commercial mortgage loans with a total outstanding balance of $26,157 at September 30, 2009.

The Company also owns all of the preferred equity and a debt security of LEAFs CMBS I Ltd. (“LEAF”). LEAF is a CDO and its underlying collateral for the structure is $2,033,916 and $2,674,875 of investment grade CMBS as of September 30, 2009 and December 31, 2008, respectively. At September 30, 2009 and December 31, 2008, the estimated fair value of the Company’s investment in LEAF on its consolidated statements of financial condition was $6,106 and $9,920, respectively.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Variable Interest Entities

ASC 810-10 applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns or both as a result of holding variable interests. The Company consolidates entities of which it is the primary beneficiary. For those entities deemed to be QSPEs, the Company does not consolidate the entity.

The Company is involved with two entities that the Company has deemed to be VIEs, one in which the Company is the primary beneficiary and one in which the company holds a significant variable interest. The Company’s variable interests in these VIEs include debt and equity interests. The Company does not have any future obligation to provide financial support to these entities. The Company’s involvement with VIEs arises from:

 

  1) A Controlling Class CMBS that did not qualify as a QSPE because the special servicer has more discretion over sales of defaulted loans than is typically permitted to qualify as a QSPE. The Company is the primary beneficiary and consolidates the VIE. The Company’s maximum exposure to loss associated with the Company’s investment in this entity is $21,194 and $22,301 as of September 30, 2009 and December 31, 2008, respectively. The carrying amounts of the VIE’s assets and liabilities included in the Company’s consolidated statement of financial condition related to this VIE at September 30, 2009 was $939,646 and $918,452 respectively. The carrying amounts of the VIE’s assets and liabilities included in the Company’s consolidated statement of financial condition related to this VIE at December 31, 2008 was $1,022,105 and $999,804, respectively. The assets of the consolidated VIE may only be used to settle the obligations of the VIE and creditors of the consolidated VIE have no recourse beyond the VIE’s assets. The assets associated with this VIE are included in commercial mortgage loan pools and the liabilities are included in secured by pledge of commercial loan pools on the consolidated statements of financial condition.

 

  2) A 10% significant variable interest in AHR JV in which substantially all of the economics of the entity are absorbed by one other investor, but for which the Company has a 50% voting right. The Company’s maximum exposure to loss associated with AHR JV was $299 and $448 related to its equity investment as of September 31, 2009 and December 31, 2008, respectively. This amount is included in equity investments on the consolidated statements of financial condition. The total assets of AHR JV at September 30, 2009 and December 31, 2008 were $3,001 and $4,479, respectively.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Note 11 BORROWINGS

Certain information with respect to the Company’s borrowings at September 30, 2009 is summarized as follows:

 

Borrowing Type

   Carrying
Value
   Adjusted
Issuance
Price
   Weighted
Average
Borrowing
Rate
    Weighted
Average
Remaining
Maturity
   Estimated
Fair Value

of Assets
Pledged

Credit facilities (1)

   $ 385,035    $ 385,035    5.4   0.9 years    $ 281,893

Commercial mortgage loan pools(4)

     918,452      918,452    4.3   4.4 years      939,646

CDOs (2)

     544,015      1,653,923    2.9   4.1 years      946,803

Senior unsecured notes (2)

     14,040      162,500    7.6   7.6 years      Unsecured

Senior unsecured convertible notes(3)

     35,766      35,766    15.4   2.9 years      Unsecured

Junior unsecured subordinated notes (2)

     14,073      235,786    4.5   22.0 years      Unsecured

TruPS (2)

     1,030      15,464    7.8   26.5 years      Unsecured
                               

Total Borrowings

   $ 1,912,411    $ 3,406,926    4.0   5.3 years    $ 2,168,342
                               

 

(1)

Includes $4,584 of borrowings under facilities related to commercial mortgage loan pools.

(2)

As a result of the adoption of ASC 825-10 on January 1, 2008, the Company records the above liabilities at fair value. Changes in fair value are recorded in unrealized gain (loss) on liabilities on the consolidated statements of operations. For the nine months ended September 30, 2009, the Company recorded an unrealized loss of $71,870 due to the increase of the fair value of such liabilities. Additionally, the Company recognized a gain of $4,779 as a result of Euro CDO buying back Class A Notes at a discount.

(3)

Assumes holders of convertible notes will exercise their right to require the Company to repurchase their notes on September 1, 2012.

(4)

Represents a controlling class CMBS that is consolidated for accounting purposes (see Note 7 of the consolidated financial statements, “Commercial Mortgage Loan Pools”). On an unconsolidated basis, the fair market value of the net equity is $2,469 at September 30, 2009.

At September 30, 2009, the Company’s borrowings had the following remaining maturities, at amortized cost:

 

Borrowing Type

   Within
30 days
   31 to 59
days
   60 days
to less
than 1
year
   1 year to
3 years
   3 years to 5
years
   Over 5
years
   Total

Credit facilities (1)

   $ 1,250    $ 15,421    $ 368,364    $ 0    $ —      $ —      $ 385,035

Commercial mortgage loan pools(2)

     —        5,867      19,452      160,440      726,204      6,489      918,452

CDOs(2)

     3,302      17,781      38,140      408,263      657,207      529,230      1,653,923

Senior unsecured notes

     —        —        —        —        —        162,500      162,500

Senior unsecured convertible notes(3)

     —        —        —        35,766      —        —        35,766

Junior unsecured subordinated notes

     —        —        —        —        —        235,786      235,786

TruPS

     —        —        —        —        —        15,464      15,464
                                                

Total Borrowings

   $ 4,552    $ 39,069    $ 425,956    $ 604,469    $ 1,383,411    $ 949,469    $ 3,406,926
                                                

 

(1)

Includes $4,584 of borrowings under facilities related to commercial mortgage loan pools.

