CDO shop Deerfield Capital Corp. announced the company's conversion to a C corporation to maximize its use of significant tax benefitsto increase stockholder value.
The tax benefits available upon conversion to a C-corp mainly represent the future tax savings expected from deductible losses on interest rate swaps and a likely 2008 net operating loss (NOL) carry forward, which can both be used to offset taxes that are otherwise due within the next 20 years.
The interest rate swap losses and NOL carry forward are expected to aggregate roughly $200 to $210 million at the end of 2008 that can be used as a dollar-for-dollar offset to taxable income, which translates into potential future year tax savings of roughly $80 to $84 million.
The conversion to a C-corp will be retroactive to January 1, 2008. The company and its subsidiaries will file a consolidated C-corp income tax return for 2008 and expect to use the interest rate swap losses and NOL carry forward to offset any taxable income generated by entities in the consolidated group. The company estimates near-term cash savings, due to lower income tax payments as a C-corp, of approximately $8 to $12 million for 2008.
"As previously communicated, the company has been exploring alternative legal and tax structures to enhance stockholder value," said Jonathan Trutter, chief executive officer. "After a thorough analysis, we determined that it is in DFR's and its stockholders' best interest to convert to a C-corp. In fact, the conversion to a C-corp is expected to lower corporate costs and provide more flexibility in decisions involving investments of capital at DFR. The strategic committee of the company's board of directors continues to work with UBS Investment Bank to explore strategic opportunities to enhance stockholder value, and conversion to a C-corp will not impede this process."
The firm also announced that in connection with its planned conversion to a C-corp, the firm entered into agreements with the holders of its Series A and Series B Senior Secured Notes and trust preferred securities to remove covenants requiring the company to maintain its REIT status.
On Oct. 1, the company notified the New York Stock Exchange (NYSE) that it had terminated its REIT status. The termination of its REIT status makes up a failure to maintain compliance with a NYSE continued listing standard.
In anticipation of the foregoing, the company submitted a listing application to the NASDAQ and is working to ensure a smooth transition of its common stock listing from the NYSE to the NASDAQ. The company's stock is expected to continue to trade under the ticker symbol "DFR." To ensure compliance with the NASDAQ's initial listing standards, the Deerfield's board of directors has approved a 1-for-10 reverse stock split. The firm expects the effective date for the reverse stock split to be Oct. 16.