18. DEBT

The Company had the following debt outstanding.



DETAIL OF DEBT
(Dollars in Thousands)

Description	As of December 31, 2018		As of December 31, 2017		Interest Rate Terms	Interest (4)		Maturity
Contingent convertible debt:
8.00% convertible senior note (the "2017 Convertible Note")	$	15,000	$	15,000	Fixed	8.00	%	March 2022 (1)
8.00% convertible senior notes (the "2013 Convertible Notes")		6,786		8,248	Fixed	8.00	%	September 2019 (2)
Less unamortized debt issuance costs		(974)		(1,343)
		20,812		21,905
Junior subordinated notes (3):
Alesco Capital Trust I		28,125		28,125	Variable	6.52	%	July 2037
Sunset Financial Statutory Trust I		20,000		20,000	Variable	6.95	%	March 2035
Less unamortized discount		(25,401)		(25,853)
		22,724		22,272

MB Financial Bank, N.A. Credit Facility ("2018 MB LOC")		-		-	Variable	NA		April 2020

LegacyTexas Credit Facility		-		-	Variable	NA		November 2019
Total	$	43,536	$	44,177

(1)

The holder of the 2017 Convertible Note may convert all or any part of the outstanding principal amount of the 2017 Convertible Note at any time prior to maturity into units of the Operating LLC at a conversion price of $1.45 per unit, subject to customary anti-dilution adjustments. Units of the Operating LLC not held by Cohen & Company Inc. may, with certain restrictions, be redeemed and exchanged into shares of the Common Stock on a ten-for-one basis. Therefore, the 2017 Convertible Note can be converted into Operating LLC units and then redeemed and exchanged into Common Stock at an effective conversion price of $14.50.

(2)

The holders of the 2013 Convertible Notes may, subject to certain restrictions, convert all or any part of the outstanding principal amount of the 2013 Convertible Notes at any time prior to maturity into shares of the Common Stock at a conversion price of $12.00 per share, subject to certain anti-dilution adjustments.

(3)

The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614. However, the Company owns the common stock of the trusts in a total par amount of $1,489. The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company. These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock. The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par. When factoring in the discount, the yield to maturities are 15.3% for the Alesco Capital I trust and 15.6% for the Sunset Financial Statutory Trust I.

(4)

Represents the interest rate in effect as of the last day of the reporting period.

Contingent Convertible Debt

The 2017 Convertible Note

On March 10, 2017 (the “Closing Date”), the Operating LLC entered into a Securities Purchase Agreement (the “2017 Convertible Note Purchase Agreement”), by and among the Operating LLC and DGC Family Fintech Trust, a trust established by Daniel G. Cohen. Daniel G. Cohen is the chairman of the Company’s board of directors and chairman of the board of managers of the Operating LLC.

Pursuant to the 2017 Convertible Note Purchase Agreement, the DGC Family Fintech Trust agreed to purchase from the Operating LLC, and the Operating LLC agreed to issue and to sell to the DGC Family Fintech Trust, a convertible senior secured promissory note (the “2017 Convertible Note”) in the aggregate principal amount of $15,000. On the Closing Date, the DGC Family Fintech Trust paid to the Operating LLC $15,000 in cash in consideration for the 2017 Convertible Note. In addition, pursuant to the 2017 Convertible Note Purchase Agreement, on the Closing Date, the Operating LLC was required to pay to the DGC Family Fintech Trust the $600 Transaction Fee, which obligation was offset in full by Daniel G. Cohen’s obligation to pay the Termination Fee for the Europe Sale Agreement (see note 6) to the Operating LLC. As required pursuant to ASC 470, the Company accounted for the 2017 Convertible Notes as conventional convertible debt and did not allocate any amount of the proceeds to the embedded equity option.

Under the 2017 Convertible Note Purchase Agreement, the Operating LLC and the DGC Family Fintech Trust offer customary indemnifications. Further, the Operating LLC and the DGC Family Fintech Trust provide each other with customary representations and warranties, the Company provides limited representations and warranties to the DGC Family Fintech Trust, and each of the Operating LLC and the Company make customary affirmative covenants.

