Business Context and Reporting Period
Company: Alesco Financial Inc. (Note: Metadata listed "Cohen & Co Inc.", but the filing is for Alesco Financial Inc., a specialty finance company and REIT managed by Cohen & Company).
Reporting Period: Quarterly period ended March 31, 2009.
Business Overview: Alesco invests in subordinated debt (TruPS), leveraged loans, and mortgage-related assets. The company utilizes significant leverage through CDOs, CLOs, and warehouse facilities. On February 20, 2009, Alesco signed a definitive merger agreement with its manager, Cohen & Company, expected to close in the second half of 2009. The merger would likely cause Alesco to cease qualifying as a REIT.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income (Loss) Attributable to Common Stockholders | $(35.8) million | $84.9 million |
| Net Investment Income (Loss) | $(9.5) million | $26.5 million |
| Investment Interest Income | $99.9 million | $173.9 million |
| Investment Interest Expense | $(59.0) million | $(139.8) million |
| Provision for Loan Losses | $(50.5) million | $(7.6) million |
| Total Assets | $3.60 billion | $3.93 billion (Dec 31, 2008) |
| Total Indebtedness | $3.25 billion | $3.51 billion (Dec 31, 2008) |
| Cash and Cash Equivalents | $87.7 million | $86.0 million (Dec 31, 2008) |
| Stockholders' Equity (Parent) | $30.0 million | $65.0 million (Dec 31, 2008) |
| Earnings Per Share (Basic & Diluted) | $(0.60) | $1.40 |
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The company reported a net loss of $35.8 million for Q1 2009, a reversal from the $84.9 million net income in Q1 2008. This shift is primarily driven by a $42.9 million increase in the provision for loan losses and significant fair value adjustments.
- Loan Loss Provisions: Provisions for loan losses surged to $50.5 million (up from $7.6 million) due to deteriorating credit quality in residential mortgages (delinquencies rose to 21.8% for 60+ days) and leveraged loans.
- Investment Income Decline: Investment interest income dropped $74.0 million year-over-year due to lower average investment balances and reduced coupon rates.
- Asset Write-downs: The company recorded $216.2 million in losses related to changes in fair value of TruPS investments and $2.1 million in impairments on Real Estate Owned (REO) properties.
- Equity Erosion: Parent stockholders' equity decreased by approximately $35 million from the prior quarter due to the net loss.
Guidance, Outlook, Risks, and Unusual Items
- Merger with Cohen & Company: A proposed merger is pending, which would transform the company from a capital investment REIT to an operating company. If completed, the company expects to lose REIT status for the 2009 tax year. A 1-for-10 reverse stock split is expected to cure NYSE listing deficiencies.
- Liquidity and Financing Risks: The disruption in credit markets has restricted the ability to complete new CDOs and CLOs. A leveraged loan warehouse facility ($157.1 million par value) is currently in default and matures in May 2009. If securitization markets remain closed, the company risks losing $38.5 million in first-loss cash deposits.
- Over-Collateralization Failures:
- TruPS: Over-collateralization tests were triggered in all eight TruPS CDOs due to $726.5 million in defaulted/deferring securities. No cash distributions are expected from these CDOs until cured.
- MBS (Kleros): Three Kleros Real Estate CDOs have failed over-collateralization tests and experienced events of default. The company's $90 million equity investment in these CDOs has been effectively written down to zero.
- Leveraged Loans: While no over-collateralization failure occurred in CLOs as of the filing date, a partial failure of an interest diversion test in April 2009 reduced cash distributions.
- NYSE Listing Status: The company is not in compliance with the NYSE minimum share price standard ($1.00). It has until August 13, 2009, to comply or face delisting. Failure to list could trigger repurchase rights on $28.7 million of contingent convertible debt.
- Legal Proceedings: Ongoing litigation regarding the "Penland Loan" involves a judgment of $13.1 million against guarantors, some of whom are in bankruptcy. A receiver has been appointed for the collateral property by the North Carolina Attorney General.
Investor Verification Checklist
- Merger Approval: Verify the status of the merger agreement with Cohen & Company and the likelihood of shareholder approval.
- Warehouse Facility Maturity: Confirm the status of the $157.1 million leveraged loan warehouse facility maturing in May 2009 and the potential loss of the $38.5 million collateral deposit.
- REIT Qualification: Assess the impact of the merger on REIT status and the resulting tax implications for 2009 and beyond.
- Delinquency Trends: Monitor the 21.8% delinquency rate in the residential mortgage portfolio and the adequacy of the $67.8 million allowance for loan losses.
- NYSE Compliance: Track progress on the 1-for-10 reverse stock split to avoid delisting and potential debt repurchase triggers.
- CDO Liquidation Risk: Evaluate the risk of liquidation for the Kleros Real Estate CDOs and the TruPS CDOs, which could impact cash flows and asset values.