MoneyGram International, the nation's second-largest wire transfer company, has become an unlikely casualty of the mortgage meltdown.By Chris Serres, Star Tribune
October 18, 2007
SourceDuring the past three years, MoneyGram International Inc. became a Wall Street darling by providing fast, reliable money transfer services to millions of people all over the globe, from Albania to the Cayman Islands.
But the fast-growing company, which saw its sales jump 40 percent between 2004 and 2006, disclosed late Wednesday that it is the latest casualty of the subprime mortgage crisis that has dragged down the value of financial stocks, bonds and other investments.
In an effort to reap higher returns, MoneyGram invested hundreds of millions of dollars of customer deposits in bonds backed by the high-rate mortgages. Now that many of those homeowners can't make their monthly payments, these bonds have plunged in value.
MoneyGram said it would take a $230 million loss on mortgage-related investments, forcing the company to consider selling one of its largest business units. MoneyGram said it has hired J.P. Morgan Chase & Co. to undertake a "strategic review" of its payment systems business, which accounted for 30 percent of the company's overall revenue last year.
Though company executives said the losses were small when compared with the overall size of its investment portfolio -- which topped $5.6 billion as of June 30 -- fears of further markdowns sent MoneyGram's stock tumbling 11.4 percent Thursday to $19.98 a share from $22.56 a share. The shares have fallen 36 percent this year.
"The question is: Are these losses just the beginning?" said Brett Horn, an equity analyst at Morningstar. "No one seems to know for certain."
MoneyGram's problems are a reminder of the far-reaching effects of the subprime mortgage meltdown. The losses that began with major banks and hedge funds are hurting a far broader spectrum of Americans than initially expected. Even some municipal governments and school boards, which bought mortgage-backed securities, have seen the values of their investments decline.
On Wednesday, Bloomington-based Residential Capital Corp. announced plans to eliminate 460 jobs, nearly 30 percent of its Twin Cities workforce, as losses from its subprime mortgages mount. Nationwide, 15 of the top 25 U.S. subprime lenders have either filed for bankruptcy, shut down some or all of their mortgage businesses, or sold their mortgage units to larger companies.
MoneyGram's woes are particularly unsettling, say analysts, because the company had no obvious reason for investing in subprime mortgages.
MoneyGram's money transfer transactions grew 41 percent in 2006, cementing its position as the world's second-largest money transmitter, after Western Union. Given the success of its core business, the company should have been investing in safer securities, such as Treasury bonds, some analysts argued.
"They should be taking absolutely no risk," said Robert Napoli, an analyst who covers the company for Piper Jaffray & Co.
"When I talk to clients about MoneyGram, I shouldn't have to waste more than two words about their investment portfolio. ... Instead, 90 percent of the conversation is about how much of a hit they're going to take."
The company has plenty of cash to avert a liquidity crisis. But it may have to absorb additional losses in the coming months if housing prices and consumer credit defaults worsen, analysts warned.
As of June 30, MoneyGram had $1.5 billion invested in residential mortgage-backed securities, on top of the $384 million in subprime mortgages. Together, that represents nearly one-third of its investment portfolio.
The company in the third quarter borrowed the remaining $200 million on its credit line in order to give itself an extra financial cushion.
Tim Gallagher, vice president of investor relations at MoneyGram, said that 70 percent of the subprime mortgages in its portfolio were issued before 2005, the year that credit underwriting standards began to become dangerously lax, in the eyes of a growing number of analysts. More than half of the subprime portfolio was rated at AA or above by major credit rating agencies.
He noted that the company hasn't sold any of the securities, so it hasn't yet realized actual losses from them.
However, Moody's reacted to the news by downgrading MoneyGram's credit rating and said it will put the company under review for further potential action.
MoneyGram could try to sell part or all of its investment portfolio, but that may be difficult in the current marketplace, and the company could suffer significant losses.
"Who wants to buy a portfolio when a lot of the risk is unknown?" asked Robert Dodd, a senior analyst at Morgan Keegan & Co. in Memphis.
Chris Serres • 612-673-4308
Chris Serres •
cserres@startribune.com