Pursuant to the 2017 Convertible Note Purchase Agreement, the Company agreed to execute an amendment (the “LLC Agreement Amendment”) to the Amended and Restated Limited Liability Company Agreement of the Operating LLC dated as of December 16, 2009, by and among the Operating LLC and its members, as amended (the “LLC Agreement”) at such time in the future as all of the other members execute the LLC Agreement Amendment. The LLC Agreement Amendment provides, among other things, that the board of managers will initially consist of Daniel G. Cohen, as chairman of the Operating LLC’s board of managers, Lester R. Brafman (the Company’s current chief executive officer), and Joseph W. Pooler, Jr. (the Company’s current executive vice president, chief financial officer, and treasurer). The LLC Agreement Amendment also provides that Daniel G. Cohen will not be able to be removed from the Operating LLC’s board of managers or as chairman of the Operating LLC’s board of managers other than for cause or under certain limited circumstances. The LLC Agreement Amendment was not executed as of December 31, 2018.

The outstanding principal amount under the 2017 Convertible Note is due and payable on the fifth anniversary of the Closing Date, provided that the Operating LLC may, in its sole discretion, extend the maturity date for an additional one-year period, in each case unless the 2017 Convertible Note is earlier converted (in the manner described below). The 2017 Convertible Note accrues interest at a rate of 8% per year, payable quarterly. Provided that no event of default has occurred under the 2017 Convertible Note, if dividends of less than $0.20 per share are paid on the Common Stock in any fiscal quarter prior to an interest payment date, then the Operating LLC may pay one-half of the interest payable on such date in cash, and the remaining one-half of the interest otherwise payable will be added to the principal amount of the 2017 Convertible Note then outstanding. The 2017 Convertible Note contains customary “Events of Default.” Upon the occurrence or existence of any Event of Default under the 2017 Convertible Note, the outstanding principal amount is immediately accelerated in certain limited instances and may be accelerated in all other instances upon notice by the holder of the 2017 Convertible Note to the Operating LLC. Further, upon the occurrence of any Event of Default under the 2017 Convertible Note and for so long as such Event of Default continues, all principal, interest, and other amounts payable under the 2017 Convertible Note will bear interest at a rate equal to 9% per year. The 2017 Convertible Note may not be prepaid in whole or in part prior to the maturity date without the prior written consent of the holder thereof (which may be granted or withheld in its sole discretion). The 2017 Convertible Note is secured by the equity interests held by the Operating LLC in all of its subsidiaries.

At any time following the Closing Date, all or any portion of the outstanding principal amount of the 2017 Convertible Note may be converted by the holder thereof into units of membership interests of the Operating LLC (“LLC Units”) at a conversion rate equal to $1.45 per unit, subject to customary anti-dilution adjustments. Units of the Operating LLC not held by Cohen & Company Inc. may, with certain restrictions, be redeemed and exchanged into shares of the Company on a ten-for-one basis. Therefore, the 2017 Convertible Note can be converted into Operating LLC units and then redeemed and exchanged into Common Stock at an effective conversion price of $14.50. Under the 2017 Convertible Note Purchase Agreement, the Company submitted a proposal to the Company’s stockholders at its 2017 annual meeting of stockholders to approve the Company’s issuance, if any, of Common Stock upon any redemption of the LLC Units and the Company’s board of directors agreed to recommend that the Company’s stockholders vote to approve such proposal. The proposal was approved at the Company’s 2017 annual meeting.

Following any conversion of the 2017 Convertible Note into LLC Units, the holder of such LLC Units will have the same rights of redemption, if any, held by the holders of LLC Units as set forth in the LLC Agreement; provided that the holder will have no such redemption rights with respect to such LLC Units if the Company’s board of directors determines in good faith that satisfaction of such redemption by the Company with shares of its Common Stock would (i) jeopardize or endanger the availability to the Company of its net operating loss and net capital loss carryforwards and certain other tax benefits under Section 382 of the Internal Revenue Code of 1986, or (ii) constitute a “Change of Control” under the Junior Subordinated Indenture, dated as of June 25, 2007, between the Company (formerly Alesco Financial Inc.) and Wells Fargo Bank, N.A., as trustee.

