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No. of Recommendations: 68
I looked at them before the GS warehouse and $260 m in cash for convertibles.

There have been years where the company misses a Q's securitization but never have they gone two consecutive Qs without the upfront cash income.
Every time FMD goes a Q without a securitization, itburns cash, has negative earnings and expenses exceed nonresidual revenue. CFFO is also negative

FY 2004

Total loans securitized $1245 million

in millions sept 03 dec 03 Mar-04 4-Jun
Q1 2003 Q2 2003 Q3 2003 Annual
no no
securit securit securit securit
income/loss operations ($5.70) $30.96 ($8.84) $50.60
earnings per share ($0.06) $0.62 ($0.06) $1.27
cash burn $7.40 $15.50
cash increase $131.00 $26.80
CFFO cumulative ($6.20) $4.80 ($9.90) $33.40
CFFO by Q ($6.20) $11.00 ($14.70) $43.30

cash burn/expenses 48% 0% 90% 0%
expenses/nonresidual revenue 187% 33% 206% 58%
expenses /operating income 268% 50% 194% 139%
operating income/revenue -70% 67% -106% 42%

As a neophyte public company doing only 2 securitizations in FY 2004, FMD was skating on a bit of thin ice without the upfront advisory fees, getting to as little as $10 million in cash on the balance sheet, two losing quarters and two cash flow negative quarters. But they ended well with $1.27 in earnings and plenty of cash.It’s apparent from this their worst year as a publicly traded company, management had definite skills understanding the need to conserve cash for laggard months. Upfront fees as a percentage of revenue(corrected for TERI fees) was between 50-60% which is where it settled at over the years by and large except for the BBB Qs. At 50% to 60% levels, FMD was very profitable increasing earnings every year substantially. And it was clear [no surprise] the more securitizations the better.

During the years before the Triple B tranches, FMD was getting about 8% fees/loan principal and making a very good living on just the upfront cash. Enough income to get by a Q or two without any securitization work.

With that in mind here is how FY 2005-FY 2007 turned out



Total loans securitized $2262.5 million

4-Sep 4-De 5-Mar Jun-05
Q1 Q2 Q3 Annual
securit securit securit 3 securit

income/loss operations ($13.43) $52.86 $46.63 $105.70
earnings per share ($0.08) $1.15 $0.72 $2.46
cash burn $22.60 $24.70
cash increase $53.00 $19.40
CFFO cumulative ($14.60) $44.45 $75.70 $108.40
CFFO by Q ($14.60) $59.05 $31.25 $32.70

cash burn/expenses 71% 0% 0% 17%
expenses/nonresidual revenue 173% 36% 45% 58%
expenses /operating income -237% 56% 81% 136%
operating income/revenue -73% 64% 55% 42%

FY 2006

Total loans securitized $3362.6

5-Sep 5-Dec Mar-06 Jun-06
Q1 Q2 Q3 Annual
securit securit securit 3 securit
income/loss operations ($18.30) $79.70 $38.30 $135.30
earnings per share ($0.08) $1.75 $0.94 $3.71
cash burn ($37.70) ($3.60) ($9.90)
cash increase $0.30
CFFO cumulative ($33.40) $46.40 $43.70 $49.70
CFFO by Q ($33.40) $79.80 ($2.70) $6.00

cash burn/expenses 82% 8% 20% 0%
expenses/nonresidual revenue 167% 36% 56% 58%
expenses /operating income -250% 55% 128% 139%
operating income/revenue -67% 64% 44% 42%

FY 2007

Total loans securitized $4292.5

6-Sep 6-Dec Mar-07 Jun-07
Q1 Q2 Q3 Annual
securit securit securit 4 securit
income/loss operations $148.91 $64.00 $81.34 $360.80
earnings per share $2.24 $0.86 $0.75 $3.94
cash burn ($8.40) ($55.20)
cash increase $122.10 $33.60

CFFO $146.40 $135.20 $187.40 $195.40
CFFO by Q $146.40 ($11.20) $52.20 $8.00

cash burn/expenses 0% 14% 0% 22%
expenses/nonresidual revenue 31% 48% 43% 41%
expenses /operating income 44% 92% 75% 70%
operating income/revenue 69% 52% 57% 59%

Great years with good growth and upfront fees [real money] going up in FY 2007 with the invention of the BBB tranche and investors happy to buy increased risk. Expenses were easily covered by nonresidual revenue and margins [ as measured by corrected operating income ex residuals] were amazing

FY 2008

Total loans securitized $2043.6 million

2 securit
income/loss operations $148.00
earnings per share $1.81
cash increase $145.30
CFFO $12.10

cash burn/expenses 0%
expenses/nonresidual revenue 40%
expenses /operating income 66%
operating income/revenue 60%

In FY 2008, the company had a few concessions to make to a difficult market--Ambac wrapped the bonds in an extra layer of protection, many of the tranches were auctioned to increase liquidity, no lower rated tranches to boost upfront fees to 12% [margins went backwards to 8.6%). It was better than nothing and got loans off lender-partners books and out of jeopardy. Jeopardy would mean that these loans if left unsecuritized longer than 180 days would start ticking down to a 1% penalty of total loan principal for FMD to pay. They made decent if not spectacular money and added to cash reserves in advance of what management had to know was going to be a December no-show.

If we look at Q1 as a rough template we can see how far in the red Q2 might run

FMD has only processing fees from TERI and administrative fees as trustee to pay expenses around $97 million without a securitization assuming expenses stay flat in Q2.

Income from operations[excluding residuals ] was $148 million in Q1. Without the upfront fees operating income drops to around -$30 million. Approximately $47 million of expenses is TERI and paid by TERI in a round trip netting zero.That leaves $50 million to be covered by FMD with only $21 million in administrative fees

Cash burn to pay expenses would be around $30 million give or take a few million.

If this scenario could be taken forward a few more quarters in the absence of securitizations, with TERI coming in and going out at 45%-50% of expenses FMD would probably keep burning $30-$40 million per quarter providing its non TERI SGA and compensation stayed flat. That's a lot of Qs at $380 million in cash reserves[before the GS $260 m]. Since they cut dividends, that freed up about $25 million per quarter [good idea] FMD has been repurchasing stock and that will stop[could account for some cash burn in good years]. No debt due. Some accrued expenses of $50 million. There are $58 million in taxes due--don't know when but likely deferred on residuals so will be a ways off. The $380 million would have been good for a few quarters and with $260 m additionally, the survival looks guaranteed.Earnings will be negative and unlikely to improve until they can sell some bonds

Of some concern was the 1% late fees that accumulating lender-partner loans was going to cost at a possible $4 billion in loans FMD might have been on the line for by years end. That's $40 million.The warehouse helps

Q2 will have negative earnings. How much does not seem to important. In the past negative earnings has not had as much impact on the stock price as long as the business model and the lending partners stayed intact. FMD was far more vulnerable to any news that reflected the loss of JPM and BofA than it was to earnings releases.

Without the write off of residuals and not knowing what the tax provision will be,the loss could be as high $0.32 per share per quarter. Any provisional taxes would make it higher--FMD does have a net deferred tax liability hanging over them. I think the market has priced the negative earnings in to the low low prices.

The residuals add around $1.95 per share in losses pretax. Those adjustments are made at the top before operating income. Total losses? Maybe around $2.25? Survival quite likely even with a no show Q3 securitization

What happens to their own loans? they may have to slow down originations to conserve warehouse and cash. Might need the $1 billion to store BofA etc. FMD likely wishes to avoid penalties.
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