Institutional Financial Markets, Inc. (formerly Cohen & Company Inc.) — FY2011 10-K Summary
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011, with quarterly results through Q4. IFMI operates in Capital Markets, Asset Management, and Principal Investing, focused on credit-related fixed income. It reported $8.1 billion of assets under management (AUM), 97.5% in collateralized debt obligations (CDOs). 2011 included the acquisitions of JVB and a roughly 70% interest in PrinceRidge; results therefore reflect a changed business mix. Unless otherwise noted, financial amounts below are in millions of dollars.
Key financial results
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Total revenue | $100.3 | $125.6 | Down 20% |
| Net trading revenue | $73.2 | $70.8 | Up 3%; acquisitions supported the total, while comparable activity faced lower volumes and margins |
| Asset management revenue | $21.7 | $25.3 | Down 14% |
| New issue and advisory revenue | $3.6 | $3.8 | Down 5% |
| Principal transactions and other income | $1.9 | $25.7 | Down $23.8 million, chiefly because FY2010 included much larger investment fair-value gains |
| Operating income (loss) | $(18.2) | $8.7 | Turned to loss |
| Net income (loss) | $(16.7) | $11.2 | Consolidated result |
| Net income (loss) attributable to IFMI | $(9.4) | $7.6 | EPS was $(0.88), versus $0.73 |
| Operating cash flow | $(6.3) | $(34.8) | Cash used in both years |
| Cash and cash equivalents, year-end | $18.2 | $43.9 | Down $25.7 million |
| Total assets / carrying-value debt | $420.6 / $37.2 | $306.7 / $44.7 | Assets rose with acquisitions and expanded trading activity; debt carrying value declined |
| Total permanent equity | $77.4 | $89.5 | Down $12.1 million |
Q4 snapshot. Revenue was $23.7 million, compared with $24.9 million in Q4 2010. Operating loss was $3.8 million versus operating income of $3.9 million; net loss attributable to IFMI was $2.3 million versus income of $2.6 million.
Margins and cash flows. Operating expenses were $118.5 million, slightly above FY2010’s $116.8 million and greater than FY2011 revenue. Compensation and benefits were $78.2 million, including $3.0 million severance and $7.7 million equity compensation. Investing activities used $6.7 million and financing activities used $12.8 million. Total cash declined to $18.2 million from $43.9 million.
Debt and liquidity. Year-end debt had $37.2 million carrying value and $68.1 million par value of recourse indebtedness was cited in the risk discussion. The debt schedule reports $18.5 million par value of convertible notes: $10.36 million of 7.625% Old Notes with a holder put date of May 2012, and $8.12 million of 10.50% New Notes with a holder put date of May 2014. The company repaid and terminated its $7.0 million bank facility in Q4. It said existing cash and its trading portfolio should support near-term operations, while warning that replacement or additional financing may not be available on acceptable terms. Approximately $11.0 million of cash and $39.5 million of net assets invested in PrinceRidge were subject to withdrawal restrictions.
Material changes versus prior period
- Revenue fell 20% as a steep reduction in principal investment gains and lower asset management fees outweighed modestly higher net trading revenue. FY2010 included $24.8 million in gains from changes in fair value of other investments; FY2011 recorded $1.5 million.
- AUM declined to $8.06 billion from $10.32 billion. CDO AUM fell to $7.86 billion from $9.73 billion; the filing says CDO AUM has declined year over year since 2007.
- JVB was acquired in January 2011 and PrinceRidge in May 2011. PrinceRidge incurred operating losses after the transaction, reducing IFMI’s investment from $45.0 million to $39.5 million by year-end.
- Operating cash use improved from $34.8 million to $6.3 million, but cash still fell by $25.7 million. Cash outflows included the $15.0 million net JVB acquisition payment, debt repayment, dividends, and share repurchases.
- Debt exchanges extended the earliest holder put date for exchanged notes from May 2012 to May 2014, but increased the coupon on those notes from 7.625% to 10.50%.
Outlook, risks, contingencies, and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management focused on improving Capital Markets performance, diversifying products, integrating acquisitions, and reducing costs. It cautioned that cost savings may not be sufficient and that competitive pressure could continue to compress margins.
- CDO and fee risk: Asset defaults, deferrals, downgrades, coverage-test failures, and liquidations have reduced management fees. Subordinated fees across the bank TruPS and ABS structures were reduced to zero; only two Kleros CDOs and one Libertas CDO had not triggered an event of default. New securitizations had not been completed since 2008.
- Investment concentration and valuation: Of $42.8 million in other investments at fair value, $37.4 million—87%—was Star Asia, exposed to Japanese real estate and yen movements. The company ended 2011 without its yen hedge. Star Asia was valued using internal Level 3 models; its reported unadjusted NAV would have produced a materially higher value than IFMI’s estimate.
- Unusual items: The company recorded $2.25 million of expense for its contribution to a settlement involving Alesco X; payment was expected in the first half of 2012. It also recorded a $1.17 million impairment of miscellaneous assets. No goodwill impairment was recorded in 2011; FY2010 included a $5.61 million goodwill impairment.
- Contingencies: A guarantee related to Alesco XIV had a recorded liability of $1.08 million and maximum potential loss of $8.75 million; liquid collateral may be required in certain circumstances. Two Sentinel-related lawsuits against broker-dealer CCS remained pending, with no contingent liability recorded. In February 2012, PrinceRidge merged its two broker-dealers, and in January 2012 IFMI agreed to sell its equity derivatives business, subject to approvals and closing conditions.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were effective for the assessed operations. PrinceRidge was excluded from the internal-control assessment: its systems were not integrated, and its controls covered $291.2 million of consolidated assets and $237.7 million of liabilities. The auditor did not attest to management’s internal-control assessment.
Important facts for investors to verify
- How IFMI funded or refinanced the $10.36 million Old Notes subject to a May 2012 holder put, and whether the higher-cost New Notes and other debt were serviced as planned.
- Whether cash generation improved after year-end, given the $18.2 million cash balance, FY2011 operating cash use, and restrictions on PrinceRidge-related cash and assets.
- Whether PrinceRidge improved profitability and whether its withdrawal rights, distribution limits, and integration costs constrained parent-company liquidity.
- Whether the Star Asia valuation, yen exposure, and investment concentration changed materially, and how CDO defaults and liquidations affected fee revenue and AUM.
- The outcomes and cash impact of the Alesco X settlement, Sentinel litigation, and Alesco XIV guarantee; also verify integration of PrinceRidge controls and completion of the planned equity-derivatives sale.