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

(2)

Commercial mortgage loan pools and CDOs are non-recourse borrowings and payments for these borrowings are supported solely by the cash flows from the assets in these structures.

(3)

Assumes holders of convertible notes will exercise their right to require the Company to repurchase their notes on September 1, 2012.

Credit Facilities and Reverse Repurchase Agreements

The following table summarizes the Company’s credit facilities at September 30, 2009 and December 31, 2008.

 

          Borrowings at
     Maturity
Date
   September 30,
2009(4)
   December 31,
2008(4)

Bank of America, N.A. and Banc of America Mortgage Capital Corporation (1)

   9/30/2010    $ 116,158    $ 127,889

Deutsche Bank, AG, Cayman Islands Branch(2)

   9/30/2010      68,592      83,570

Bank of America, N.A.(3)

   9/30/2010      33,804      44,009

Morgan Stanley Bank (3)

   9/30/2010      133,031      194,864

BlackRock Holdco 2, Inc.(1)

   3/05/2010      33,450      30,000
                
      $ 385,035    $ 480,332
                

 

(1)

USD only.

(2)

Multicurrency (USD and Non-USD).

(3)

Non-USD only.

(4)

At September 30, 2009 and December 31, 2008, the Company had no unused borrowing capacity.

As a result of the decline in the cash flows from the Company’s assets, the Company was unable to make the full September 30, 2009 amortization payments required under its secured facilities for two of its three secured lenders. Pursuant to amendments to its secured facilities with Bank of America, Deutsche Bank and Morgan Stanley, which closed in May 2009 (as detailed in “Secured Credit Facility Restructuring” below), the Company is required to make payments to reduce the principal balances under the facilities by certain specified amounts as of the end of each quarter, commencing for the quarter ended September 30, 2009. The Company was only able to make the full required amortization payment under its facility with Morgan Stanley. In addition, separate and apart from the aforementioned amortization payment obligations, the Company was unable to make the entire amount of a monthly $1,250 amortization payment under its facility with Morgan Stanley due October 31, 2009. The Company has until December 31, 2009 to cure such aggregate amortization payment shortfall or an event of default will occur. During the cure period, all the cash flows from the Company’s assets are being diverted to a cash management account for the benefit of the Company’s secured lenders, with certain exceptions agreed by the secured lenders.

Secured Credit Facility Restructuring

On May 15, 2009, the Company restructured each of its four secured credit facilities with Bank of America, Deutsche Bank and Morgan Stanley, as described in more detail below.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Bank of America Credit Facilities

On May 15, 2009, the Company and AHR Capital BofA Limited (“AHR BofA”), a wholly owned subsidiary of the Company, entered into the Omnibus Amendment to Credit Agreement and Custodial and Payment Application Agreement (the “BofA Omnibus Amendment”). The BofA Omnibus Amendment was in respect of (i) the Credit Agreement, dated as of March 17, 2006, and (ii) the Custodial and Payment Application Agreement, dated as of April 7, 2006. The BofA Omnibus Amendment was executed by the Company, as borrower agent, AHR BofA, as borrower, and Bank of America, N.A. (“BANA”), as custodian and lender.

On May 15, 2009, in connection with the BofA Omnibus Amendment, the Company entered into the Second Amended and Restated Parent Guaranty (the “BofA Amended Parent Guaranty”). The BofA Amended Parent Guaranty amended and restated the original guaranty dated as of March 17, 2006 as amended and restated on August 7, 2008, October 20, 2008, November 7, 2008 and January 28, 2009. The BofA Amended Parent Guaranty was executed by the Company, as guarantor, in favor of BANA, as lender.

On May 15, 2009, Anthracite Capital BofA Funding LLC (“Anthracite BofA”), a wholly owned subsidiary of the Company, entered into the Amendment to the Master Repurchase Agreement (the “BofA Repo Amendment”) in respect of the Master Repurchase Agreement dated as of July 20, 2007 (together with Annex I thereto). The BofA Repo Amendment was executed by the Company, as sponsor, Anthracite BofA, as seller, BANA, as a buyer, Banc of America Mortgage Capital Corporation (“BAMCC,” together with BANA, collectively, the “BOA Parties”), as a buyer, and BANA, as buyer agent.

On May 15, 2009, in connection with the BofA Repo Amendment, the Company entered into the Second Amended and Restated Guaranty (the “BofA Amended Guaranty”). The BofA Amended Guaranty amended and restated the original guaranty dated as of March 17, 2006 as amended and restated on August 7, 2008, October 20, 2008, November 7, 2008 and January 28, 2009. The BofA Amended Guaranty was executed by the Company, as guarantor, in favor of BANA and BAMCC, as buyers, and BANA, as buyer agent.

Deutsche Bank Credit Facility

On May 15, 2009, the Company, Anthracite Funding, LLC (“Anthracite Funding”), a wholly owned subsidiary of the Company, and AHR Capital DB Limited (“AHR DB”), a wholly owned subsidiary of the Company, entered into the Amendment No. 4 to the Master Repurchase Agreement and Annex I to the Master Repurchase Agreement Supplemental Terms and Conditions (the “DB Facility Amendment”) with respect to the Master Repurchase Agreement and Annex I to the Master Repurchase Agreement Supplemental Terms and Conditions, dated as of December 23, 2004 and as amended on February 8, 2007, July 8, 2008 and July 17, 2008. The DB Amendment was executed by Anthracite Funding, as seller, AHR DB, as seller, the Company, as sponsor, and Deutsche Bank AG, Cayman Islands Branch (“Deutsche Bank”), as buyer.

