Cohen & Company Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparison is Q1 2019 unless otherwise noted. Dollar amounts are in thousands, except per-share data. Cohen & Company provides fixed-income capital markets, asset management and principal-investing services. At quarter-end, AUM was approximately $2.65 billion, about 79% of which was in company-sponsored CDOs.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Total revenue | $17,770 | $11,140 |
| Operating income (loss) | $(9,445) | $(68) |
| Net income (loss) | $(11,785) | $(1,824) |
| Net loss attributable to Cohen & Company Inc. | $(3,102); $(2.70) per basic and diluted share | $(1,202); $(1.06) per share |
| Cash and cash equivalents | $85,454 | $8,304 at Dec. 31, 2019 |
| Total assets / total equity | $6,596,540 / $36,913 | $8,001,624 / $48,756 at Dec. 31, 2019 |
| Debt | $61,864 | $48,861 at Dec. 31, 2019 |
| Operating cash flow | $64,470 | $(9,270) |
| Investing / financing cash flow | $30 / $12,721 | $888 / $3,564 |
Revenue and costs: Net trading revenue rose 113% to $18,561, led by investment-grade corporate trading ($9,958) and matched-book repo ($6,868). Mortgage trading contributed $3,035; high-yield corporate trading lost $1,996. Asset-management fees fell 19% to $1,615, primarily because of lower performance fees on managed accounts. Principal transactions and other income swung to a $2,406 loss from $414 of income, including losses on IMXI shares, CLOs and other investments.
Operating expenses increased 143% to $27,215. Compensation and benefits rose 122% to $14,134; management attributed the high compensation-to-revenue ratio partly to variable compensation not falling alongside significant negative revenue in certain trading books and principal transactions. A $7,883 JVB goodwill impairment was a major unusual expense. Operating margin was negative, with an operating loss of $9,445.
Liquidity and funding: The $85,454 cash balance included $74,692 of counterparty cash collateral that the Company said was temporary and unavailable for general operations because it must be returned when substitute securities are provided. The cash-flow statement includes a $65,168 operating cash inflow from the increase in this collateral; therefore, reported operating cash flow and cash should not be viewed as entirely discretionary liquidity. Receivables under resale agreements were $6.014 billion and repurchase-agreement liabilities were $6.066 billion, largely reflecting matched-book financing. The Company reported $17,500 drawn under its FT Financial revolving facility. It also had $2,400 of 12% senior notes due September 2020, $4,500 of 12% notes due January 2022, and a $15,000 convertible note due March 2022, among other debt. Management said available cash, trading assets and borrowing capacity should cover near-term needs, while cautioning that replacement or additional financing was uncertain.
Broker-dealer regulatory capital exceeded minimum requirements: JVB’s adjusted net capital was $56,517, and European subsidiaries also reported capital in excess of minima. However, distributions from JVB to fund losses elsewhere in the group are constrained by regulatory rules, lender terms and counterparty requirements. The quarterly common dividend had been suspended since 2019; no common dividend was declared for Q1 2020.
Material changes versus Q1 2019 and year-end 2019
- Revenue increased 60%, but the Company’s net loss widened to $11,785 from $1,824. The parent-company-attributable loss widened to $3,102 from $1,202.
- Trading revenue improved substantially, while principal-investment income deteriorated and asset-management fees declined. Asset-management revenue remains exposed to CDO amortization and the Company has not completed a new securitization since 2008.
- Operating expenses rose sharply, reflecting higher compensation and the $7,883 goodwill impairment; total goodwill fell from $7,992 at year-end to $109.
- Total assets fell by approximately $1.405 billion, principally alongside lower resale-agreement receivables and repo balances. Debt rose by approximately $13.0 million, including the $17.5 million revolver draw, partly offset by debt repayments.
- Cash rose by $77.150 million, but the increase was materially affected by temporary cash collateral received from counterparties.
- AUM declined from $2.757 billion at year-end 2019 to $2.651 billion at March 31, 2020.
Outlook, risks and unusual items
- COVID-19: Management reduced JVB’s GCF repo and TBA activity and leverage to limit counterparty, liquidity and margin-call risk, and expected lower volumes for an indefinite period. It warned that this could hurt JVB profitability, while weaker fund returns, fundraising challenges and investor liquidity needs could reduce asset-management fees and AUM. Prolonged unemployment could also weigh on mortgage originations and related revenue. The full impact remained uncertain; no quantitative earnings guidance was provided.
- Goodwill impairment: The Company recorded a $7,883 impairment after concluding JVB’s fair value was below its carrying value amid pandemic-related volatility and reduced activity.
- ViaNova wind-down: ViaNova received a credit-facility default notice on March 19 because its unrestricted cash was below a required amount; the lender also suspended funding for the relevant loan category. ViaNova repaid its outstanding facility, stopped acquiring residential transition loans and did not intend to resume. Four loans and related interest strips remained, with fair value of $2,956.
- Subsequent financing: After quarter-end, the Company received a roughly $2.2 million PPP loan. It said it did not anticipate significant workforce or compensation reductions in the near term, but would monitor revenue and costs.
- Debt and liquidity risks: The Company was working to extend the draw period and maturity of its FT facilities. Its matched-book repo funding is concentrated on the supply side through FICC, and repo, clearing and margin arrangements can require additional collateral or become payable immediately on default.
- Litigation: JVB faces a New York action seeking more than $1 billion in damages over alleged assistance in a former client’s portfolio-marking scheme. The court denied defendants’ motions to dismiss on April 29, 2020; the Company said it intends to defend the action. The filing does not provide a clear estimate of potential loss.
- Other items: The Company adopted a Section 382 rights plan in March, with a 4.95% ownership threshold subject to exceptions, intended to protect tax attributes. The filing also discloses significant related-party financing and transactions, including senior notes purchased in part by an entity owned by the vice chairman.
Most important facts for investors to verify
- How much of reported cash is freely available after excluding collateral and other operational or regulatory constraints.
- Whether the $2,400 senior notes due September 2020 and the FT credit facilities were repaid, renewed or extended, and whether financial covenants were met.
- Subsequent trends in repo and TBA volumes, margin calls, counterparty exposure and JVB regulatory capital following the March volatility.
- Performance and valuation support for trading and principal-investment positions, especially less-liquid or Level 3 assets and IMXI shares.
- Developments in the litigation seeking more than $1 billion, including any later rulings, settlement discussions or loss accruals.
- The effect of the ViaNova wind-down, pandemic-related AUM and fee changes, and the status and terms of the PPP loan.
- The impact of compensation costs, related-party arrangements, and the Section 382 rights plan on cash needs and common-stock holders.