Under the 2017 Convertible Note, if following any conversion of the 2017 Convertible Note into LLC Units, for so long as the Company owns a number of LLC Units representing less than a majority of the voting control of the Operating LLC, each holder of any LLC Units issued as a result of the conversion of the 2017 Convertible Note (regardless of how such LLC Units were acquired by such holder) is obligated to grant and appoint the Company as such holder’s proxy and attorney-in-fact to vote (i) the number of LLC Units owned by each such holder that, if voted by the Company, would give the Company a majority of the voting control of the Operating LLC, or (ii) if such holder holds less than such number of LLC Units, all such holder’s LLC Units.

The 2017 Convertible Note provides that it is senior to all indebtedness of the Operating LLC incurred following the Closing Date and is senior to any subordinated or junior subordinated indebtedness of the Operating LLC outstanding as of the Closing Date; however, in connection with the MB Financial Bank, N.A. loan agreement discussed below, the Operating LLC’s payment obligations under the 2017 Convertible Note are subordinated to any loans under the MB Financial, N.A. Credit Facility. See note 31.

The 2013 Convertible Notes

In connection with the investments by Mead Park Capital and EBC, as assignee of CBF, in September 2013, the Company issued $8,248 in aggregate principal amount of convertible senior promissory notes. The 2013 Convertible Notes accrue 8% interest per year, payable quarterly. As required under ASC 470, the Company accounted for the 2013 Convertible Notes as conventional convertible debt and did not allocate any amount of the proceeds to the embedded equity option.

The original maturity date of the 2013 Convertible Notes was September 25, 2018. Immediately prior to maturity, the 2013 Convertible Notes were held by three holders. On September 25, 2018, the Company fully paid off one holder in the amount of $1,461. The Company entered into amendments with the holders of the remaining $6,786 aggregate principal amount of the 2013 Convertible Notes: the Edward Cohen IRA and the EBC 2013 Family Trust. Edward E. Cohen is the benefactor of the Edward E. Cohen IRA and is the father of Daniel G. Cohen, the President and Chief Executive of the Company’s European operations and Chairman of the Company’s board of directors. Daniel G. Cohen is a trustee of the EBC 2013 Family Trust. See note 29.

Pursuant to the amendments, (i) the maturity date of each of the outstanding 2013 Convertible Notes was extended from September 25, 2018 to September 25, 2019; and (ii) the conversion price under each of the outstanding 2013 Convertible Notes was reduced from $30.00 per share of Common Stock, to $12.00 per share of Common Stock.

The amendments amended the 2013 Convertible Notes to each provide that, until the Company’s stockholders approve the issuance of the shares of Common Stock issuable upon conversion of the 2013 Convertible Notes for purposes of Section 713 of the NYSE American’s Company Guide, the 2013 Convertible Notes may not be converted if such conversion would result in the Company issuing a number of shares of Common Stock that, when aggregated with any shares of Common Stock previously issued in connection with any conversion under the 2013 Convertible Notes, equals or exceeds, in the aggregate, 19.99% of the outstanding Common Stock as of September 25, 2018.

In addition, the amendments amended the 2013 Convertible Notes to provide that (i) the Company is required to cause its stockholders to vote on a proposal (the “Stockholder Proposal”) regarding the issuance of the shares of Common Stock issuable upon conversion of the 2013 Convertible Notes for purposes of Section 713 of the NYSE American’s Company Guide at the Company’s 2019 Annual Meeting of the Company’s stockholders, (ii) the Company is required use its reasonable best efforts to solicit proxies for such stockholder approval, and (iii) the Company’s board of directors is required to recommend to the Company’s stockholders that such stockholders approve the Stockholder Proposal.

The 2013 Convertible Notes also have certain provisions that allow for the deferral of interest payments: (i) if dividends of less than $0.20 per share are paid on the Common Stock in the quarter prior to any interest payment date, then the Company may pay one-half of the interest in cash on such date, and the remaining one-half of the interest otherwise payable will be added to the principal amount of the convertible note then outstanding and (ii) if no dividends are paid on the Common Stock in the quarter prior to any interest payment date, then the Company may make no payment in cash on such date, and all of the interest otherwise payable on such date will be added to the principal amount of the note then outstanding.

