The following discussion and analysis of the consolidated financial condition
and results of operations of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based on our consolidated financial statements, which have been
prepared in accordance with
All amounts in this disclosure are in thousands (except share and unit and per share and per unit data) except where noted.
Overview
We are a financial services company specializing in fixed income markets. We were founded in 1999 as an investment firm focused on small-cap banking institutions, but have grown to provide an expanding range of capital markets and asset management services. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.
? Capital Markets: OurCapital Markets business segment consists primarily of fixed income sales, trading, matched book repo financing, new issue placements in corporate and securitized products, and advisory services. Our fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. We specialize in a variety of products, including but not limited to: corporate bonds, ABS, MBS, RMBS, CDOs, CLOs, CBOs, CMOs, municipal securities, TBAs and other forward agency MBS contracts,U.S. government bonds,U.S. government agency securities, brokered deposits and CDs for small banks, and hybrid capital of financial institutions including TruPS, whole loans, and other structured financial instruments. We also offer execution and brokerage services for equity products. We carry out our capital markets activities primarily through our subsidiaries: JVB inthe United States and CCFESA inEurope . A division of JVB,Cohen & Company Capital Markets is our full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, with clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces. ? Asset Management: Our Asset Management business segment manages assets within CDOs, managed accounts, joint ventures, and investment funds (collectively, "Investment Vehicles"). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of default, the lenders will have recourse only to the assets securing the loan. Our Asset Management business segment includes our fee-based asset management operations, which include on-going base and incentive management fees. As ofJune 30, 2022 , we had approximately$2.2 billion in assets under management ("AUM") of which 52.8% was in CDOs. A substantial portion of our asset management revenue is earned from the management of CDOs. We have not completed a new securitization since 2008. As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults. Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations. The remaining portion of our AUM is from a diversified mix of other Investment Vehicles that were more recently formed. ? Principal Investing: Our Principal Investing business segment is comprised of investments that we hold related to our SPAC franchise and other investments have made for the purpose of earning an investment return rather than investments to support our trading, matched book repo, or other Capital Markets business segment activities. These investments are a component of our other investments, at fair value, other investments sold, not yet purchased, and investments in equity method affiliates in our consolidated balance sheet.
We generate our revenue by business segment primarily through the following activities.
Capital Markets: ? Our trading activities, which include execution and brokerage services, securities lending activities, riskless trading activities, as well as gains and losses (unrealized and realized) and income and expense earned on securities and derivatives classified as trading or trading securities sold, not yet purchased; ? Net interest income on our matched book repo financing activities; and ? New issue and advisory revenue comprised primarily of (a) new issue revenue associated with originating, arranging, or placing newly created financial instruments and (b) revenue from advisory services. Asset Management: ? Asset management fees for our on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities issued in the Investment Vehicle; and ? Incentive management fees earned based on the performance of Investment Vehicles. Principal Investing: ? Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments, at fair value and other investments sold, not yet purchased. ? Income and loss earned on equity method investments. 59
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Table of Contents Business Environment
Our business in general and our Capital Markets business segment in particular, do not produce predictable earnings. Our results can vary dramatically from year to year and quarter to quarter. Our business is materially affected by economic conditions in the financial markets, political conditions, broad trends in business and finance, the housing and mortgage markets, changes in volume and price levels of securities transactions, and changes in interest rates, including overnight funding rates, all of which can affect our profitability and are unpredictable and beyond our control. These factors may affect the financial decisions made by investors and companies, including their level of participation in the financial markets and their willingness to participate in corporate transactions. Severe market fluctuations or weak economic conditions could reduce our trading volume and revenues, negatively affect our ability to generate new issue and advisory revenue, and adversely affect our profitability. As a general rule, our trading business benefits from increased market volatility. Increased volatility usually results in increased activity from our clients and counterparties. However, periods of extreme volatility may at times result in clients reducing their trading volumes, which would negatively impact our results. Also, periods of extreme volatility may result in large fluctuations in securities valuations and we may incur losses on our holdings. Also, our mortgage group's business benefits when mortgage volumes increase, and may suffer when mortgage volumes decrease. Among other things, mortgage volumes are significantly impacted by changes in interest rates.
In addition, as a smaller firm, we are exposed to intense competition. Although we provide financing to our customers, larger firms have a much greater capability to provide their clients with financing, giving them a competitive advantage. We are much more reliant upon our employees' relationships, networks, and abilities to identify and capitalize on market opportunities. Therefore, our business may be significantly impacted by the addition or loss of key personnel. We try to address these challenges by (i) focusing our business on clients and asset classes that are underserved by the large firms, (ii) continuing to monitor our fixed costs to enhance operating leverage and limit our losses during periods of low volumes, and (iii) attempting to hire and retain entrepreneurial and effective traders, investment bankers, and salespeople. Our business environment is rapidly changing. New risks and uncertainties emerge continuously and it is not possible for us to predict all the risks we will face. This may negatively impact our operating performance.
A portion of our revenue is generated from net trading activity. We engage in
proprietary trading for our own account, provide securities financing for our
customers, and execute "riskless" trades with a customer order in hand resulting
in limited market risk to us. The inventory of securities held for our own
account, as well as held to facilitate customer trades, and our market making
activities are sensitive to market movements. A portion of our revenue is
generated from new issue and advisory engagements. The fees charged and volume
of these engagements are sensitive to the overall business environment. We
provide investment banking and advisory services in
A portion of our revenue is generated from management fees. Our ability to
charge management fees and the amount of those fees is dependent upon the
underlying investment performance and stability of the Investment Vehicles. If
these types of investments do not provide attractive returns to investors, the
demand for such instruments will likely fall, thereby reducing our opportunity
to earn new management fees or maintain existing management fees. As of
A substantial portion of our asset management revenue is earned from the management of CDOs. As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults. Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations.