On May 15, 2009, the Company entered into the Amendment No. 3 to Guaranty (the “DB Guaranty Amendment”). The DB Guaranty Amendment amended the original guaranty dated as of December 23, 2004, as amended on February 8, 2007, July 8, 2008 and July 17, 2008. The DB Guaranty Amendment was executed by the Company, as guarantor, in favor of Deutsche Bank, as buyer.

Morgan Stanley Credit Facility

On May 15, 2009, AHR Capital MS Limited (“AHR MS”), a wholly owned subsidiary of the Company, entered into the Fourth Amended and Restated Multicurrency Revolving Facility Agreement (the “MS

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Amended Facility”), through an Amendment and Restatement Deed. The Amendment and Restatement Deed amended and restated the original agreement dated as of February 17, 2006, as amended and restated on July 20, 2007, February 15, 2008 and January 9, 2009. The Amendment and Restatement Deed was executed by AHR MS, as borrower, Morgan Stanley Mortgage Servicing Limited (“MSM”), as the security trustee, Morgan Stanley Bank (“MS Bank”), as the initial lender, and Morgan Stanley Principal Funding, Inc. (“MSPFI,” together with MSM, collectively, “Morgan Stanley Parties”), as the first new lender and agent.

On May 15, 2009, the Company entered into the Second Amended and Restated Parent Guaranty and Indemnity (the “MS Amended Guaranty”). The MS Amended Guaranty amended and restated the original guaranty dated as of February 17, 2006, as amended and restated on February 15, 2008, and amended on April 14, 2008 and December 31, 2008. The MS Amended Guaranty was executed by the Company, as guarantor, in favor of MSM, as security trustee under the MS Amended Facility, and MSPFI, as agent and lender under the MS Amended Facility.

Description of Credit Facility Amendments

The BofA Omnibus Amendment, the BofA Repo Amendment, the DB Facility Amendment and the MS Amended Facility are each referred to herein as a “Credit Facility Amendment” and collectively referred to as the “Credit Facility Amendments.” The BOA Parties, Deutsche Bank and the Morgan Stanley Parties are collectively referred to herein as the “Secured Creditors” and each, a “Secured Creditor.”

Each Credit Facility Amendment, among other things, extends the maturities of the respective facility to September 30, 2010. The maturity date for each facility may be further extended to March 30, 2011 at the discretion of the respective Secured Creditor. However, if certain conditions are met, the decision by a Secured Creditor to not extend may result in such Secured Creditor losing the benefit of certain new collateral (described below) that was posted under the restructuring.

Each Credit Facility Amendment eliminates all mark-to-market requirements with respect to the underlying asset collateral value. Each Credit Facility Amendment eliminates any outstanding margin calls and the right to make future margin calls.

The new interest rate on the facilities is the greater of 30-day LIBOR plus 3.50% or 5.50%. If the facilities are further extended, as described above, then the interest rate during the extension period will be 30-day LIBOR plus 4.00%. Each Credit Facility Amendment also requires payment of a deferred restructuring fee in the amount of 8% of the outstanding balance of the Credit Facilities as of May 15, 2009, which is due and payable to each Secured Creditor on the earliest of: (a) the date all loans and purchased assets are prepaid, paid or repaid in full, (b) the maturity date of the facility, and (c) any date the balance of the loans is declared or becomes automatically accelerated. The deferred restructuring fee is broken into two components: a 1% fee, which is characterized as a guaranteed fee, and a 7% fee, which is characterized as a secondary fee and which will be paid only to the extent afforded by the respective Secured Creditor’s collateral, in the absence of an event of default. The Company is not required to accrue for this contingent liability as it is currently not probable of occurring.

Each Credit Facility Amendment also imposes restrictions or conditions on the incurrence or restructuring of any indebtedness and the payment of fees and other amounts to the Manager of the Company and its affiliates. In addition, each Credit Facility Amendment amends certain definitions, including “Event of Default,” in order to make such terms substantially uniform across all facilities.

 

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Anthracite Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

The Credit Facility Amendments replace existing scheduled amortization payments with cash management requirements. All cash received from the primary collateral will be used first to pay interest and then to reduce each lender’s principal balance. The Company has agreed to reduce the principal balance for each Secured Creditor through the application of certain proceeds under this process by an agreed upon amount, measured on a cumulative basis, at the end of each quarter starting with the period ended September 30, 2009. If the Company does not satisfy such required reduction, the Company has 90 days to cure such shortfall or an event of default would occur.

The Secured Creditors will continue to hold the same primary collateral, consisting of U.S. and non-U.S. denominated commercial real estate assets. In addition, the Credit Facility Amendments contemplate that the Secured Creditors receive a security interest in all unencumbered assets of the Company, as well as a subordinated second lien on each other’s primary collateral. The cash flows generated by the bulk of the formerly unencumbered assets will be deposited monthly into a cash management account that will be available for use by the Company for its operations pursuant to a prescribed budget, subject to (i) the absence of any defaults under the facilities and (ii) the cure of any outstanding deficiency in the required reductions of the principal balance of any Secured Creditor, as described above. In the event of a failure to meet required principal amortization targets or an uncured event of default, the cash management account proceeds must be used to pay down the relevant lender’s debt until the deficiency has been cured.

Description of Restructured Secured Credit Facility Guarantees

The BofA Amended Parent Guaranty, the BofA Amended Guaranty, the DB Guaranty Amendment, and the MS Amended Guaranty are each referred to herein as a “Credit Facility Guaranty” and collectively referred to as the “Credit Facility Guarantees.”

