Anthracite Capital, Inc. (NYSE:AHR) (the "Company" or "Anthracite") reported net loss available to common stockholders for the third quarter of 2009 of $(0.51) per share, compared to $(0.03) per share for the same three-month period in 2008. (All currency amounts discussed herein are in thousands, except share and per share amounts. All per share information is presented on a diluted basis. Prior year amounts have been restated for the adoption of recently issued guidance related to accounting for convertible debt instruments).

Operating Earnings (defined below) for the third quarters of 2009 and 2008 were $0.03 and $0.32 per share, respectively. Operating Earnings is a non-GAAP measure. Table 1, provided below, reconciles Operating Earnings per share to diluted net income (loss) per share available to common stockholders.

Update on Financial Condition

Given the circumstances described below, substantial doubt continues to exist about the Company's ability to continue as a going concern.

As of September 30, 2009, the Company had $297 of unrestricted cash and cash equivalents, compared with $9,686 at December 31, 2008. As described in further detail below, the Company failed to meet amortization payment requirements under its secured facilities with Bank of America, Deutsche Bank and Morgan Stanley (the "secured bank facilities") and has until December 29, 2009 to cure such shortfall (as of November 1, 2009, over $1,315) 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 them.

The Company did not make interest payments due on October 30, 2009 (approximately $1,554) on three series of its senior notes. Under the indentures governing 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 BlackRock Holdco 2, Inc. ("Holdco 2") and, if any such debt were accelerated, would trigger a cross-acceleration provision in the Company’s convertible notes indenture. If acceleration were to occur, the Company would not have sufficient liquid assets available to repay such 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.

In addition, for the quarter ended September 30, 2009, the Company is in breach of a covenant in its secured bank facilities that requires the Company's operating earnings (as defined in the applicable secured bank facility) not be less than a specified amount at quarter end. Unless waived, this breach could lead to an event of default and acceleration and lead to the consequences described in the preceding paragraph. The Company also continues to be in breach of the covenant in its secured facility with Holdco 2 that 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. In March 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.

Based on the Company's current liquidity situation, the Company continues to seek ways to refinance or restructure its indebtedness and is focused on negotiations with its secured bank lenders and unsecured noteholders to cure or obtain a waiver for missed interest payment and amortization payment defaults and covenant breaches.

Effect of Market Conditions on the Company's Business

Although the capital markets have shown recent signs of stabilizing after a 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. These adverse 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 lenders. Pursuant to amendments to its secured bank facilities 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 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. In such event, the Company would need to cure such shortfall by March 31, 2010 to avoid an event of default.
• 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.

• Elimination of dividends. The Company's Board of Directors (the "Board of Directors") has not declared any dividend on the Company's common stock or 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 and subject to restrictions in the Company's debt instruments.
• 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 that requires that the average closing price of listed common stock be no less than $1.00 per share over a consecutive 30 trading-day period (the "Price Condition"). The Company 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 common stock will be subject to suspension and delisting by the NYSE, which would result in defaults under certain of the Company's debt instruments. The exact ratio of the reverse stock split will be determined based on the facts and circumstances at a later date.

Completed Initiatives to Restructure Debt

Since May 2009, the Company, in addition to amending its secured bank facilities in May 2009, restructured a significant portion of its unsecured debt and thereby reduced its near-term interest expense.

Equity-for-Debt Exchanges

From May through September 2009, the Company completed a number of equity-for-debt exchanges with holders of its 11.75% Convertible Senior Notes due 2027 (the "convertible notes") pursuant to which the Company acquired and canceled over half of the outstanding amount of convertible notes. In these exchanges, the Company issued an aggregate of 14,997,000 shares of its common stock for $40,981 aggregate principal amount of convertible notes. Holders in these exchanges generally released the Company from paying them any accrued and unpaid interest on the exchanged convertible notes.

As of November 1, 2009, $39,019 aggregate principal amount of convertible notes remained outstanding.

Junior Subordinated Debt Exchanges

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

In May 2009 and July 2009, the Company completed exchanges with holders of $160,000 aggregate liquidation amount of trust preferred securities of its three subsidiary capital trusts and holders of €50,000 aggregate principal amount of the Company's euro-denominated junior subordinated notes. The Company issued new notes with a significantly reduced initial interest rate (0.75% per year) for up to four years (the "junior debt modification period") and with a higher principal amount (125% of the principal or liquidation amount of the securities exchanged).

In October 2009, the Company and the holder of $15,000 aggregate liquidation amount of trust preferred securities agreed to amend those securities in accordance with the terms of the May 2009 and July 2009 new notes.

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 junior debt modification period, the interest rates of the new notes and trust preferred securities return to the original, higher rates of the securities for which they were exchanged or from which they were amended. In addition, during the junior debt modification period, the Company will be subject to limitations on its ability to pay cash dividends on its common or preferred stock or redeem, purchase or acquire any equity interests, and to 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 (collectively, the "new junior debt covenants"). In addition, during the junior debt modification period, the cure period for a default in the payment of interest when due is three days. The new notes and trust preferred securities otherwise generally have the same terms, including maturity dates, as the securities for which they were exchanged or from which they were amended.

Senior Notes Exchanges

In October 2009, the Company restructured $64,500 aggregate principal amount of its 7.22% Senior Notes due 2016, 7.20% Senior Notes due 2016 and 7.772%-to-Floating Rate Senior Notes due 2017. The senior notes exchanges were similar in structure to the junior subordinated debt exchanges. The Company issued new notes with a significantly reduced initial interest rate (1.25% per year) for up to four years (the "senior notes modification period") and with a higher principal amount (120% of the principal amount of the notes exchanged).