A portion of our revenues is generated from our principal investing activities. Therefore, our revenues are impacted by the overall market supply and demand of these investments as well as the individual performance of each investment. Our principal investments are included within other investments, at fair value, other investments sold, not yet purchased, and investments in equity method affiliates in our consolidated balance sheets. More recently, a significant component of our principal investment revenue has come from SPAC related equity investments, primarily in entities that have been the result of sponsored SPAC business combinations or related party sponsored SPAC business combinations. Access to these investments is reliant on a robust SPAC market. Performance of the resulting principal investments can be materially impacted by overall performance of the equity markets. See note 7 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
The SPAC Market
Beginning in 2018, we began sponsoring a series of SPACs. Each sponsored SPAC
either completed or seeks to complete a business combination with a company
involved in the insurance market. In addition, we invest in other SPACs at
various stages of their business life cycle. Beginning in 2019, these SPAC
activities have become a significant portion of our Principal Investing business
segment. In
Equity prices of SPACs and post business combination SPACs declined
significantly during the first half of 2022. We are exposed to public equity
prices of SPACs and post business combination SPACs both through our other
investments, at fair value and investments in equity method affiliates. As a
result, we recorded significant principal transaction losses and equity method
losses during the six months ended
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Margin Pressures in Fixed Income Brokerage Business
Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors including the volatility of the equity and fixed income markets, the level and shape of the various yield curves, and the volume and value of trading in securities.
Margins and volumes in certain products and markets within the fixed income brokerage business continue to decrease materially as competition has increased and general market activity has declined. Further, we continue to expect that competition will increase over time, resulting in continued margin pressure.
Our response to this margin compression has included: (i) building a diversified fixed income trading platform; (ii) acquiring or building out new product lines and expanding existing product lines; (iii) building a hedging execution and funding operation to service mortgage originators; and (iv) monitoring our fixed costs. Our cost management initiatives are ongoing. However, there can be no certainty that these efforts will be sufficient. If insufficient, we will likely see a decline in profitability.
U.S. Housing Market
Our mortgage group is significant to our Capital Markets segment and our company
overall. The mortgage group primarily earns revenue by providing hedging
execution, securities financing, and trade execution services to mortgage
originators and other investors in mortgage-backed securities. Therefore, this
group's revenue is highly dependent on the volume of mortgage originations in
the
COVID 19
In
In 2021, medical professionals developed COVID-19 vaccines and governments began
to distribute them globally, which is expected to reduce virus spread and
further aid economic recovery. Despite broad improvements in the global fight
against the COVID-19 virus, we will likely be impacted by the pandemic in other
ways which we cannot reliably determine. We will continue to monitor market
conditions and respond accordingly. In
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Table of Contents Recent Events The 2017 Convertible Note
On
The 2017 Convertible Note was originally scheduled to mature on
Pursuant to the
The 2020 Senior Notes
On
New Commercial Real Estate Opportunities ("CREO") JV
On
The CREO JV was formed for the purposes of investing in primarily multi-family commercial real estate mortgage-backed loans and below-investment-grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. "CRE CLO" means any pooling of commercial real estate mortgage-backed loans into a collateralized loan obligation.
The commercial real estate loans that will be funded by the CREO JV may be
originated by us and we may earn origination fees earned in connection with such
transactions. In addition, the Company may earn structuring fees in connection
with structuring and consummating a
We have elected the fair value option in accordance with the provisions of FASB
ASC 820, Fair Value Measurements ("FASB ASC 820") to account for our investment
in the CREO JV. The investment is included in other investments at fair value,
on the consolidated balance sheet and gains and losses (both realized and
unrealized) are recognized in the consolidated statement of operations as a
component of principal transactions and other income. Because the CREO JV has
the attributes of investment companies as described in FASB ASC 946-15-2, we
estimate the fair value of our investment using the net asset value ("NAV") per
share (or its equivalent) as of the reporting date in accordance with the
"practical expedient" provisions related to investments in certain entities that
calculate net asset value per share (or its equivalent) included in FASB ASC 820
for all entities. As of
Wind Down of the Company's GCF Repo Business
The Company has carried out a matched book GCF repo business as a full netting
member of the
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INSU Acquisition Corp III ("Insurance SPAC III")
Each Insurance SPAC III Unit consists of one share of Insurance SPAC III's Class
A common stock, par value
The Insurance SPAC III Sponsor Entities purchased an aggregate of 575,000 of
placement units in Insurance SPAC III in a private placement that occurred
simultaneously with the IPO for an aggregate of
A total of
The Insurance SPAC III Sponsor Entities collectively hold 8,525,000 founder
shares in Insurance SPAC III. Subject to certain limited exceptions, the founder
shares will not be transferable or salable except (a) with respect to 25% of
such shares, until consummation of a business combination, and (b) with respect
to additional 25% tranches of such shares, when the closing price of Insurance
SPAC III Common Stock exceeds
As of
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Consolidated Results of Operations
This section provides a comparative discussion of our consolidated results of operations for the specified periods. The period-to-period comparisons of financial results are not necessarily indicative of future results.
Six Months Ended
The following table sets forth information regarding our consolidated results of
operations for the six months ended
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