The existing financial covenants in each Credit Facility Guaranty were modified and apply to the Company under each Credit Facility Guaranty as follows:

 

   

Tangible net worth (as defined in each applicable facility) cannot fall below $400,000 plus 75% of any equity offering proceeds at any quarter end, and cannot fall by more than 20% in any one quarter or more than 40% in any four-quarter period. In measuring the change in tangible net worth, a decline in the carrying value of the Carbon Funds is excluded;

 

   

The debt service coverage ratio (as defined in each applicable facility) must be at least 1.40; and

 

   

Total recourse debt to tangible net worth ratio may not exceed 2.5.

The Company also agreed, among other things, to certain other terms in each Credit Facility Guaranty which establish (i) restrictions or conditions on the incurrence or restructuring of any indebtedness and the payment of fees and other amounts to the Manager of the Company and its affiliates, (ii) limits on acquiring new assets and (iii) required quarterly operating earnings of no less than:

 

   

$15,163 for the fiscal quarter ended on June 30, 2009;

 

   

$14,931 for the fiscal quarter ended on September 30, 2009; and

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

   

$15,288 for the fiscal quarters ending on December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010.

Operating earnings is defined in the Credit Facility Guarantees as total interest income less interest expense, general and administrative expenses and management fees, exclusive of net income or losses of the Carbon Funds. For the period ended September 30, 2009, the Company was not in compliance with the operating earnings covenant.

The Company has also agreed, among other things, to obtain the unanimous written consent of its independent directors prior to voluntarily filing for bankruptcy or taking similar actions.

In addition, the waiver of covenant breach under the Company’s secured credit facility with BlackRock Holdco 2, Inc. has been extended through January 22, 2010.

Senior Unsecured Convertible Notes

As previously disclosed and described below, since May 2009, the Company completed a number of privately negotiated exchanges in which the Company issued approximately 15 million shares of its common stock in exchange for $40,981 aggregate principal amount of the convertible notes pursuant to Section 3(a)(9) of the Securities Act of 1933. Certain holders in these exchanges released the Company from all obligations to pay to them principal, interest (including accrued and unpaid interest due to certain holders on September 1, 2009) and other payments on their exchanged convertible notes. By completing these exchanges, the Company was released from paying approximately $2,000 of accrued and unpaid interest on the exchanged convertible notes that it otherwise would have been required to pay for the interest payment originally due and payable on September 1, 2009 if such notes had remained outstanding.

For the nine months ended September 30, 2009, the Company recorded a gain on the extinguishment of debt of $26,056 in realized gain (loss) on liabilities on the consolidated statements of operations which was offset by a loss of $2,426 related to the restructuring of the Company’s unsecured debt through debt-for-equity exchanges as described below.

On May 27, 2009, the Company issued 850,000 shares of its common stock in exchange for $4,000 aggregate principal amount of convertible notes in a privately negotiated exchange with a holder of such notes.

On July 1, 2009, the Company issued 900,000 shares of its common stock in exchange for $3,000 aggregate principal amount of convertible notes in a privately negotiated exchange with a holder of such notes.

On July 29, 2009, the Company issued 1,317,000 shares of its common stock in exchange for $3,951 aggregate principal amount of convertible notes in a privately negotiated exchange with a holder of such notes.

On August 17, 2009, the Company issued 5,000,000 shares of its common stock in exchange for $15,000 aggregate principal amount of convertible notes in a privately negotiated exchange with a holder of such notes.

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

On August 18, 2009, the Company issued 915,000 shares of its common stock in exchange for $3,000 aggregate principal amount of convertible notes in a privately negotiated exchange with a holder of such notes.

On September 24, 2009, the Company issued an aggregate of 3,315,000 shares of its common stock in exchange for $6,630 aggregate principal amount of convertible notes pursuant to separate, privately negotiated exchange agreements entered into on September 23, 2009 between the Company and holders of such notes.

On September 25, 2009, the Company issued an aggregate of 2,700,000 shares of its common stock in exchange for $5,400 aggregate principal amount of convertible notes pursuant to separate, privately negotiated exchange agreements entered into on September 24, 2009 between the Company and holders of such notes.

On September 30, 2009, the Company made interest payments, originally due and payable on September 1, 2009, on its $39,019 aggregate principal amount of convertible notes remaining outstanding after the above mentioned exchanges. The Company made the interest payments before the payment default constituted an event of default under the indenture governing these notes. The next interest payment date under these notes is March 1, 2010.

The exchange of senior unsecured convertible notes described above is considered a troubled debt restructuring which required the Company to account for the effect of the extinguishment of debt as a gain/loss within the statement of operations and record the expenses related to the extinguishment immediately through earnings.

Senior Unsecured Notes

On October 30, 2009 and after giving effect to the exchange detailed below in this section, the Company did not make interest payments due on such date on its outstanding $13,750 aggregate principal amount of 7.22% senior unsecured notes due 2016, its outstanding $15,000 aggregate principal amount of 7.772%-to-floating rate senior unsecured notes due 2017 and its outstanding $37,500 aggregate principal amount of 8.1275%-to-floating rate senior unsecured notes due 2017. Under the indenture governing each of these notes, the failure to make an interest payment is subject to a 30-day cure period before constituting an event of default. Unless the secured bank lenders allow the Company to access some of the cash flow currently being diverted into the cash management account or the holders of these notes agree to a refinancing or agree to waive the defaults, the Company will not be able to make interest payments on these notes and events of default will occur on November 30, 2009. An event of default under these notes, absent a waiver, would trigger cross-default and cross-acceleration provisions in the Company’s secured bank facilities and its credit facility with Holdco 2 and, if any such debt were accelerated, would trigger a cross-acceleration provision in the Company’s convertible notes indenture. If such acceleration were to occur, the Company would not have sufficient liquid assets available to repay such accelerated indebtedness and, unless the Company was able to obtain additional capital resources or waivers, the Company would be unable to continue to fund its operations or continue its business.

