Business Context and Reporting Period
Company: Alesco Financial Inc. (Note: Request metadata listed "Cohen & Co Inc.", but the filing is for Alesco Financial Inc., managed by Cohen & Company Management, LLC).
Reporting Period: Fiscal year ended December 31, 2008.
Business Overview: A specialty finance company and Real Estate Investment Trust (REIT) investing primarily in trust preferred securities (TruPS), leveraged loans, and mortgage-backed securities (MBS). The company is externally managed by Cohen & Company Management, LLC.
Strategic Development: On February 20, 2009, the company entered into a definitive merger agreement with Cohen & Company. Upon closing, the company expects to cease qualifying as a REIT and shift from a capital investment company to an operating company with three segments: Capital Markets, Asset Management, and Principal Investing.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Investment Income | $53.1 million | $83.6 million |
| Net Loss | ($144.7) million | ($1,261.3) million |
| Basic EPS | ($2.43) | ($22.48) |
| Total Assets | $3.93 billion | $8.94 billion |
| Total Indebtedness | $3.51 billion | $11.10 billion |
| Stockholders' Equity | $64.3 million | ($2.40) billion (Deficit) |
| Cash and Cash Equivalents | $86.0 million | $80.2 million |
Portfolio Composition (Carrying Amount): Total investments of $3.70 billion, consisting of TruPS ($1.62 billion), Residential Mortgages ($860 million), Leveraged Loans ($754 million), and MBS ($458 million).
Liquidity: The company holds $86.0 million in cash and cash equivalents. However, liquidity is constrained by the credit crisis, with a $39.0 million warehouse deposit at risk if securitization markets do not reopen by May 2009.
Material Changes vs. Prior Period
- Net Loss Reduction: Net loss improved significantly from $1.26 billion in 2007 to $144.7 million in 2008. This improvement was primarily driven by the adoption of SFAS No. 159 (Fair Value Option) in 2008, which allowed fair value changes on assets and liabilities to offset each other in earnings, and a $58.0 million gain on the repurchase of convertible debt.
- Asset Base Contraction: Total assets decreased by approximately $5.0 billion (56%) from 2007 to 2008 due to significant writedowns and deconsolidation of entities.
- Equity Recovery: Stockholders' equity moved from a deficit of $2.40 billion in 2007 to a positive $64.3 million in 2008, largely due to a $2.6 billion cumulative effect adjustment from adopting SFAS No. 159.
- Investment Income Decline: Net investment income decreased by $30.5 million (36%) due to lower weighted-average coupon rates and increased provisions for loan losses ($61.1 million in 2008 vs. $16.2 million in 2007).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
The company does not provide specific numerical guidance for 2009. Management expects the merger with Cohen & Company to close in the second half of 2009, subject to shareholder approval. The merger is expected to provide enhanced financial resilience and shift the business model to an operating company.
Material Risks and Contingencies
- Credit Market Disruption: The global credit crisis has severely restricted access to liquidity and securitization markets (CDOs/CLOs). The company cannot currently execute its long-term financing strategy.
- Overcollateralization Failures: All TruPS and MBS CDOs have failed overcollateralization tests due to defaults and downgrades. Consequently, the company is not receiving cash distributions from these investments; cash flows are being used to pay down senior debt.
- Warehouse Facility Risk: A leveraged loan warehouse facility maturing in May 2009 holds $165.6 million in assets. If the facility cannot be refinanced or securitized, the company risks losing its $39.0 million first-loss cash deposit.
- NYSE Listing Status: The company received notice of non-compliance with NYSE minimum share price standards ($1.00). It plans to effectuate a 1-for-10 reverse stock split to cure the deficiency. Failure to maintain listing could trigger a repurchase obligation for $28.7 million of contingent convertible debt.
- REIT Qualification: The company faces risks to its REIT status if it cannot maintain asset and income tests, particularly if remaining MBS CDOs are liquidated. The proposed merger will cause the company to cease REIT qualification in 2009.
Unusual Items
- Accounting Change: Adoption of SFAS No. 159 on January 1, 2008, resulted in a $2.6 billion increase to stockholders' equity and significantly altered the volatility of reported earnings by moving fair value changes into the income statement.
- Debt Repurchase: Repurchased $111.4 million of convertible debt for $50.6 million, realizing a $58.0 million gain.
Key Facts for Investor Verification
- Merger Status: Verify the progress of the merger with Cohen & Company, including shareholder approval status and expected closing date, as this fundamentally alters the company's tax status and business model.
- Warehouse Facility Maturity: Confirm the status of the $165.6 million leveraged loan warehouse facility maturing in May 2009 and the potential loss of the $39.0 million cash deposit.
- NYSE Compliance: Monitor the execution of the 1-for-10 reverse stock split and the company's ability to maintain listing standards to avoid triggering debt repurchase obligations.
- CDO Cash Flows: Verify the continued failure of overcollateralization tests in TruPS and MBS CDOs and the resulting lack of cash distributions to the company.
- Portfolio Valuation: Assess the fair value of the remaining portfolio, particularly the $1.62 billion TruPS and $860 million residential mortgage holdings, given the high concentration of defaults and delinquencies.