IFMI - Institutional Financial Markets Inc

[Olmsted]

Well I feel like an ass for not bringing this one to the board until a 25% up day.  I think it's still cheap here.

 

IFMI is a company with a tiny investment bank, fixed income dealer, an asset manager, and a pile of investments.  It is cheap on an asset basis, and on an earnings basis too if the last two quarters’ performance is sustainable. 

 

The price/book value is .44 as I write.  Most assets and liabilities, however, are working capital for the investment bank and the fixed income trading operation.  For example, securities inventory, repo agreements, etc.  If you exclude working capital in order to look at assets free and clear of ongoing operations, the long-term investments and cash just cover the share price.

 

After the financial crisis killed the securitization business, they bled cash as their cost structure was just too high.  Management has been cutting expenses and headcount in order to size expenses in line with business.  It is probably too early to say definitively, but it looks like they have turned the corner over the last year on this front.  On the last conference call, they implied that they have reached their desired level of cuts, that they are targeting the current compensation/revenue ratio going forward, and that the “cost platform” is sustainable.

 

The company lost about $1m over the last year, but the last two quarters were profitable.  I do expect earnings to be lumpy going forward.  This is due to the investment banking model in general, the continued attenuation of their assets under management, mark-to-market valuation of their investments – particularly their investments denominated in ¥. 

 

On the other hand, I think ¥ exposure and mark-to-market losses make earnings look worse than underlying business is actually performing.  Embedded in their earnings last year is a mark-to-market loss of $5.5m (including $4.9m in the last quarter) from their ¥ exposure.  I am sure this scares investors away.  But as a thought experiment, I take their Star Asia (primary ¥-denominated investment) and mark it down by a bad-case ¥ scenario.  Say, 40 or 50%.  Then I mentally ignore all currency losses.  That would knock book value down by about $16m – meaning the share price would now be a bit more than .5x book value.  But it also means they turned $4.5m in profit in the last year, and $8m in the last quarter – compared to a $32m market cap.

 

The asset management business is slowly dying, but you get optionality on a rebound in TRUPS, CDO, CLO, other structured asset management and origination.  You also get a free option on some managed assets they co-invested in, many of which have been written down almost all the way. 

 

Management own a big stake, about 30% of the company, in membership units that are convertible after 2013 to shares or cash equivalent to share price (whether they convert to one or the other is at the board’s option).  This is a pretty big incentive to get the share price up.

 

Thanks to L Sigurd from Reminiscences of a Stockblogger for first pointing the idea out.  Wexboy did some work on it too in his asset managers series.

 

[Olmsted]

Management own a big stake, about 30% of the company, in membership units that are convertible after 2013 to shares or cash equivalent to share price (whether they convert to one or the other is at the board’s option).  This is a pretty big incentive to get the share price up.

 

Some clarification on why I think the structure of this conversion means management will be incentivized to get the share price up to fair value:

 

The board has an arb opportunity when management converts their membership units into shares.  If the P/BV is very low when management presents their units for conversion, it would make sense to redeem those units in cash.  That would have the effect of a buyback below intrinsic value.  If, on the other hand, the price is very high, the board would be best-advised to redeem those units in shares (of course, management could then sell those shares at a high price). 

 

I do not think that management would present their units for conversion while the price is below book value, or their idea of intrinsic value.  The risk that the board gives them cash is high - which would under-compensate them.  I think management will wait to convert until the share price at least approximates book value or intrinsic value.  The sooner this happens, the sooner they can turn a restricted/illiquid asset (membership units) into a liquid asset (cash or IFMI shares).  Thus it makes sense for management to make the IFMI story better known over the next year.

[Olmsted]

Earnings out, and they aren't good.  Net income -$4.5m, operating income of -$5.6m - but that's including a $6m mark-to-market ¥ loss which everyone knew was coming.  Excluding that, they made a tiny profit this Q - but a lot less than last quarter.

 

The real news though, is a dilutive capital raise from "Mead Park" and Cohen.  5.5m shares - half at $2 and half as notes convertible at $3.  I had previously been warned on management ethics, Cohen (the CEO) but particularly Chris Ricciardi, who had actually left the company before that warning.  Well now he is back like a bad dream as principal of Mead Park, and is going to get a board seat.

 

Oh, and this morning we got a poison pill plan too.  So there goes any potential takeover premium.

[Olmsted]

Here's the new chairman:

 

http://investing.businessweek.com/research/stocks/private/person.asp?personId=731542&privcapId=661102

 

Apparently got fired from MS after betting treasury interest rates would go up:

 

http://www.businessinsider.com/category/jack-dimaio.rss

 

An early career/personal background:

 

http://observer.com/2001/10/csfbs-jack-dimaio-may-be-the-last-15-million-man/

 

 

[Olmsted]

 

Institutional Financial Markets, Inc. (NYSE MKT: IFMI) (“IFMI”), a financial services firm specializing in credit-related fixed income investments, today announced that it has appointed Lester Brafman as President, effective immediately.

 

During an 11-year tenure at Goldman Sachs, Mr. Brafman served as Chief Operating Officer of Credit and Mortgage Trading, and as Head of High Yield and Distressed Trading. Mr. Brafman most recently served as a Managing Director of Leveraged Finance Sales at Goldman Sachs, covering accounts for leveraged loans, bonds, and CDs.

 

http://www.ifmi.com/investorrelations/press/IFMIAppointsLBrafmanPresident.pdf

[Olmsted]

Lackluster results out - poor trading volumes and revenue, exacerbated by yen losses.

 

http://www.sec.gov/Archives/edgar/data/1270436/000119312513320472/d579466dex991.htm

 

While still cheap on an asset basis, I will need to see some signs of life in their core business to stick around.  The new management team is just starting, so we will see.  This is a tracking position until it becomes evident that they are beginning to get some traction in structured credit markets.