Subject to the conversion restrictions described above, the holders of the outstanding 2013 Convertible Notes may convert all or any part of the outstanding principal amount of the 2013 Convertible Notes at any time into shares of the Common Stock at $12.00 per share conversion price, subject to customary anti-dilution adjustments. Accordingly, subject to the conversion restrictions described above, based on the current principal balance, the 2013 Convertible Notes may be converted into up to an aggregate of 565,469 shares of Common Stock.

As of December 31, 2018, the Company was in compliance with the covenants of the 2013 Convertible Notes and has paid all of the interest due thereunder in cash.

Junior Subordinated Notes

The Company assumed $49,614 aggregate principal amount of junior subordinated notes outstanding at the time of the Merger. The Company recorded the debt at fair value on the acquisition date. Any difference between the fair value of the junior subordinated notes on the Merger date and the principal amount of debt is amortized into earnings over the estimated remaining life of the underlying debt as an adjustment to interest expense.

The junior subordinated notes are payable to two special purpose trusts:

1. Alesco Capital Trust I: $28,995 in aggregate principal amount issued in June 2007. The notes mature on July 30, 2037 and may be called by the Company at any time. The notes accrue interest payable quarterly at a floating interest rate equal to LIBOR plus 400 basis points per annum through July 30, 2037. All principal is due at maturity. Alesco Capital Trust I simultaneously issued 870 shares of Alesco Capital Trust I’s common securities to the Company for a purchase price of $870, which constitutes all of the issued and outstanding common securities of Alesco Capital Trust I.

2. Sunset Financial Statutory Trust I (“Sunset Financial Trust”): $20,619 in aggregate principal amount issued in March 2005. The notes mature on March 30, 2035. The notes accrue interest payable quarterly at a floating rate of interest of 90-day LIBOR plus 415 basis points. All principal is due at maturity. Sunset Financial Trust simultaneously issued 619 shares of Sunset Financial Trust’s common securities to the Company for a purchase price of $619, which constitutes all of the issued and outstanding common securities of Sunset Financial Trust.

Alesco Capital Trust I and Sunset Financial Trust (collectively, the “Trusts”) described above are VIEs pursuant to variable interest provisions included in FASB ASC 810 because the holders of the equity investment at risk do not have adequate decision making ability over the Trusts’ activities. The Company is not the primary beneficiary of the Trusts as it does not have the power to direct the activities of the Trusts. The Trusts are not consolidated by the Company and, therefore, the Company’s consolidated financial statements include the junior subordinated notes issued to the Trusts as a liability, and the investment in the Trusts’ common securities as an asset. The common securities were deemed to have a fair value of $0 as of the Merger Date. These are accounted for as cost method investments; therefore, the Company does not adjust the value at each reporting period. Any income generated on the common securities is recorded as interest income, a component of interest expense, net, in the consolidated statement of operations.

The junior subordinated notes have several financial covenants. Since the Merger, Cohen & Company Inc. has been in violation of one covenant of Alesco Capital Trust I. As a result of this violation, Cohen & Company Inc. is prohibited from issuing additional debt that is either subordinated to or pari passu with Alesco Capital Trust I debt. This violation does not prohibit Cohen & Company Inc. from issuing senior debt or the Operating LLC from issuing debt of any kind. Cohen & Company Inc. is in compliance with all other covenants of the junior subordinated notes. The Company does not consider this violation to have a material adverse impact on its operations or on its ability to obtain financing in the future.

MB Financial Bank, N.A.

Effective on April 25, 2018, the Company, the Operating LLC, and JVB Holdings, as guarantors, and JVB, as borrower, entered into a loan agreement (the “2018 MB LOC”) with MB Financial Bank, N.A., (“MB Financial”), as lender.

Pursuant to the terms of the 2018 MB LOC, MB Financial agreed to make loans (each a “Loan” and collectively, the “Loans”) at JVB’s request from time to time in the aggregate amount of up to $25,000. The Loans (both principal and interest) are scheduled to mature and become immediately due and payable in full on April 10, 2020.

In accordance with the terms of the 2018 Credit Facility, JVB paid to MB Financial a commitment fee in the amount of $250.

