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December 1, 2021 | In this Premium Service edition of The Institutional Risk Analyst, we return to several names that we featured earlier this year, Wise Plc (WISE), Better.com and United Wholesale Mortgage Corp (UWMC). Starting from the ridiculous and working forward to the sublime, we’ll begin with the Katzenjammer Kids antics of UWMC CEO Matt Isihiba and his team, touch wheels in the magical world of new age mortgage lending, and land finally at WISE. Suffice to say that both UWMC and WISE show signs of growing pains and a lack of good business advice and internal controls. Next week, our subscribers will feast upon the Q4 2021 edition of The IRA Bank Book, our quarterly survey and outlook for the US banking industry.
UWM Holdings
If you work in the mortgage industry, you find time each day to read Rob Chrisman’s commentary, a daily compendium of market announcements and industry analysis that often contains precious little gems. This past week, Rob took notice of the latest twist from UWMC, namely an abortive attempt to sell $1 billion worth of insider shares even as the stock has been languishing well-below last year’s IPO price. In January of 2021, UWMC was a $13 stock.
Somehow the folks at UWMC did not take notice of the fact that secondary stock offerings for all issuers, including IMBs, have basically disappeared in the past several months. Deals are getting done, but the public holders are not looking to see the managers who have been awarding themselves big stock based compensation heading for the door.
“The industry took note of United Wholesale’s stock plans,” Chrisman writes with his usual understatement. One East Coast broker wrote to me, asking, ‘What’s up at UWM? Initially trying to buy back the outstanding 8%, but doing a public stock offering eight months after the IPO and after the stock tanks, makes it look deceptive.’”
Chrisman revealed that according to a new amended S-1A filing with the Securities and Exchange Commission, “SFS Holding Corp. has registered 150 million shares of United Wholesale Mortgage common that it intends to sell ‘from time to time’ as market conditions allow. The maximum offering price is $7.00 a unit. The gross proceeds could total roughly $1.05 billion if all goes well.”
Chrisman detailed that SFS, which is controlled by UWMC CEO Mat Ishbia, planned to sell 50 million shares of common stock. After the deal was pulled, UWMC said this to investors:
“The offering was intended to increase UWMC’s public float by approximately 50%, thereby making it a more liquid, tradable stock for larger indexes and institutional investors, while at the same time utilizing the company’s buyback authorization to reduce the number of fully diluted shares outstanding. However, the market’s reaction to the offering resulted in a share price level at which SFS is not willing to sell. With the termination of the offering, no shares of common stock will be sold by SFS at this time. Instead, the company intends to accelerate its previously announced buyback program and defer its plans to increase public float to a later date.”
Buying back shares in an IMB that is facing declining volumes in its primary business channel is not likely to be a path to success for UWMC or any other IMB, to be fair. With yesterday’s news that the FOMC intends to taper mortgage bond purchases, the outlook is for higher mortgage rates (already 0.5% above the February lows) and perhaps even wider spreads. But for firms that are primarily dependent upon wholesale channel volumes, the future appears bleak.
We suspect that UWMC CEO Ishiba will destroy as much shareholder value as possible, then announce his intention to take the IMB private sometime in 2022. As one observer told The IRA: “Yep, these are very smart people making big time smart choices.”
Better.com
Moving right along, we come to Better.com, a new IMB that has managed to buy its way into the top-20 issuers during a period of low or even negative default rates in residential 1-4s. Now the Softbank sponsored Better.com has been forced to take down an addition $750 million in funding, TechCrunch reveals, raising questions about the previous statements regarding a public offering. TechCrunch reports:
“The new arrangement will replace the prior agreement wherein $950 million of the $1.78 billion in committed financing from Aurora and SoftBank would have been used to purchase existing shares from Better’s stockholders rather than the company receiving it directly to its balance sheet.”
The fact that Better.com insiders are no longer able to, in effect, sell shares to Softbank in the current risk environment speaks volumes about the deterioration of conditions in the US equity market more generally. As we noted about with respect to UWMC, this is not the right moment for secondary offerings. After yesterday’s Senate hearing, Fed Chairman Jay Powell has taken a hawkish turn and is now promising to accelerate the taper of MBS and Treasury bond purchases by April of 2022.