On October 30, 2009, the Company issued (i) $43,500 aggregate principal amount of new senior unsecured notes in exchange for $36,250 aggregate principal amount of its 7.22% senior unsecured notes due 2016, (ii) $7,500 aggregate principal amount of new senior unsecured notes in exchange for $6,250 aggregate principal amount of its 7.20% senior unsecured notes due 2016, and (iii) $26,400 aggregate principal amount of new senior unsecured notes in exchange for $22,000 aggregate principal amount of its 7.772%-to-floating rate senior unsecured notes due 2017.

The new notes in the above mentioned exchanges bear a significantly reduced initial interest rate of 1.25% per year until the earlier of (i) October 30, 2013 and (ii) the date on which the outstanding aggregate principal amount of secured loans under the Company’s secured bank facilities with Bank of America, Deutsche Bank and Morgan Stanley is less than or equal to $4,000 (the “senior unsecured modification period”). Moreover, holders in these exchanges permitted the Company to retrospectively apply the significantly reduced initial interest rate to the most recently completed interest period for which payment had not been previously made.

After the senior unsecured modification period, the new notes bear interest at the same rates as the securities for which they were exchanged. In addition, during the senior unsecured modification period, the Company will be subject to limitations on its ability to pay cash dividends on shares of its common stock or preferred stock or redeem, purchase or acquire any equity interests, and to create, incur, issue or otherwise become liable for new debt other than trade debt or similar debt incurred in the ordinary course of business and debt in exchange for or to provide the funds necessary to repurchase, redeem, refinance or satisfy the Company’s existing secured and senior unsecured debt. Moreover, during the senior unsecured modification period, the cure period for a default in the payment of interest when due is three days. The new notes otherwise generally have the same terms, including maturity dates and capital structure priority, as the securities for which they were exchanged.

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

Junior Unsecured Subordinated Notes and TruPS

From May through September 2009, the Company restructured all of its junior subordinated debt, comprised of TruPS of its subsidiary capital trusts or related obligations and euro-denominated junior subordinated notes, as described below.

On May 29, 2009, the Company issued (i) $62,500 aggregate principal amount of new junior subordinated notes in exchange for $50,000 aggregate liquidation amount of TruPS of Anthracite Capital Trust I, (ii) $62,500 aggregate principal amount of new junior subordinated notes in exchange for $50,000 aggregate liquidation amount of TruPS of Anthracite Capital Trust II, (iii) $43,750 aggregate principal amount of new notes in exchange for $35,000 aggregate liquidation amount of trust preferred securities of Anthracite Capital Trust III, and (iv) €62,500 aggregate principal amount of new junior subordinated notes in exchange for €50,000 aggregate principal amount of floating rate junior subordinated notes due 2022 of the Company.

On July 22, 2009, the Company issued $31,250 aggregate principal amount of new junior subordinated notes in exchange for $25,000 aggregate liquidation amount of TruPS of Anthracite Capital Trust I.

On October 23, 2009, the Company issued through Anthracite Capital Trust III $18,750 aggregate liquidation amount of new TruPS to the holder of $15,000 aggregate liquidation amount of TruPS of Anthracite Capital Trust III in connection with the Company and the holder’s agreement to amend those securities.

The new notes and TruPS issued in the above mentioned exchanges and amendments bear a significantly reduced initial interest rate of 0.75% per year until the earlier of (i) the fourth anniversary of the exchange or amendment,

 

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(Dollar amounts in thousands, except share and per share data)

 

and (ii) the date on which all of the existing secured loans under the Company’s senior secured bank facilities with Bank of America, Deutsche Bank and Morgan Stanley are fully amortized, including certain deferred restructuring fees (the “junior subordinated modification period”). Moreover, holders in these exchanges and amendments permitted the Company to retrospectively apply the significantly reduced initial interest rate to the most recently completed interest period for which payment had not been previously made.

After the junior subordinated modification period, the new notes and TruPS bear interest at the same rates as the securities for which they were exchanged or from which they were amended. In addition, during the junior subordinated modification period, the Company will be subject to limitations on its ability to pay cash dividends on shares of its common stock or preferred stock or redeem, purchase or acquire any equity interests, and to create, incur, issue, or otherwise become liable for new debt other than trade debt or similar debt incurred in the ordinary course of business and debt in exchange for or to provide the funds necessary to repurchase, redeem, refinance or satisfy the Company’s existing secured and senior unsecured debt. Moreover, during the junior subordinated modification period, the cure period for a default in the payment of interest when due is three days. The new notes and TruPS otherwise generally have the same terms, including maturity dates and capital structure priority, as the securities for which they were exchanged or from which they were amended.

Under the provisions of ASC 470-60-15, Debt-Troubled Debt Restructuring (formerly SFAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings), the restructuring of TruPS described above is considered a troubled debt restructuring which requires the Company to account for the effect of the interest rate modification prospectively and to record the expenses related to the modification immediately through earnings.

