Wow.

This article contains strong views underpinned by material inaccuracies. AFN may be very bad stuff. I can't spend much time on this but it is clear the author has zero credibility and understand of the business model (he admits his own "confusion!"

1) AFN $.31 dividend equates to far more than a 9% yield. If you can't do the math (.31*4)/$3.28, or qualify that this yield is quarterly, you have no business writing such an article claiming insight into the business. BTW: management has noted $.25c as a likely recurring level of dividend.

2) Claiming management is less than forthright by including non-GAAP metrics is ignorant and irresponsible. AFN discloses all GAAP numbers. It also includes other metrics that provide a better view of economic reality in this case. As a business school teacher you should know that GAAP requires AFN to including risk in excess of maximum loss in the equity, which is silly. You should also know that FAS 157/159 will change all that next quarter-which will "magically" change GAAP. Geez.

Disclosure: I have no position in AFN.

Peter, do you have any financial qualifactions, such as the CFA designation?

Your article makes reference to the fact that AFN has $3.6 Billion in indebtedness that must be repaid by Jan 08....

This is not true.....$3.1 Billion of this debt were repurchase agreements that were repaid during the year. Their Sept 30th balance sheet showed no repurchase agreements outstanding....

I believe that the remainder in debt (approx. $557 Million) are warehouse credit lines most of which are unused.....

I don't believe that AFN has any liquidity issues that can force them into bankruptcy for at least another 5 years....so they face no imminent bankruptcy...and will most likely ride this credit crisis out.

IMO, Babson College should feel humiliated to employ Peter Cohan. As other comments have already indicated, Cohan has failed to correctly report on AFN's situation. Were his errors intentional or just due to not being very good at what he does? I feel sorry for the parents of students at Babson that may be wasting their money paying this ill-informed man to teach their children anything. The article was shockingly inaccurate.

WTF.

Peter, did you read the 10K and the 10Qs?

You show no knowlege of AFN or any companies of its ilk. In the future please read and understand before you write!

AFN has NO liquidity issues and only shows losses and a negative net worth because GAAP rules distort what is actually occuring. Management shows different metrics for investors and others to review so that they can get a better understanding of the company.

Thank God I went to Wharton and not Babson:-)

Cut the man a little slack, not everyone can get into Wharton... Perhaps Professor Cohen was admitted to an on-line school under a "special admittance policy and no one told him to purchase the requisite books. Pity, perhaps one of them would have been an accounting text.

Hey, don't get so personal guys! ; )

I for one would really appreciate it if Dr. Cohan did a follow up based on the refutations above. If you tick him off, he might not.

John,

Great post. You've done your homework.

You getan A+ Peter gets a D-.

David

Hi There,

I read over your article with interest and can only come to 1 of 2 conclusions: Either this Mgmt team is dishonest and belongs in jail. Or you are highly irresponsible and could not find the time to do some basic research on this company. If you would have taken the time to do some research, you would realize that the detailed transcipt of the 3Q earnings Conf Call isavailable as well as a presentation they gave at a FBR Conf in earlyDecember.

What is most disturbing is that in an article purporting todemonstrate that this "dog" is approaching bankruptcy, you fail to
note the following:

1. At the end of Sep 2007, AFN had $43M in a CDS gain sitting ontheir books from shorting RMBS assets which was worth more by the endof Nov 2007. This asset could be monetized at any time.

2. AFN's debt is largely financed by NON RECOURSE, long term CDOfinancing (as opposed to the short term repo warehouse lines that took down the likes of AHN & NEW), which means they do not have topay back any significant debt for years. For someone who purports tobe a "Finance Professor", I find it disturbing that you do not know the difference between long term CDO financing and short term repolines, and impugns the company with this ignorance.

3. The GAAP "loss" that you refer to results because under current GAAP rules, companies are required to mark their assets to the market but not their Liabilities. Starting Jan 1, 2008, SFAS 159 will allows companies will also allow companies to mark their Liabilities to market thereby eliminating that ugly negative Book Value number. To wit: AFN like many similar companies will record a huge GAAP gain in 1Q2008.


There are other major problems with your post but I'm on vacation with the family and do not have time to rebut the other errors andomissions in your post. You say you have no interest here and that is why I'm so perplexed that you can commit what I consider a libelous attack on this company without doing basic research and being so careless with your facts.

Peter, I hope you are not so pigheaded that you are unable to admit you are mistaken about AFN. If so, you might change your mind about it and load up on it portfolio. Your line, "The question about whether to sell short this stock revolves around whether Alesco can pay off its $11.2 billion in debt." shows how naive you are about this stock. AFN has around $200 million in debt and it is not due until 2012.

