Business context and reporting period
Cohen & Company Inc. (NYSE American: COHN) filed this Form 10-K for the fiscal year ended December 31, 2019. The financial services company operates in Capital Markets, Asset Management and Principal Investing, with a focus on fixed income. Unless otherwise noted, amounts below are in U.S. dollars and millions.
At year-end, assets under management were $2.76 billion, down from $2.85 billion. CDOs represented 79.7% of AUM; the company has not completed a new securitization since 2008.
Financial performance and condition
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $49.7 | $49.4 |
| Operating income | $4.0 | $3.7 |
| Operating margin | 8.1% | 7.4% |
| Net loss | ($3.6) | ($4.0) |
| Net loss attributable to Cohen & Company Inc. | ($2.1) | ($2.5) |
| Basic loss per share | ($1.81) | ($2.14) |
| Net interest expense | $7.6 | $8.5 |
- Net trading revenue rose 30% to $38.2 million, led by matched-book repo ($12.0 million, up $7.4 million) and mortgage trading ($8.1 million, up $2.9 million). High-yield and investment-grade corporate trading declined.
- Asset-management revenue fell 40% to $7.6 million, reflecting lower CDO fees, liquidations and reduced managed-account performance fees. New-issue and advisory revenue fell 39% to $1.8 million; principal transactions and other income fell 54% to $2.1 million.
- Operating expenses were essentially flat at $45.6 million. Lower professional and other operating costs largely offset higher compensation, business-development, clearing and execution costs.
- Cash and cash equivalents declined to $8.3 million from $14.1 million. Operating activities used $15.5 million; investing activities provided $3.7 million and financing activities provided $5.9 million. Management said available cash, trading assets and related borrowing capacity should cover near-term needs, while noting uncertainty about replacing financing.
- Reported debt carrying value was $48.9 million; debt principal at par was approximately $74.7 million. Redeemable financial instruments were $17.0 million. The company also had $208.4 million payable under margin financing with Pershing.
- Matched-book repo balances were large and nearly offset: $7.50 billion in resale receivables and $7.53 billion in repurchase obligations at year-end. The filing changed to gross presentation of repo balances in 2019, increasing reported balance-sheet totals; these amounts should not be read as ordinary funded debt.
- Total equity was $48.8 million, including $33.3 million of stockholders’ equity and $15.4 million of non-controlling interest. The company reported $2.76 billion of AUM and $14.9 million of principal-investment assets.
In the fourth quarter, revenue was $16.1 million versus $15.6 million a year earlier, and net income attributable to the company was $0.8 million versus a loss of $0.4 million. Quarterly results are volatile and are not necessarily indicative of future performance.
Material changes versus the prior period
- Net trading improved substantially, but this was largely offset by weaker asset-management, new-issue and principal-investment revenue; total revenue increased only 1%.
- Operating income improved 10%, and the net loss narrowed. Net interest expense declined 11% to $7.6 million.
- AUM declined 3% year over year. CDO AUM fell to $2.20 billion from $2.39 billion, partly reflecting the 2019 liquidation of the Munda CLO; other-vehicle AUM increased to $559 million.
- On December 30, the company transferred 662,361 IMXI shares valued at $7.8 million to the Operating LLC in exchange for newly issued LLC units and Series F voting preferred shares. The transaction reduced the company’s economic interest in the Operating LLC to 28.75%, while a proxy preserved 51% voting control; the company stated that the non-controlling interest share would rise to 71.25% following the transaction.
- The company suspended its quarterly cash dividend in August 2019. FY 2019 dividends were $0.40 per common share, versus $0.80 in 2018.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management described results as unpredictable and dependent on market activity, interest rates, mortgage originations, trading volumes and volatility.
- Management intends to use dividend savings to support new initiatives and strengthen the financial position; reinstatement of the dividend is not assured. Capital Markets performance improvement and cost management remain priorities, but management cautioned that results are uncertain.
- On September 25, 2019, $6.8 million of notes due in 2019 were amended into 12% senior notes due September 2020, with the conversion feature removed. A $4.8 million LegacyTexas facility was outstanding at year-end and scheduled to mature in April 2020. Subsequent to year-end, the company issued $4.5 million of 12% senior notes and used the proceeds to repay a related-party note in February 2020.
- Key exposures include dependence on repo and clearing counterparties, margin and funding needs, competition and margin pressure, declining legacy CDO fees, valuation and liquidity risk in investments, variable-rate debt and regulatory capital requirements. The filing also identifies Brexit-related uncertainty and the emerging COVID-19 outbreak as potential risks.
- JVB faces a New York lawsuit alleging broker-dealer assistance in a portfolio-marking scheme; the plaintiff seeks more than $1 billion from multiple defendants. The company said it would defend the action. The filing does not provide a clear estimate of any potential loss or an associated accrual.
- Related-party financing and transactions are material. Daniel G. Cohen controls the company’s voting power, and the company disclosed a significant reduction in its economic ownership of the Operating LLC. The filing also reports a Pennsylvania tax assessment of $4.7 million against an inactive subsidiary; the company believes it has no liability and recorded no provision.
Important facts for investors to verify
- Review the audited statements and notes for operating cash-flow drivers, repo netting and gross presentation, collateral and counterparty concentrations, and the distinction between debt carrying value and par obligations.
- Confirm the 2020 debt maturities, subsequent refinancing and repayment terms, and the company’s ability to renew or replace borrowing and clearing facilities.
- Assess the assumptions and liquidity of fair-value investments, especially the $8.3 million IMXI holding, restricted shares and Level 3 CLO valuations.
- Track CDO auctions, liquidations, defaults and AUM trends, alongside the growth and profitability of newer businesses.
- Follow the Visium litigation and Pennsylvania tax matter; the filing does not quantify a likely loss for either.
- Review the IMXI-related related-party transaction, voting proxy, non-controlling interest allocation and potential dilution from redeemable Operating LLC units. The filing’s market-information section contains “TBD” placeholders for certain current share-price and holder data.