Note 12 FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the notional amount, carrying value and estimated fair value of financial instruments at September 30, 2009 and December 31, 2008:

 

     September 30, 2009     December 31, 2008  
     Notional
Amount
   Carrying
Value
    Estimated
Fair Value
    Notional
Amount
   Carrying
Value
    Estimated
Fair Value
 

Cash and cash equivalents

   $ —      $ 297      $ 297      $ —      $ 9,686      $ 9,686   

Restricted cash equivalents

     —        38,939        38,939        —        23,982        23,982   

Securities held-for-trading

     —        855,800        855,800        —        936,302        936,302   

Commercial mortgage loan pools (1)

     —        939,646        939,646        —        1,022,105        1,022,105   

Commercial mortgage loans

     —        668,556        344,795        —        754,707        555,536   

Secured borrowings

     —        385,035        385,035        —        480,332        480,332   

CDO borrowings

     —        544,015        544,015        —        564,661        564,661   

Commercial mortgage loan pool borrowings (1)

     —        918,452        918,452        —        999,804        999,804   

Senior unsecured notes

     —        14,040        14,040        —        18,411        18,411   

Senior unsecured convertible notes

     —        35,766        1,885        —        72,000        24,960   

Junior unsecured subordinated notes

     —        14,073        14,073        —        5,726        5,726   

TruPS

     —        1,030        1,030        —        12,643        12,643   

Currency forward contracts

     —        —          —          —        4,530        4,530   

Currency swap agreements

     —        (304     (304     —        (612     (612

Interest rate swap agreements

     1,139,429      (65,716     (65,716     1,291,798      (99,249     (99,249

LIBOR cap

     85,000      284        284        85,000      53        53   

 

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Notes to Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in thousands, except share and per share data)

 

 

(1)

Represents a controlling class CMBS that is consolidated for accounting purposes (see Note 7 of the consolidated financial statements, “Commercial Mortgage Loan Pools”). On an unconsolidated basis, the fair market value of the net equity is $2,469 and $6,166 at September 30, 2009 and December 31, 2008, respectively.

Note 13 PREFERRED STOCK

The Company elected not to declare any of the specified dividends on its three series of preferred stock during 2009. As of September 30, 2009, $12,206 of preferred dividends were in arrears. These dividends in arrears are included as part of dividends on preferred stock on the consolidated statements of operations since they represent a claim on earnings superior to common stockholders. These dividends in arrears have not been accrued as dividends payable since they have not been declared.

Note 14 COMMON STOCK

The following table summarizes Common Stock issued by the Company for the nine months ended September 30, 2009:

 

     Shares    Net Issuance

Conversion of senior unsecured convertible notes(1)

   14,997,000    $ 12,477

Director compensation

   582,807      403
           

Total

   15,579,807    $ 12,880
           

 

(1)

See Note 11 to the consolidated financial statements, “Borrowings”, for further details.

Note 15 TRANSACTIONS WITH THE MANAGER AND CERTAIN OTHER PARTIES

The Company has a Management Agreement, an administration agreement and an accounting services agreement with the Manager, the employer, with its affiliates, of certain directors and all of the officers of the Company, under which the Manager and the Company’s officers manage the Company’s day-to-day investment operations, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the Management Agreement and these other agreements, the Manager and the Company’s officers formulate investment strategies, arrange for the acquisition of assets, arrange for financing, monitor the performance of the Company’s assets and provide certain other advisory, administrative and managerial services in connection with the operations of the Company. For performing certain of these services, the Company is to pay the Manager under the Management Agreement a base management fee equal to 0.375% for the first $400,000 in average total stockholders’ equity; 0.3125% for the next $400,000 of average total stockholders’ equity and 0.25% for the average total stockholders’ equity in excess of $800,000 for the applicable quarter.

The Manager is entitled to receive a quarterly incentive fee equal to 25% of the amount by which the applicable quarter’s Operating Earnings (as defined in the Management Agreement) of the Company (before incentive fee) plus realized gains, net foreign currency gains and decreases in expense associated with reversals of credit impairments on commercial mortgage loans less realized losses, net foreign currency losses and increases in expenses associated with credit impairments on commercial mortgage loans exceeds the weighted average issue price per share of the Company’s Common Stock ($10.23 per common share at September 30, 2009) multiplied by the ten-year Treasury note rate plus 4.0% per annum (expressed as a

 

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(Dollar amounts in thousands, except share and per share data)

 

quarterly percentage), multiplied by the weighted average number of shares of the Company’s Common Stock outstanding during the applicable quarterly period. The Management Agreement provides that the incentive fee payable to the Manager will be subject to a rolling four-quarter high watermark.

On March 11, 2009, the Company’s unaffiliated directors approved the First Amendment and Extension to the 2008 Management Agreement, and the parties entered into the First Amendment and Extension as of such date.

For the full one-year term of the renewed contract, the Manager has agreed to receive all management fees and any incentive fees in Common Stock subject to (i) the Common Stock continuing to be listed on the NYSE and (ii) if stockholder approval is required for any issuance of the Common Stock, such required stockholder approval has been obtained. If the Common Stock is at any time not listed on the NYSE or if stockholder approval is required for any issuance of the Common Stock and such required stockholder approval has not been obtained, such fees will be payable in cash. The Company’s unaffiliated directors and the Manager may also mutually agree to defer the payment of any management fee and incentive fee, in whole or in part. Such deferred fees will be payable in cash unless the Company’s unaffiliated directors and the Manager mutually agree otherwise.

The Common Stock issued and to be issued to the Manager has not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be sold by the Manager except pursuant to an effective registration statement or an exemption from registration. For example, the Manager may sell such shares pursuant to Rule 144 under the Securities Act subject to compliance with the terms of such rule, including the six-month holding period.

The following is a summary of management and incentive fees incurred for the three and nine months ended September 30, 2009 and 2008:

 

     For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
     2009    2008    2009    2008

Management fee

   $ 1,817    $ 3,050    $ 5,901    $ 9,286

Incentive fee

     —        —        —        11,879

Incentive fee - stock based

     184      382      490      1,426
                           

Total management and incentive fees

   $ 2,001    $ 3,432    $ 6,391    $ 22,591
                           

At September 30, 2009 and 2008, management and incentive fees of $14,762 and $11,077, respectively, remained payable to the Manager and are included on the accompanying consolidated statements of financial condition as a component of other liabilities.

