Business context and reporting period
Institutional Financial Markets, Inc. (IFMI), formerly Cohen & Company Inc., filed this Form 10-K for the fiscal year ended December 31, 2014. The company provides fixed-income capital-markets, principal-investing and asset-management services. Amounts below are in U.S. dollars; financial statement figures stated in thousands are converted to millions where noted.
In January 2014, IFMI combined its U.S. broker-dealers into JVB and reduced staffing. It also sold its Star Asia interests in February and agreed to sell its European operations, a related-party transaction, subject to U.K. regulatory approval.
Key financial results and position
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Total revenue | $55.750 million | $57.517 million | Down 3% |
| Net trading revenue | $28.056 million | $38.528 million | Down 27% |
| Asset-management revenue | $14.496 million | $19.239 million | Down 25% |
| New issue and advisory revenue | $5.219 million | $6.418 million | Down 19% |
| Operating income (loss) | $0.288 million | ($21.104 million) | 2014 operating margin approximately 0.5% |
| Consolidated net income (loss) | ($3.672 million) | ($19.919 million) | 2014 net margin approximately (6.6%) |
| Net income (loss) attributable to IFMI | ($2.585 million) | ($13.318 million) | Basic and diluted loss per share: $0.17 |
| Operating cash flow | $4.114 million | ($8.231 million) | Turned positive |
| Cash and cash equivalents at year-end | $12.253 million | $13.161 million | Down $0.908 million |
| Total assets / total equity at year-end | $296.087 million / $56.494 million | $217.050 million / $61.183 million | Asset increase included higher repo-related balances |
| Debt at carrying value | $27.939 million | $29.674 million | Separate debt disclosures cite approximately $56.4 million of recourse debt at par |
FY 2014 results included a $3.121 million goodwill impairment. Compensation and benefits fell 37% as headcount declined from 148 to 111. The company declared $0.08 per common share in dividends for 2014. In the fourth quarter, unaudited revenue was $17.776 million and net income attributable to IFMI was $2.891 million, compared with $11.671 million revenue and a $4.012 million attributable loss in fourth-quarter 2013.
Material changes versus the prior comparable period
- Revenue fell modestly overall, but trading revenue and asset-management fees declined substantially. Management attributed trading weakness in part to broker-dealer consolidation, workforce reductions and lower European trading volumes.
- Asset under management fell to $4.297 billion from $5.695 billion, about 25% lower. Nearly all 2014 AUM was in legacy CDOs; no new securitizations were completed from 2009 through 2014.
- Principal transactions and other income improved to $7.979 million from a loss of $6.668 million. The 2013 comparison included a $13.065 million Star Asia investment loss; 2014 included $2.917 million of contingent payments from the Star Asia sale.
- The company reported $4.114 million of cash from operations versus $8.231 million used in 2013. Year-end cash nevertheless declined, and financing activities used $5.289 million.
- IFMI invested more than $25 million in ten third-party CLOs during 2014. Their year-end fair value was $21.518 million; nine were equity investments, the most junior tranche.
Outlook, risks and unusual items
- Management described the business environment as challenging and expected continued competition and margin pressure. The filing gives no quantified earnings or revenue guidance.
- The proposed European-business sale was expected to close in the first half of 2015, subject to customary conditions and FCA approval. The stated price was $8.7 million: $4.75 million upfront, subject to adjustment, and $3.95 million over four years. The buyer is controlled by Vice Chairman Daniel G. Cohen. IFMI expected to retain substantially all Munda CLO management revenue through a trust arrangement, despite transferring the manager.
- The European business to be sold, excluding Munda-related revenue and expenses, reported approximately $8.869 million of 2014 revenue, a $1.858 million operating loss and $2.072 million of net assets. The filing text gives inconsistent dates in this disclosure; verify the underlying figures and period in the filed statements.
- Liquidity and financing risks include dependence on trading and secured-financing markets, collateral and margin calls, counterparty and settlement exposure, and restrictions on withdrawals from regulated subsidiaries. At year-end, broker-dealer regulatory capital was $16.252 million against $2.305 million of minimum requirements.
- Outstanding debt included $8.248 million of 8% convertible notes due 2018, convertible at $3 per share, and junior subordinated notes. The filing reports a covenant violation under the Alesco Capital Trust I notes that restricts additional debt subordinated to or pari passu with those notes; management said it did not consider the violation materially adverse.
- Key risks include losses or valuation changes in illiquid CLO equity and other investments, declining legacy CDO fees and possible manager removals, competition, regulatory capital requirements, and the risk that the European sale is delayed or does not close. Much of the CLO investment portfolio is valued using Level 3 inputs and management models.
- Litigation involving former subsidiaries over a CDO investment remained ongoing; certain plaintiff theories had been dismissed. A Pennsylvania tax assessment of $4.683 million plus interest relating to 2009 was under appeal; the company recorded no reserve. Management also disclosed routine legal and regulatory matters.
Important facts for investors to verify
- Whether the European transaction closed, the cash actually received, deferred consideration collected, and any post-closing obligations or continuing Munda revenue rights.
- The composition, liquidity and valuation sensitivity of the $21.518 million CLO portfolio, especially its junior equity positions and Level 3 assumptions.
- Whether operating cash flow and the fourth-quarter improvement continued, and how much of reported income depends on investment gains, sale-related contingent payments or other nonrecurring items.
- Debt covenant compliance, the distinction between carrying-value debt and par-value recourse obligations, and liquidity available after regulatory capital and collateral requirements.
- Developments in the Pennsylvania tax appeal and CDO-related litigation, including potential costs or liabilities.
- The filing reports effective disclosure controls and management-assessed effective internal control over financial reporting; the auditor did not provide an internal-control attestation.