And here you go again with, "For some reason, Alesco's banks have not demanded repayment of its debt ". The $11.2 billion number you mention is due to asset impairments not bank debt that needs to be repaid.

If you strip away all the "losses" from the acccounting noise, you have a company generating $75 million a year in income, that has $40 million in cash, about $60 million in gains from its credit default swaps (short on real estate), and $200 million in debt not due for five years. If the debt AFN had was as bad as you suggest, I would agree with you about it being a no-brainer short, but they are due to asset impairments and they are therefore not real.

...Unfortunately, he seems to be taking his sweet time to amend his blog...

It appears the author did little to no independent research on AFN. As a shareholder, it is disheartening to see a company and management team that seemingly is saying and doing all the right things to stay afloat in a time of crisis get bashed by someone who admittedly does not understand how the business works. Instead of attempting to write an article on a company that you do not fully understand, stick to something that is familiar to you. Misinformed articles such as these only hurt a stock and company while tarnishing the reputation of the author. If a 24 y/o grad student can perform some DD on a stock, I suggest a published professor can do and should do the same.

Professor Peters, this is an embarrassingly bad piece which shows a deep lack of understanding, not just of the company you are commenting on, but the industry subsegment it plays in. You are fortunate to have received commentary from several people who have done extensive due diligence on this company, including docjoe99, rogersbank, and briangsmooth. I've read the commentaries of all of these individuals in other places before, double checked their assertions, and found that they really know what they are talking about.

You would do well to intensively modify your article. A good place to start is by understanding the companies business. AFN is in the debt business. It puts togethers pools of investors who buy tranches of SIVs (principly TRUps) that package loans made, primarily, to banks. They make their money by putting together these packages, processing payments from the banks that have taken the loans, and distributing the proceeds to the investor pool within the contractual requirements of the SIVs. They also generally own some tranches of the SIVs themselves (usually the lowest rated and unrated tranches).

These packages put a large level of debt on AFN's balance sheet (as they would for anyone in this industry), but that debt is not callable. It is simply payable as payments are made within the terms of the SIVs. As a result, AFN can manage its way through almost any downturn so long as some reasonable level of payments continue to be made. There is risk in this model, to be sure, but the risk is not that AFN's debt will be called. It is that too many banks will fail (as Netbank recently did).

I just received my most recent AFN dividend. I have read through their materials and listened to their conference calls and understand why the dividend was both correct and likely to continue. I would suggest to you, and your readers, that you will find better advice from several of the people who have commented here on the AFN bulletin board on Yahoo.

The most obvious reason to be bearish on AFN is that fact that it is externally managed by the same investment bank that originated the Kleros CDOs. Cohen & Co is compensated only through management and origination fees. McEntee has stated several times that the management company doesn't "have any skin in the game." I'm surprised that Mr. Cohan didn't point this out seeing as his specialty is management consulting and evaluating management teams.

That being said I'm personally very bullish on AFN. As rogersbank has already pointed out, most of the debt that Mr. Cohan pointed out is NON-RECOURSE. If the corresponding asset to the debt blows-up, AFN hands over the collateral and there is no more liability for Alesco. In GAAP terms the debt is there (pre-FSA 159) but in economic terms AFN is not on the hook and paid good money up-front for the privelage. Also, Cohen & Co are the best of breed when it comes to CDOs, especially since the addition of Riccardi to the team. It should be mentioned that the management team saw the writing on the wall and made some well-timed exits earlier in '07. Mr. Cohan is unequivocally wrong when he has said that the management team has been less than forthright. Also, the credit default swaps will help with liquidity through the next several quarters. Once the open warehouses for CDOs are unwound, I will not be worried about AFN's liquidity.

The most important thing to see here is that AFN is a credit play. The majority of the dividend ($0.24 per share) is coming from TruPS in banks and insurance companies, which have been stated by McEntee to be largely unaffected so far. I hope that the management team allocates more capital to this asset class and reaches its 50% allocation goal over the next several quarters. Historically, these have been very safe, which also could've been said of CDOs before the subprime mess but these have a much longer, and better history. If the quality of these instruments deteriorates to >2% defaults, take all of your money out of the market and put it under your mattress because it means global liquidity has officially dried up. The TruPS portfolio is the reason why I'm in the stock and why the shorts will be owing their brokers a lot of money for many years to come.

**As of the writing of this, I have a small, long position in AFN but I'm not an employee of Cohen & Co or any of its subsidiaries**