Penson Shares Take Heavy Hit On Collateral Disclosure
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Shares of Penson Worldwide Inc. (PNSN) plummeted to an all-time low Thursday after a regulatory disclosure by the brokerage and trade-clearing firm raised questions around potentially illiquid securities accepted as trading collateral.
Penson reported this week that it held $42.6 million in bonds issued by a horse-racing track operator that maintains ties with one of Penson's board members, which the company said may bring a write-down "that could be material in amount," according to a filing.
"We believe that a significant risk to Penson is that the new disclosures affect its correspondent clearing customers,"
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"We believe that a significant risk to Penson is that the new disclosures affect its correspondent clearing customers," Rich Repetto, an analyst with Sandler O'Neill, wrote in a research note Thursday that warned of competitors poaching Penson's existing customers and potential clients taking their business elsewhere.
The company's stock recently was down 20.6% at $3.12 after trading at a historic low earlier Thursday. Shares fell 23.8% Wednesday and have lost nearly 40% of their value year-to-date.
Representatives for Penson weren't immediately available for comment.
The Dallas-based company's core business lies in clearing trades in securities and derivatives contracts for broker-dealers serving retail investors, as well as high-frequency trading firms that need access to exchanges. The company also operates a Chicago-based futures brokerage.
At the end of the first quarter, Penson held $97.4 million in non-accruing receivables, which analysts said reflect non-liquid assets held as collateral against trades gone bad. Nearly half that figure represented bonds issued by Retama Development Corp., owner of Retama Park, a racetrack located in Selma, Texas.
Those bonds are collateralized by the value of Retama Park's real estate, and although they were regularly traded at the time Penson took them as collateral, "there is no longer any active market," according to a note from Raymond James analyst Patrick O'Shaughnessy.
Raising further questions is the relationship of Penson board member Thomas Johnson, chief executive of Call Now Inc., which manages the racetrack and owns $15 million of the Retama Development Corp. bonds, according to Sandler O'Neill's Repetto; Call Now was an early investor in Penson.
"While we believe that Call Now's use of RDC bonds as collateral for margin loans could have reasonable explanations, Penson's exposure to $27.8 million of other Retama bonds raises questions about how the concentration of risk developed," Repetto wrote.
For Penson, which has seen its valuation nearly halved to $88.9 million this week, nearly $100 million in non-accrual receivables is "a troubling level," Repetto wrote.
Penson Chief Executive Philip Pendergraft is expected to attend a stock-options industry event Thursday in Savannah, Ga., where some clients are expected to discuss the matter with him.
"I'm reserving judgment until I look him in the eye and see what he has to say about it," said one client, who requested anonymity due to the sensitivity of the issue. "Right now I don't think it impacts the business they do for us."
