Business context and reporting period
Institutional Financial Markets, Inc. (IFMI; the registrant in this filing) filed this unaudited Form 10-Q for the quarter ended June 30, 2015. The company provides credit-focused capital markets, principal investing, and asset management services. Unless stated otherwise, amounts below are in thousands of dollars.
At quarter-end, assets under management were $4.03 billion, 98.9% of which was in CDOs. The filing states that the company has not completed a securitization since 2008.
Financial and operating highlights
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $11,051; down 22% year over year | $23,845; down 13% |
| Operating income (loss) | $511, versus $(1,660) | $792, versus $(3,352) |
| Net income (loss) attributable to IFMI | $(345), versus $(2,123) | $(903), versus $(4,221) |
| Basic loss per share | $(0.02), versus $(0.14) | $(0.06), versus $(0.28) |
| Operating margin | Approximately 4.6%, versus (11.7%) | Approximately 3.3%, versus (12.2%) |
| Interest expense | $991 | $1,967 |
Revenue pressure reflected lower asset management, new issue and advisory, and principal transaction income. Net trading revenue was comparatively steady: $6,742 for the quarter, up 2%, and $14,013 for the half-year, up 3%. Management fees fell 29% for the quarter and 37% for the half-year. Management cited declining CDO collateral balances, terminated securitizations, and no 2015 performance fees from separate accounts. New issue and advisory revenue fell 73% for the quarter and 21% for the half-year; the company had stopped providing U.S. SPAC advisory services in early 2014.
Operating expenses declined 34% for the quarter and 25% for the half-year, including lower compensation and costs following headcount and office reductions. The prior-year comparison also included a $3,121 goodwill impairment, with no such charge in 2015. Headcount was 101 at June 30, 2015, compared with 121 a year earlier. By segment, six-month operating income was $906 in Capital Markets, $4,641 in Asset Management, and $640 in Principal Investing, before $5,395 of unallocated costs.
Financial position, cash flow and liquidity
- Total assets were $410,709 at June 30, 2015, up from $342,518 at December 31, 2014; total equity was $55,149, down from $56,494. Cash and cash equivalents were $12,878, compared with $12,253.
- Six-month operating cash flow was $(7,010), versus $1,160 provided in the prior-year period. Investing activities provided $8,514, mainly from $8,841 of sales and returns of principal on investments. Financing activities used $822, including $609 of dividends and $213 of distributions to non-controlling interests. Cash increased by $625 overall.
- Receivables under resale agreements were $172,746 and repurchase-agreement liabilities were $172,717. Both were substantially higher than at year-end; the company describes much of this activity as matched-book financing. Repurchase agreements outstanding at quarter-end were due within 30 days.
- Debt carrying value was $28,460, versus $27,939 at year-end; estimated fair value was $37.3 million. Debt included $8,248 of 8% convertible notes due September 2018 and junior subordinated notes. The convertible notes may be converted at $3.00 per share, subject to adjustment.
- Broker-dealer regulatory capital exceeded minimum requirements: JVB had $20,960 of adjusted net capital, and CCFL had $2,226 of net liquid capital against a $1,824 minimum. Management said cash, the trading portfolio, and related borrowing capacity should meet near-term operating needs.
Outlook, risks and unusual items
- Management expects asset management revenue to continue declining as CDOs run off and does not expect to complete new securitizations. It also cautioned that trading results and new issue/advisory revenue are volatile and may not indicate future performance; no quantified earnings guidance was provided.
- The planned sale of European operations to an entity controlled by Vice Chairman Daniel G. Cohen has an approximately $8.7 million stated purchase price, including $4.75 million upfront and up to $3.95 million over four years. The sale had not closed by June 30; the deadline was extended to December 31, 2015 and remains subject to customary conditions and FCA approval. The transaction involves a related party. If terminated, Mr. Cohen agreed to pay $600 toward certain fees, and a specified employment agreement amendment would cap qualifying severance at $1 million rather than the current minimum of $3 million.
- The company disclosed ongoing litigation involving former broker-dealer CCS and adviser CIRA concerning a CDO investment. It is also appealing a Pennsylvania tax assessment of $4.683 million plus interest relating to 2009; the company recorded no reserve. Routine legal and regulatory matters are also noted.
- Key business risks include market and credit losses, liquidity and margin-call demands, reliance on clearing and financing counterparties, regulatory capital requirements, key-person retention, and uncertain fair values. Level 3 CLO investments were $16.248 million and depend on management valuation assumptions.
- The board declared a $0.02-per-share dividend on July 30, 2015, payable August 28. The filing cautions that future dividends may be reduced or discontinued. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the European operations sale closes by the extended December 31, 2015 deadline, including regulatory approval, consideration received, and continuing rights to Munda CLO I revenue.
- The pace of CDO runoff and the resulting effect on AUM and fee revenue, alongside the company’s ability to sustain Capital Markets and Principal Investing results.
- Liquidity and financing exposure as repo balances and resale receivables expand, including collateral quality, margin requirements, and access to clearing-agency financing.
- Valuation and performance of Level 3 CLO holdings, and whether reported investment income and unrealized gains translate into realized cash returns.
- Outcomes of the Pennsylvania tax appeal and CDO-related litigation, as well as the company’s capacity to maintain dividends while reporting losses and negative operating cash flow.