Business context and reporting period
Institutional Financial Markets, Inc. (IFMI), a fixed-income financial services company, filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The filing describes Capital Markets, Principal Investing and Asset Management operations. Figures below are in millions of dollars unless stated otherwise. The company reported $3.84 billion of assets under management, 95.5% in CDOs.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $14.37 | $11.05 | $28.10 | $23.85 |
| Operating income | $2.21 | $0.51 | $3.47 | $0.79 |
| Net income (loss) attributable to IFMI | $0.83 | $(0.35) | $1.03 | $(0.90) |
| Basic and diluted earnings (loss) per share | $0.07 | $(0.02) | $0.08 | $(0.06) |
| Operating margin | 15.4% | 4.6% | 12.4% | 3.3% |
- Revenue growth was driven by net trading, up 67% in Q2 and 53% for the first half. Asset management revenue fell 31% in Q2 and 15% in the first half; principal transactions and other income fell 62% and 56%, respectively. New issue and advisory revenue rose 51% in Q2 but declined 36% for the first half.
- Operating expenses increased 15% in Q2 and 7% for the first half, mainly due to compensation and benefits, up 36% and 23%, respectively. Management attributed the higher compensation to incentive pay linked to revenue and operating profitability; headcount fell from 101 to 80 year over year.
- At June 30, total assets were $584.59, total liabilities $539.25 and total equity $45.33. Cash and cash equivalents were $7.68, down from $14.12 at year-end 2015. H1 operating cash flow was $(8.38), investing cash flow $5.04 and financing cash flow $(2.96).
- Trading assets were $143.20; other investments at fair value were $9.86, including $8.03 in CLOs. The company reported $29.05 of debt carrying value; this includes $8.25 par of 8% convertible notes due September 2018 and junior subordinated notes. Interest expense was $1.98 for the first half.
- Matched-book financing expanded materially: resale-agreement receivables were $345.36 versus $128.01 at year-end, and repurchase-agreement liabilities were $366.65 versus $127.91. Repurchase liabilities are collateralized and generally short term; the filing notes margin-call and counterparty risks.
- Regulatory capital at June 30 exceeded minimums: JVB had $31.78 of adjusted net capital, $31.53 above its minimum; CCFL had $1.31 of net liquid capital, $0.31 above its minimum.
Changes, outlook, risks and unusual items
- Management said increased trading revenue reflected municipal and corporate bond activity, mortgage/TBA trading and matched-book repo revenue. It cautioned that trading includes unrealized gains, depends on market conditions, and may not recur; valuations may differ from eventual sale prices.
- Management expects asset-management revenue to continue declining: no new securitization has been completed since 2008, and the company does not expect future securitizations. CDO maturities, repayments and defaults reduce managed assets. A European broadly syndicated-loan CLO experienced deteriorating performance and cash-flow diversion, reducing subordinated fees; Q2 included reversal of previously accrued subordinated fees.
- The proposed sale of the European business remained unresolved. Management said the probability of closing was very low but had not exercised its termination right, citing potential value and the buyer’s continuing evaluation.
- The company recorded $1.10 of CLO investment income for the first half, including investment income and unrealized gains, partly offset by impairment and realized losses. EuroDekania valuation changes also weighed on principal transactions.
- A Pennsylvania tax assessment of $4.68, plus interest, relating to a 2009 tax credit remained under appeal; the company recorded no reserve. Routine legal and regulatory matters were not expected by management to materially affect results, though associated future legal costs were not estimable.
- After quarter-end, the board adopted a Section 382 rights agreement intended to protect tax-loss carryforwards. The triggering ownership threshold is generally 4.95%; the rights are scheduled to expire by December 31, 2019 unless earlier terminated. The board also declared a $0.02-per-share dividend, payable September 1, 2016.
- The company repurchased shares for $2.24 during the first half, including privately negotiated purchases, and continued its 10b5-1 plan. It paid $0.04 per share in dividends during the first half. Management stated that cash, trading investments and borrowing capacity should meet near-term needs, while noting uncertainty about future financing availability.
- Market risks include interest rates, credit and liquidity conditions, counterparty and settlement failures, and reliance on key personnel. A 100-basis-point rise in the yield curve was estimated to reduce fair value by $5.04; a 10% adverse equity-price move was estimated to affect value by $0.14.
Important facts for investors to verify
- Whether trading gains and improved profitability are sustainable, particularly given their exposure to market volatility and unrealized valuations.
- The pace of CDO asset runoff, subordinated-fee diversion and the resulting decline in asset-management revenue.
- Liquidity and collateral capacity as repo and resale balances grow, including access to clearing-agency financing and ability to meet margin calls.
- Outcome and potential cost of the Pennsylvania tax assessment appeal, and status of the proposed European-business sale.
- Debt repayment and refinancing needs, regulatory-capital constraints, and the extent to which tax-loss carryforwards remain usable under Section 382.
- Reconciliation of the company name in the request, “Cohen & Co Inc.,” with the filing registrant, Institutional Financial Markets, Inc. (IFMI).