Loans under the 2018 MB LOC bear interest at a per annum rate equal to LIBOR plus 6.0%. As of December 31, 2018, JVB had not made any draws against the 2018 MB LOC. During 2018, the Company recognized expense of $270 related to 2018 MB LOC (both from unused fees and amortization of deferred financing costs). This expense is included as a component of interest expense. The Operating LLC is required to pay an undrawn commitment fee at a per annum rate equal to 0.50% of the undrawn portion of the MB Financial’s $25,000 commitment under the 2018 MB LOC. Pursuant to the 2018 MB LOC, all Loans must be used by JVB for working capital purposes and general liquidity of JVB. Further, under the 2018 MB LOC, JVB may request a reduction in the $25,000 commitment in a minimum amount of $1,000 and multiples of $500 thereafter, upon not less than five days’ prior notice to MB Financial.

On January 29, 2019, the 2018 MB LOC was restructured. See note 31.

LegacyTexas Bank

On November 20, 2018, ViaNova, as borrower entered into a Warehousing Credit and Security Agreement (the “LegacyTexas Credit Facility”) with LegacyTexas Bank as the lender with an effective date of November 16, 2018. The LegacyTexas Credit Facility supports the buying, aggregating and distributing of residential loans by ViaNova.

Pursuant to the terms of the LegacyTexas Credit Facility, LegacyTexas Bank agreed to make loans at ViaNova’s request from time to time in the aggregate amount of up to $12,500. The loans (both principal and interest) are scheduled to mature and become immediately due and payable in full on November 15, 2019.

Loans under the LegacyTexas Credit Facility will bear interest at a per annum rate equal to LIBOR (with a floor of 1.50%) plus 4.0% (for residential transition loans) or 5.0% (for aged residential transition loans). Commencing February 14, 2019, ViaNova became required to pay an undrawn commitment fee at a per annum rate equal to 0.25% of the undrawn portion of the $12,500 commitment under the LegacyTexas Credit Facility; provided, however, that such fee shall be waived for any calendar month (i) in which the used portion for such month is equal to or greater than fifty percent (50%) of the $12,500 commitment amount, or (ii) the aggregate advances funded by LegacyTexas Bank for such calendar month is equal to or greater than the $12,500 commitment amount, as may be in effect from time to time.

Loans under the LegacyTexas Credit Facility must be used by ViaNova to provide funding for short-term mortgages to developers for the purchase and renovation of residential 1-4 family properties or to purchase such short-term mortgages from correspondents that originate such short-term mortgages.

The obligations of ViaNova under the LegacyTexas Credit Facility are secured by a lien on the mortgages financed by the credit facility. Further, pursuant to the terms of the LegacyTexas Credit Facility, ViaNova deposited cash in an amount equal to 2% of the $12,500 commitment amount in a non-interest-bearing account with LegacyTexas Bank as additional collateral. See note 14.

Deferred Financing

The Company incurred $1,400 of deferred financing costs associated with the issuance of the 2017 Convertible Note and $670 of deferred financing costs associated with the issuance of the 2013 Convertible Notes. These amounts were initially recorded as a discount on debt and are amortized to interest expense over the life of the notes under the effective interest method. The Company also incurred $525 of deferred financing costs associated with the 2018 MB LOC. These amounts were initially recorded as a component of other assets and are amortized to interest expense over the life of the line of credit using the straight line method. The Company recognized interest expense from deferred financing costs of $552, $332, and $136 for the years ended December 31, 2018, 2017, and 2016, respectively.

Interest Expense, Net

Interest expense incurred is shown in the table below by instrument for the years ended December 31, 2018, 2017, and 2016.



INTEREST EXPENSE
(Dollars in Thousands)

	Year Ended December 31,
	2018		2017		2016
Junior subordinated notes	$	3,499	$	3,293	$	3,176
2013 Convertible Notes		752		811		798
2017 Convertible Note		1,445		1,154		-
2018 MB LOC		270		-		-
Redeemable Financial Instrument - DGC Family Fintech Trust / CBF		587		89		-
Redeemable Financial Instrument - JKD Capital Partners I LTD		1,968		831		761
Redeemable Financial Instrument - ViaNova Capital Group, LLC		(34)		-		-
	$	8,487	$	6,178	$	4,735