Business Context and Reporting Period
Company: Alesco Financial Inc. (Note: Metadata referenced "Cohen & Co Inc.", but the filing is for Alesco Financial Inc., managed by Cohen & Company).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A specialty finance company and Real Estate Investment Trust (REIT) investing in Trust Preferred Securities (TruPS), mortgage-backed securities (MBS), residential mortgages, and leveraged loans. The company utilizes significant leverage through Collateralized Debt Obligations (CDOs) and warehouse facilities.
Key Financial Metrics
| Metric | Q3 2008 (3 Months) | YTD 2008 (9 Months) | Q3 2007 (3 Months) | YTD 2007 (9 Months) |
|---|---|---|---|---|
| Net Income (Loss) | $64.1 million | $67.7 million | ($496.6 million) | ($532.0 million) |
| Earnings Per Share (Basic) | $1.07 | $1.14 | ($8.36) | ($9.59) |
| Net Investment Income | $16.8 million | $71.4 million | $21.8 million | $57.6 million |
| Total Assets | $4.99 billion | As of Sep 30, 2008 | ||
| Total Indebtedness | $4.45 billion | As of Sep 30, 2008 | ||
| Stockholders' Equity | $267.8 million | As of Sep 30, 2008 | ||
| Cash and Cash Equivalents | $96.2 million | As of Sep 30, 2008 | ||
| Loan Loss Reserve | $46.4 million | As of Sep 30, 2008 |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $64.1 million for Q3 2008, a significant improvement from a net loss of $496.6 million in Q3 2007. This reversal is primarily driven by the adoption of SFAS No. 159 (Fair Value Option), which resulted in a net gain of $70.0 million from changes in fair value of debt securities and non-recourse indebtedness, and a $43.9 million gain on the repurchase of convertible debt.
- Balance Sheet Contraction: Total assets decreased from $8.94 billion (Dec 31, 2007) to $4.99 billion (Sep 30, 2008), and total indebtedness dropped from $11.10 billion to $4.45 billion. This reflects the deconsolidation of certain entities and the repayment/repurchase of significant debt.
- Investment Portfolio Decline: Investments in debt securities fell from $6.63 billion to $2.97 billion due to fair value write-downs and asset sales. The company recorded $1.0 billion in fair value losses on TruPS investments for the quarter.
- Loan Loss Provisions: The provision for loan losses increased to $12.8 million in Q3 2008 from $4.1 million in Q3 2007, reflecting rising delinquencies in the residential mortgage portfolio (60+ day delinquencies rose to 9.6%).
Guidance, Outlook, Risks, and Unusual Items
- NYSE Listing Risk: On October 10, 2008, the NYSE notified the company of non-compliance with the minimum share price standard ($1.00 average closing price). The company has six months to cure this deficiency or face delisting. Delisting could trigger a repurchase obligation for remaining convertible debt holders.
- CDO Over-Collateralization Failures:
- MBS (Kleros CDOs): All remaining Kleros Real Estate CDOs have failed over-collateralization tests due to rating downgrades. Cash flows are being used to pay senior debtholders; equity distributions have ceased. One CDO (Kleros III) was liquidated in June 2008.
- TruPS: Over-collateralization tests were triggered in all eight TruPS CDOs due to 25 bank deferrals/defaulting ($490.5 million principal). Equity distributions are suspended until tests are cured.
- Liquidity Constraints: The credit crisis has severely restricted the ability to complete new CDOs and CLOs. The company relies on existing long-term financing and warehouse facilities. There is a risk of losing first-loss cash deposits if securitization markets remain closed.
- Unusual Items:
- Debt Repurchase Gain: Realized a $43.9 million gain by repurchasing $78.8 million par value of convertible debt for $33.0 million.
- Accounting Change: Adoption of SFAS No. 159 on Jan 1, 2008, resulted in a $2.6 billion cumulative adjustment to stockholders' equity and significant volatility in earnings due to fair value changes.
Investor Verification Checklist
- Delisting Status: Verify the company's progress in curing the NYSE minimum share price deficiency to avoid triggering debt repurchase obligations.
- CDO Liquidation Risk: Monitor the status of Kleros Real Estate I, II, and IV CDOs; liquidation could impact REIT qualifying assets and income.
- TruPS Recovery: Assess the likelihood of recovery on the $490.5 million of defaulted/deferring TruPS, which currently blocks equity distributions in TruPS CDOs.
- Residential Mortgage Delinquencies: Review the trend of 60+ day delinquencies (currently 9.6%) and the adequacy of the $46.4 million loan loss reserve.
- Warehouse Collateral: Confirm the safety of the $40.8 million cash collateral deposited with warehouse lenders, which is at risk if long-term financing cannot be secured.