Piper Jaffray Companies (PJC)

PJC 
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Piper Jaffray Companies (PJC)

Q3 2008 Earnings Call

October 15, 2008 9:00 am ET

Executives

Andrew S. Duff - Chairman and Chief Executive Officer

Debbra L. Schoneman - Chief Financial Officer

Analysts

Devin Ryan - Sandler O’Neill

Brian Hagler - Kennedy Capital

Horst Hueniken - Thomas Weisel Partners

Steve Stelmach - FBR Capital Markets

Presentation

Operator

Welcome to the Piper Jaffray Companies conference call to discuss the financial results for the third quarter of 2008. (Operator Instructions)

The company has asked that I remind you that statements on this call are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company’s reports on file with the SEC, which are available on the company’s website at www.piperjaffray.com and on the SEC website at www.sec.gov.

And now, I would like to turn the call over to Andrew Duff.

Andrew S. Duff

There is no question that the third quarter was very difficult for our firm as reflected in our financial results. During the quarter the financial markets experienced unprecedented events. The equity markets experienced significant volatility and the credit market seized up in September, which had significant negative implications for the short-term segment of the fixed income market. This is an extraordinary environment, one which creates not only operating challenges, but also historic opportunities.

I’m going to take you through three areas today: how the fallout from the market turmoil impacted us, what actions we are taking given the realities of the significantly lower revenue environment, and how we have used the opportunities available to us given the dramatic change in the competitive landscape.

First, our investment banking revenues held up reasonably well in the quarter against a very weak industry environment. Debt financing and advisory revenues were decent. Equity financing revenues increased from the sequential second quarter, but were well below our historic quarterly run rate and industry fundamentals remained weak. Our financial performance depends heavily on investment banking activity and with the equity capital markets essentially on hold, our results were negatively impacted.

Sales and trading revenues were mixed during quarter. Equity sales and trading continued to perform well, client activity was strong, and the team reported solid trading performance. Year-to-date equity sales and trading revenues were up 20% compared to last year. We are benefiting from increased market volume and volatility and our efforts to target sales resources, research or capital to clients that are paying for the value appears to be contributing positively. In addition, electronic trading generated its best quarter ever.

The turmoil in the credit markets drove extreme volatility in the fixed income market particularly at the end of September. The volatile markets were difficult to manage and our fixed income sales and trading results were negatively impacted. As we disclosed last week, the area that was significantly impacted by the volatile fixed income markets was our Tender Option Bond or TOB program. Let me summarize my comments from our prior call.

We determined our TOB program no longer qualified for off balance sheet accounting treatment. As a result, we consolidated $258 million of municipal bond assets and $269 million of variable rate certificate liabilities onto our balance sheet as of September 30th and recorded an after tax loss of $13.4 million in the third quarter.

We took this action because current volatility in the credit markets caused the decline in the market value for municipal securities, which increased the likelihood that Piper Jaffray would make payments under its reimbursement obligation to the third party liquidity provider for the program. This reimbursement constitutes material involvement in the trust and requires them to be consolidated onto the balance sheet. We also decided we will discontinue the program as we believe the TOB trust will not have long-term life as we originally expected.

We have longstanding expertise in the municipal market and we will continue to invest in and underwrite municipal bonds as one of our primary business activities. We will continue to deploy capital to the municipal market when we believe it is advantageous to do so, but we won’t to use the TOB vehicle for financing.

All of the TOB bonds that we consolidated onto our balance sheet are rated AA or better. As of our call with you last week we had already reduced our exposure by selling 94 million or 36% of the bonds largely at prices at or above where we mark them at September 30th.

Our exit strategy meets our two key objectives during this time of market volatility. First to remove a potential funding risk to the existing TOB program, and secondly to manage our overall municipal exposure prudently relative to the overall risk framework that we maintained for the firm. The resulting level of our overall municipal exposure is within the range that we’ve historically managed with these securities inclusive of the remaining TOB bonds.

Now let me move to our ARS inventory, which is that $50 million as of today and the same as it was in our second quarter call. We anticipate that we would be able to complete additional restructurings, but given the turmoil in the credit markets and the dislocation municipal markets, pricing on deals has been difficult. The largest of the three remaining issuers has made a decision on restructuring its two issues and deals are on our calendar to price depending on market condition. As these deals do get priced the balance will drop to $26 million. The restructuring timing on the remaining deals could move to late this year or early next.

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