Business context and reporting period
This is Institutional Financial Markets, Inc. (IFMI)’s unaudited Form 10-Q for the quarter ended September 30, 2014, comparing the three- and nine-month periods with 2013. The filing identifies the registrant as Institutional Financial Markets, Inc.; the request metadata names Cohen & Co Inc. The company provides credit-related fixed-income capital markets, asset management, and principal-investing services. At quarter-end, AUM was approximately $4.54 billion, 99% in CDOs.
Key financial results
Amounts below are in millions of dollars except per-share data; the filing’s financial statements are presented in thousands.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $10.55 | $18.09 | $37.97 | $45.85 |
| Operating income (loss) | $(0.58) | $(1.17) | $(3.94) | $(14.14) |
| Net income (loss) | $(1.72) | $(0.31) | $(7.39) | $(13.78) |
| Net loss attributable to IFMI | $(1.26) | $(0.10) | $(5.48) | $(9.31) |
| Basic and diluted loss per share | $(0.08) | $(0.01) | $(0.36) | $(0.80) |
- Revenue mix and changes: Q3 revenue fell 42% year over year; nine-month revenue fell 17%. Nine-month net trading revenue declined 39% to $19.88 million, asset-management revenue declined 24% to $10.00 million, and new-issue/advisory revenue declined 43% to $3.00 million. Principal transactions and other income improved to $5.09 million from a $5.11 million loss in the prior-year period.
- Expenses and margins: Nine-month operating expenses decreased 30% to $41.91 million, mainly reflecting lower compensation and operating costs after the broker-dealer merger and workforce reductions. The company recorded a $3.12 million goodwill impairment. Calculated operating margins were approximately (5.5)% for Q3 2014 and (10.4)% for the first nine months of 2014.
- Cash flow and liquidity: Cash and cash equivalents were $7.25 million at September 30, down from $13.16 million at December 31, 2013. Nine-month operating cash flow was $(0.80) million, investing cash flow $(0.38) million, and financing cash flow $(4.69) million. Investing included $19.92 million of net Star Asia sale proceeds and $25.31 million of purchases of other investments.
- Balance sheet and financing: Total assets were $276.92 million and total equity $53.30 million. Debt carrying value was $27.58 million, down from $29.67 million at year-end; this includes $8.25 million of 8% convertible notes due 2018 and junior subordinated notes. The company also reported $66.66 million of repurchase-agreement liabilities and $73.57 million payable to brokers, dealers, and clearing agencies. It reported no material off-balance-sheet arrangements.
- Regulatory capital: U.S. broker-dealer JVB had adjusted net capital of $8.58 million, $8.32 million above its minimum. U.K. subsidiary CCFL had net liquid capital of $1.96 million, $0.23 million above its minimum.
Material changes, outlook, and risks
- In January 2014, the company merged its U.S. broker-dealers, JVB and CCPR, and reduced its workforce by approximately 20%; headcount was 118 at September 30, compared with 189 a year earlier. Cost reductions helped narrow the nine-month operating loss, while weaker trading and lower fee revenue continued to weigh on results.
- The company completed the sale of the Star Asia Group in February for $20.04 million upfront and contingent payments tied to certain revenues for at least four years. It recognized a $0.08 million gain; future contingent payments are recorded as earned.
- In August, the company agreed to sell its European operations to an entity controlled by Vice Chairman Daniel G. Cohen for approximately $8.70 million: $4.75 million upfront, subject to adjustment, and up to $3.95 million over four years. The transaction had not closed at filing; it was expected to close in Q1 2015, subject to customary conditions and U.K. regulatory approval. A trust arrangement is intended to preserve substantially all revenue from managing Munda CLO I. The filing says the go-shop period ended without a superior proposal.
- Management described the market environment as challenging for the remainder of 2014, citing uneven markets, weak fixed-income activity, competition, and margin pressure. The filing provides no quantified earnings or revenue guidance. Management said existing cash, the trading portfolio, and related borrowing capacity were expected to cover near-term operating needs, while cautioning that replacement or additional financing may not be available on favorable terms.
- The company began expanding principal investments in CLOs it does not manage, investing $23.01 million in nine CLOs during the first nine months. It cautioned that CLO equity is subordinated, potentially illiquid, highly leveraged, and exposed to collateral defaults and coverage-test failures.
- Other material exposures include market and valuation risk, dependence on securities financing and clearing relationships, margin-call and counterparty risk, regulatory capital requirements, and volatile trading and transaction-based revenue. A 100-basis-point yield-curve increase was estimated to produce a $5.82 million loss on net interest-rate-sensitive assets.
- Legal and tax matters: former subsidiaries are defendants in Northern Rock litigation alleging fraud and other claims relating to a CDO; the company intends to defend the case. Pennsylvania assessed $4.68 million, including penalties, over a 2009 tax credit; the company appealed and recorded no reserve. The filing does not quantify a likely outcome for either matter.
- The board declared a $0.02-per-share dividend on October 31, payable November 28, 2014. Management cautioned that future dividends may be changed or discontinued.
Most important facts for investors to verify
- Confirm the registrant’s identity and relationship to the Cohen & Co Inc. name in the request metadata.
- Track whether the related-party European sale closes, its final consideration and adjustments, regulatory approval, and the continuing economics of the Munda CLO I arrangement.
- Assess whether cost savings can offset falling trading, advisory, and asset-management revenue, including the decline in AUM and termination of managed securitizations.
- Review cash availability, repo and clearing-broker financing exposure, debt service, regulatory-capital headroom, and the sustainability of the dividend.
- Monitor CLO portfolio performance and fair-value assumptions, as well as developments in the Northern Rock litigation and Pennsylvania tax appeal.