In accordance with the provisions of the Management Agreement, the Company recorded reimbursements to the Manager of $100 and $200 for certain expenses (accrual adjustments) incurred on behalf of the Company during the three and nine months ended September 30, 2009 and $(175) and $75 for the three and nine months ended September 30, 2008, respectively.

The Company has administration and accounting services agreements with the Manager. Under the terms of the administration agreement, the Manager provides financial reporting, audit coordination and accounting oversight services to the Company. Under the terms of the accounting services agreement, the Manager provides investment accounting services to the Company. For the three and nine months ended September 30, 2009,

 

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(Dollar amounts in thousands, except share and per share data)

 

the Company recorded administration and investment accounting service fees of $215 and $705, respectively, which are included in general and administrative expense on the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2008, the Company recorded administration and accounting service fees of $250, and $735, respectively, which are included in general and administrative expense on the consolidated statements of operations.

The special servicer for 33 of the Company’s 39 Controlling Class trusts is Midland Loan Services, Inc. (“Midland”), a wholly owned indirect subsidiary of PNC Bank. The Manager is a wholly owned subsidiary of BlackRock. PNC Bank and Midland are subsidiaries of the PNC Financial Services Group (“PNC”), a significant stockholder of BlackRock, and thus a related party of the Manager.

As disclosed in Note 11 of the consolidated financial statements, “Borrowings,” on March 7, 2008, the Company entered into a credit facility with a subsidiary of BlackRock. The Company has pledged its interest in Carbon II as collateral under this facility.

During 2001, the Company entered into a $50,000 commitment to acquire shares in Carbon I, a private commercial real estate income opportunity fund managed by the Manager. The Carbon I investment period ended on July 12, 2004 and the carrying value of the Company’s investment in Carbon I at September 30, 2009 was $1,710. The Company does not incur any additional management or incentive fees to the Manager related to its investment in Carbon I. At September 30, 2009, the Company owned approximately 20% of the outstanding shares in Carbon I.

The Company entered into an aggregate commitment of $100,000 to acquire shares in Carbon II, a private commercial real estate income opportunity fund managed by the Manager. The final obligation to fund capital of $13,346 was called on July 13, 2007. At September 30, 2009, the carrying value of the Company’s investment in Carbon II was $17,850. The Company does not incur any additional management or incentive fees to the Manager related to its investment in Carbon II. At September 30, 2009, the Company owned approximately 26% of the outstanding shares in Carbon II.

The Company is committed to invest up to $5,000, for up to a 10% interest, in AHR JV. AHR JV invests in U.S. CMBS rated higher than BB. As of September 30, 2009, the carrying value of the Company’s investment of AHR JV was $299. AHR JV is managed by the Manager. The other member in AHR JV is managed by or otherwise associated with an affiliate of Credit Suisse.

On June 26, 2008, the Company invested $30,872 in RECP Anthracite International JV Limited (“AHR International JV”). The other shareholder in AHR International was JV, RECP IV Cite CMBS Equity, L.P. (“RECP”), which is managed by or otherwise associated with an affiliate of Credit Suisse. RECP holds the Company’s 12% Series E Cumulative Convertible Redeemable Preferred Stock. Moreover, one of the Company’s directors, Andrew Rifkin, was appointed by RECP. In January 2009, in connection with the amendment and extension of the Company’s credit facility with Morgan Stanley, the Company transferred its entire interest of $26,402 in Anthracite International JV’s sole investment, a non-U.S. commercial mortgage loan, to AHR Capital MS Limited, a wholly owned subsidiary of the Company, which then posted the asset as additional collateral under the facility.

During 2000, the Company completed the acquisition of CORE Cap, Inc. At the time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.’s external advisor) $12,500 over a ten-year period (“Installment Payment”) to purchase the right to manage the Core Cap, Inc. assets under the existing management contract (“GMAC Contract”). The GMAC Contract had to be terminated in order to allow the Company to complete the merger, as the Company’s management agreement with the Manager did not

 

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(Dollar amounts in thousands, except share and per share data)

 

provide for multiple managers. As a result, the Manager offered to buy out the GMAC Contract as the Manager estimated it would receive incremental fees above and beyond the Installment Payment, and thus was willing to pay for, and separately negotiate, the termination of the GMAC Contract. Accordingly, the value of the Installment Payment was not considered in the Company’s allocation of its purchase price to the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed that should the Management Agreement with its Manager be terminated, not renewed or not extended for any reason other than for cause, the Company would pay to the Manager for services to be performed an amount equal to the remaining Installment Payment less the sum of all payments made by the Manager to GMAC. At September 30, 2009, the Installment Payment is $1,000 payable over one year. The Company is not required to accrue for this contingent liability.

At December 31, 2008, Merrill Lynch & Co., Inc. (“Merrill Lynch”) owned approximately 44.2% of BlackRock’s voting common stock outstanding and held approximately 48.2% of BlackRock’s capital stock on a fully diluted basis. PNC owned approximately 36.5% of BlackRock’s voting common stock outstanding and held approximately 32.1% of BlackRock’s capital stock on a fully diluted basis. On January 1, 2009, Bank of America Corporation (“Bank of America Corp.”) acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which each agreed to exchange a portion of the BlackRock voting common stock they held for non-voting preferred stock. On September 30, 2009, Bank of America/Merrill Lynch owned approximately 4.6% of BlackRock’s voting common stock and 46.1% of BlackRock’s capital stock on a fully diluted basis, and PNC owned approximately 43.8% of BlackRock’s voting common stock and 30.7% of BlackRock’s capital stock on a fully diluted basis.

