Institutional Financial Markets, Inc. (IFMI) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The filing identifies the registrant as Institutional Financial Markets, Inc. (ticker IFMI), not Cohen & Co Inc. Unless noted, financial amounts below are in thousands of dollars.
Business context and reporting period
IFMI is a financial-services company focused on credit-related fixed-income capital markets, asset management and principal investing. At quarter-end it reported $6.2 billion in assets under management, 96% of which was in company-sponsored CDOs. The filing describes uneven, vulnerable markets and says the business environment was expected to remain challenging for the rest of 2013.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Total revenue | $14,026 | $18,760 |
| Operating income (loss) | $(7,072) | $(5,203) |
| Net income (loss) | $(6,594) | $(5,890) |
| Net loss attributable to IFMI | $(4,500) | $(3,859) |
| Basic and diluted loss per share | $(0.40) | $(0.37) |
| Net cash used in operating activities | $(4,353) | $(4,577) |
| Cash and cash equivalents | $9,775 at March 31 | $14,500 at December 31 |
| Total assets / total liabilities | $336,186 / $266,093 | $341,001 / $264,384 at December 31 |
| Debt carrying value | $26,788 | $25,847 at December 31 |
Operating margin was approximately negative 50% of revenue, compared with approximately negative 28% in Q1 2012. IFMI’s attributable net loss margin was approximately negative 32%, versus negative 21%. The company declared $0.02 per common share for the quarter.
Cash used in investing activities was $4,353? No: cash flow from investing activities was provided of $580; cash used in financing activities was $739. The resulting net decrease in cash was $4,725, including a $213 adverse foreign-exchange effect.
Material changes versus the prior comparable period
- Revenue fell 25%, primarily as net trading revenue declined 26% to $13,059. Management attributed the trading decline to lower activity across several JVB asset classes and reduced PrinceRidge revenue, including $2,633 less from equity derivatives following the sale of that business in December 2012.
- Asset-management revenue decreased 4% to $4,762. Lower CDO fees, including expiration of a services agreement in February 2013, were partly offset by increased fees from other accounts and European syndicated-loan management.
- Principal transactions and other income remained negative at $(4,790), reflecting a $(5,398) fair-value loss on other investments. The Star Asia investment accounted for a $(6,033) loss, including $(3,697) from foreign exchange and $(2,336) from underlying investment values.
- Operating expenses declined 12% to $21,098, mainly due to lower cash compensation and reduced subscription, clearing and execution costs. Compensation fell 17%; headcount declined to 202 from 219 a year earlier. Professional fees and other operating expenses rose 15%, including higher consulting costs.
- Income from equity-method affiliates increased to $1,519 from $516. Effective March 1, IFMI acquired control of Star Asia Manager and began consolidating it; the acquisition contributed $273 of revenue and $186 of net income for the period after acquisition.
- AUM was $6.24 billion, down from $7.76 billion at March 31, 2012. Company-sponsored CDO AUM was $5.98 billion, versus $7.57 billion.
Liquidity, debt and capital
- Management said cash, the trading portfolio and related borrowing capacity should provide sufficient liquidity for near-term operations. However, operating cash flow was negative and quarter-end cash fell by $4,725 from year-end.
- Repurchase-agreement liabilities were $101,580 and receivables under resale agreements were $101,416 at March 31. These financing arrangements are collateralized, subject to margin calls and are presented gross; IFMI said it had historically met margin calls but gave no assurance it could do so in future conditions.
- Debt included $8,077 carrying value of 10.5% contingent convertible notes, $17,644 of junior subordinated notes, $342 of subordinated notes due June 20, 2013, and a new $725 Star Asia Manager note. The convertible notes have an earliest holder put date in May 2014; contractual maturity is May 2027.
- Contractual obligations totaled $114,068, including $48,125 principal of junior subordinated notes and $6,421 of operating leases. The contractual-obligations schedule assumes the convertible notes are repaid in May 2014 and the Star Asia Manager note in March 2014.
- Broker-dealer and UK regulatory capital exceeded minimum requirements. Total net capital or equivalent at licensed broker-dealers was $29,001; minimum requirements were $2,934.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management expected a challenging business environment through the remainder of 2013 and warned that market volatility, trading volumes, margins and transaction timing could make results volatile.
- Management cited continuing corporate-bond brokerage margin pressure from competition and lower market activity. It described diversification, European expansion, new product lines and cost controls as responses, but cautioned that these efforts might not be sufficient.
- Approximately 99% of other investments at fair value consisted of four managed vehicles; Star Asia alone was 74% of the portfolio. Its $24,136 reported fair value relied on a Level 3 internal valuation model. The filing says unadjusted Star Asia NAV would imply $34,375, materially above IFMI’s modeled value.
- IFMI’s Japanese-yen exposure was unhedged at quarter-end, with a reported long exposure of ¥3.8 billion. Management noted that hedging could create cash-liquidity demands against a comparatively illiquid investment.
- On May 9, 2013, after quarter-end, IFMI agreed to raise $13,746 from Mead Park Capital and Cohen Bros. Financial through common-stock purchases and convertible notes, subject to shareholder approval and other conditions. The filing warns of potential dilution and risks if the transaction does not close. The agreements also contemplated board changes and a CEO succession search.
- A lawsuit by U.S. Bank alleges unpaid trustee fees and seeks damages and a declaration regarding future fees; a motion to dismiss was pending. Separately, a guarantee related to Alesco XIV had a recorded fair-value liability of $1,084 and maximum potential loss of $8,750; Assured Guaranty may require liquid collateral in certain circumstances.
- Management stated disclosure controls were effective as of March 31, 2013 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the May 2013 financing closed, its final terms, shareholder approval and resulting dilution, and whether the contemplated governance and leadership changes occurred.
- Whether trading and asset-management revenue stabilized, particularly after the equity-derivatives sale and expiration of the CDO services agreement.
- Star Asia’s valuation assumptions, foreign-exchange exposure and subsequent performance, given its concentration in the principal-investment portfolio and Level 3 valuation.
- Liquidity and collateral capacity under repurchase and clearing arrangements, including the June 2013 subordinated-note maturity and the May 2014 convertible-note put date.
- Developments in the U.S. Bank litigation and the Alesco XIV guarantee, including any collateral demand or change in estimated exposure.