Holders in these exchanges permitted the Company to retrospectively apply the significantly reduced initial interest rate to the most recently completed interest period.

After the senior notes modification period, the interest rates of the new notes return to the original, higher rates of the notes for which they were exchanged. In addition, during the senior notes modification period, pursuant to the applicable indentures, the Company is subject to new covenants similar to the new junior debt covenants and additional covenants. In addition, during the senior notes 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, as the notes for which they were exchanged.

As of November 1, 2009, $13,750 aggregate principal amount of the Company's 7.22% Senior Notes due 2016, $18,750 aggregate principal amount of its 7.20% Senior Notes due 2016, $28,000 aggregate principal amount of its 7.772%-to-Floating Rate Senior Notes due 2017, and the entire $37,500 aggregate principal amount of its 8.1275%-to-Floating Rate Senior Notes due 2017 are outstanding and have not been restructured.

The Company estimates that the effect of the combined unsecured restructurings and exchanges will result in cash savings of over $22,000 per year during the period that the lower coupons are in effect, excluding the impact of certain one-time fees paid in connection with the completion of the restructurings and exchanges. The Company intends to use cash from these savings to reduce indebtedness under its secured bank facilities.

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 bank 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. The chart below is a summary of the Company's CDO compliance tests as of September 30, 2009.

Because the failures of the Anthracite Euro CRE CDO 2006-1’s (“Euro CDO”) 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 bank lenders, the cash flow available to pay down the lender's outstanding balance has been reduced.

The chart below summarizes the cash flows received from the fourth quarter 2008 through the third quarter of 2009 from the Company's retained CDO bonds.

Commercial Real Estate Loans

The Company did not record any additional provisions for specific loan losses for the three months ended September 30, 2009. The Company also reduced the general provision by $4,308. The general loan loss provision methodology is more fully described in the Company's 2008 Annual Report on Form 10-K for the year ended December 31, 2008.

A summary of the changes in the Company's reserve for loan losses is as follows:

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

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.

The general reserve of $40,401 represents approximately 6% of the carrying value of the loans against which the Company has not specifically reserved. The specific reserve of $207,443 represents approximately 77% of carrying value of ten specific loans.

The chart below summarizes the outstanding principal balance, carrying value, and loan loss reserves for the commercial real estate loans held directly by the Company at September 30, 2009.

* Excludes $2,187 of accrued interest and $1,186 of loan related expenses.

Earnings from Equity Investments

Also included in commercial real estate loans are the Company's investments in Carbon Capital, Inc. ("Carbon I") and Carbon Capital II, Inc. ("Carbon II" and together with Carbon I, the "Carbon Funds"), which are managed by the Company's manager. For the quarters ended September 30, 2009 and 2008, respectively, the Company recorded losses of $(2,624) and income of $1,972 for the Carbon Funds. The investment periods for the Carbon Funds have expired and no new portfolio additions are expected.

The Company's investments in the Carbon Funds were as follows:

Carbon II recorded a provision for loan losses of $3,095 for the three months ended September 30, 2009 which includes a net decrease of a general provision of $325 and a provision of $2,770 related to two loans with an aggregate principal balance of $14,438. The loans are in various stages of resolution and due to the estimated fair value of the underlying collateral being below the principal balance of the loans, Carbon II does not believe the full collectability of the loans is probable. The Company incurs its share of Carbon II's operating results through its approximately 26% ownership interest in Carbon II.

Commercial Real Estate Securities

The Company considers CMBS where it maintains the right to control the foreclosure/workout process on the underlying loans as controlling class CMBS ("Controlling Class CMBS"). The Company owns Controlling Class CMBS issued in 1998, 1999 and 2001 through 2007.

The Company did not acquire any additional Controlling Class CMBS trusts during the third quarter of 2009. At September 30, 2009, the Company owned 39 Controlling Class CMBS trusts with an aggregate underlying loan principal balance of $56,106,168. Delinquencies of 30 days or more on these loans as a percent of current loan balances were 5.6% at September 30, 2009, compared with 5.2% at June 30, 2009.

The chart below summarizes the par, weighted average coupon, market value, adjusted purchase price and third quarter 2009 estimated loss assumptions for the Company's U.S. dollar denominated Controlling Class CMBS:

⁽¹⁾ Adjusted purchase price is inclusive of mark-to-market losses taken since purchase

During the three months ended September 30, 2009, no securities of the Company's Controlling Class CMBS were upgraded and 66 securities in 16 Controlling Class CMBS were downgraded by at least one rating agency. Additionally, at least one rating agency upgraded two of the Company's non-Controlling Class commercial real estate securities and downgraded 15.

Summary of Commercial Real Estate Assets

A summary of the Company's commercial real estate assets with estimated fair values in local currencies and U.S. dollars at September 30, 2009 is as follows:

(1) Includes the carrying value of the Company's investment in AHR JV of $448 at December 31, 2008.

(2) Includes the carrying value of the Company's investments in the Carbon Funds of $40,871 and AHR International JV of $28,199 at December 31, 2008. In January 2009, in connection with the amendment and extension of the Company's secured bank facility with Morgan Stanley, the Company transferred its entire interest in Anthracite International JV's sole investment, an investment in non-U.S. commercial mortgage loan, to AHR MS, which then posted the asset as additional collateral under the facility.