Bank of America Corp. is the parent of Bank of America, N.A. and Banc of America Mortgage Capital Corporation, secured credit facility lenders to the Company.

Note 16 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company accounts for its derivative investments under ASC 815, Derivatives and Hedging (“ASC 815”) (formerly SFAS 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded in the consolidated statement of financial condition at estimated fair value. If the derivative is designated as a cash flow hedge, the effective portion of change in the estimated fair value of the derivative are recorded in OCI and are recognized in the consolidated statement of operations when the hedged item affects earnings. Ineffective portions of changes in the estimated fair value of cash flow hedges are recognized in earnings.

The Company uses interest rate swaps to manage exposure to variable cash flows on portions of its borrowings under reverse repurchase agreements, credit facilities and the floating rate debt of its CDOs. On the date in which the derivative contract is entered into, the Company designates the derivative as either a cash flow hedge or a trading derivative.

The reverse repurchase agreements, credit facilities and the floating rate debt of its CDOs bear interest at a LIBOR-based variable rate. Increases in the LIBOR rate could negatively impact earnings. The interest rate

 

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(Dollar amounts in thousands, except share and per share data)

 

swap agreements allow the Company to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure.

Interest rate swap agreements contain an element of risk in the event that the counterparties to the agreements do not perform their obligations under the agreements. The Company minimizes its risk exposure by entering into agreements with parties rated at least A or better by credit rating agencies. Furthermore, the Company has interest rate swap agreements established with several different counterparties in order to reduce the risk of credit exposure to any one counterparty. Management does not expect any counterparty to default on their obligations.

Where the Company elects to apply hedge accounting, it formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. The Company assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting prospectively.

Occasionally, counterparties will require the Company, or the Company will require counterparties, to provide collateral for the interest rate swap agreements in the form of margin deposits as credit ratings and estimated fair values change. Such deposits are recorded as a component of either other assets, other liabilities or restricted cash. Should the counterparty fail to return deposits paid, the Company would be at risk for the estimated fair value of that asset. At September 30, 2009, the balance of such net deposits pledged by counterparties as collateral under these agreements totaled $8,385 and is recorded as components of other assets and other liabilities on the consolidated statements of financial condition.

At September 30, 2009, the Company had restricted cash of $38,939, consisting of $36,188 on deposit with the trustees for the Company’s CDOs and $2,751 is restricted under the terms of the Credit Facility Amendments. At December 31, 2008, the Company had restricted cash of $23,982, consisting of $2,869 on deposit with the trustees for the Company’s CDOs, $3,100 pledged as collateral for interest rate swap agreements and $18,013 required by financial covenants under the Company’s credit facilities.

The following table summarizes the Company’s derivative instruments at September 30, 2009 and December 31, 2008. All derivative assets are included in derivative assets on the consolidated statements of financial condition and all derivative liabilities are included in derivative liabilities on the consolidated statements of financial condition.

 

     Asset Derivatives Estimated
Fair Value
   Liability Derivatives Estimated
Fair Value
 
     September 30,
2009
   December 31,
2008
   September 30,
2009
    December 31,
2008
 

Derivatives designated as hedging instruments

          

Interest rate swaps

   $ —      $ —      $ —        $ (4,579
                              

Total derivatives designated as hedging instruments

   $ —      $ —      $ —        $ (4,579
                              

Derivatives not designated as hedging instruments

          

Interest rate swaps

   $ 3,970    $ 4,048    $ (69,402   $ (92,682

Foreign exchange contracts

     22,493      925,584      (22,797     (921,666
                              

Total derivatives not designated as hedging instruments

     26,463      929,632      (92,199     (1,014,348
                              

Total derivatives

   $ 26,463    $ 929,632    $ (92,199   $ (1,018,927
                              

 

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(Dollar amounts in thousands, except share and per share data)

 

The following table summarizes the amounts recognized on the consolidated statements of financial condition and operations related to the Company’s cash flow hedges for the nine months ended September 30, 2009 and 2008, respectively.

 

Derivatives in

Cash Flow

Hedging

Relationship

   Amount of Gain/(Loss)
Recognized in OCI on
Derivative

For the nine months
ended September 30,
   

Location of

Gain/(Loss)

reclassified from

Accumulated

OCI into Income

   Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI into
Income

For the nine months
ended September 30,
   

Location of

Gain/(Loss)

recognized in

income on

derivative

   Amount of Gain/(Loss)
recognized in income on
derivative

For the nine months
ended September 30,
   2009    2008        2009     2008        2009    2008

Interest rate swaps

   $ 931    $ (6,219  

Interest

income/expense/

dedesignation

   $ (13,428   $ (11,661  

Interest

expense

   $ 64    $ 534
                                                  

Total

   $ 931    $ (6,219      $ (13,428   $ (11,661      $ 64    $ 534
                                                  

The following table summarizes the amounts recognized on the consolidated statements of operations related to the Company’s trading derivatives for the nine months ended September 30, 2009 and 2008, respectively.

 

Derivatives not designated

as hedging instruments

  

Location of

Gain/(Loss)

Recognized in Income

on Derivative (1)

   Amount of
Gain/(Loss)
Recognized in Income
on Derivative
 
      2009     2008  

Interest rate swaps

   Other gains (losses)    $ (4,411   $ (15,759

Foreign exchange contracts

   Other gains (losses)      2,223        11,012   
                   

Total

      $ (2,188   $ (4,747