Given that mortgage lending volumes are also falling, it is hard to say what the net effect will be on mortgage rates and volumes, but MBS spreads to the Treasury curve have widened in the past several weeks. Look for Treasury Secretary Janet Yellen to become increasingly critical of Powell and the FOMC as the Fed Chair seeks to rescue his agency’s credibility on inflation. This will not be a positive environment for bringing weak stock offerings to market. Of note, Aurora Acquisition Corp (AURC) and Softbank continue to maintain that Better.com is worth almost $7 billion.
More than a mortgage play, Better.com has mutated into areas such as insurance, making comparisons with traditional lenders difficult. More, like Blend Labs (BLND), Better.com has acquired a title company during a bull market in mortgage lending. But as anyone familiar with mortgages knows, title is an awful business in a declining mortgage market. Both in the case of BLND and Better.com, acquiring a title company at the peak of a lending cycle does not give us great confidence in the judgment of management.
AURC recently disclosed that its auditor had informed them that the company needed to restate its financials for the past year and that previous financial disclosure and public statements could no longer be relied upon by investors. Aurora stated in a November 2021 8-K:
“The Audit Committee concluded that the Company’s previously issued financial statements issued in connection with the Company’s initial public offering, dated March 8, 2021, and contained in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021, originally filed on May 26, 2021 and August 11, 2021, respectively (collectively “Non-Reliance Periods”), should no longer be relied upon. Similarly, related press releases, earnings releases, and investor communications describing the Company’s financial statements for the Non-Reliance Periods should no longer be relied upon.”
Of note, in the November 12, 2021 amended S-1, AURC reports that Better.com had $172 million in income in 2020 on $875 million in net revenue. In the first six months of 2021, mortgage platform revenue almost tripled vs 1H 2020, but operating expenses and stock-based compensation rose faster, driving Better.com to a small net loss.
We can only wonder what the full year 2021 will look like as refinance volumes continue to fall and loan delinquency slowly rises, pushing up operating and net-interest expenses. But more to the point, the idea that AURC is going to be able to float a post-merger Better.com at multiples of book value seems fanciful looking at the public comps. We think that the cash infusion by Softbank may be the first of several such investments. We place a low probability on the Better.com IPO getting done unless and until US interest rates start to move lower. The natural value of a well-managed mortgage company is somewhere around book value.
Wise PLC
Finally, we arrive at WISE, a supposed disruptor in the world of global payments. We wrote favorably about the company earlier this year and even bought the LSE-traded stock. It appears from press reports that WISE convinced some of the investor community that they were more focused on pushing down cash transfer costs than making money for shareholders. The market value of WISE plummeted.
Fortunately, the most recent financials tell a different story, with WISE steadily growing revenue, operating expenses rising less so and pretax income increasing accordingly. Unlike many fintech plays in the US, WISE looks remarkably normal, almost boring. But in the present environment, boring is good. WISE increased forward guidance and the stock responded favorably.
Of note, the WISE board asked CEO Kristo Kaarmann to appoint tax advisers following disclosure of a fine for defaulting on his personal taxes, The Telegraph of London reported this week. The Estonian co-founder of the payment services provider was fined 365,651 pounds sterling ($486,864) for deliberately defaulting during the fiscal 2018 tax year on 720,495 pounds of taxes. Kaarmann welcomed the suggestion of professional. WISE’s stock jumped almost 8% on Tuesday’s close, but then retreated the following day.
It is still very early days for WISE. The company faces some difficult challenges in displacing the staid and very corrupt monopoly of large banks that control money transfers around the world. The revolutionary, change-the-world attitude of WISE will not endear them to large global banks. Clearly the senior management team of visionary disrupters that founded the company will need to transition to a more institutionalized management team and compliance culture in order for WISE to win these coming battles.
Disclosures: L: NLY, CVX, NVDA, WMB, BACPRA, USBPRM, WFCPRZ, WFCPRQ, CPRN, WPLCF, NOVC S: UWMC, RKT
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