MoneyGram Rescue Plan At Risk

A much-needed investment from private equity firms depends on the company selling its remaining portfolio of impaired asset-backed loans

by David Bogoslaw

The subprime meltdown has found another victim: MoneyGram International (MGI). The money transfer services provider's stock lost half its value Jan. 15 after the company disclosed a plan to recapitalize its balance sheet that depends on its ability to shed its risky loan portfolio.

While the company has been a relatively conservative play on money transfer services to consumers, its other business of transferring money between banks and other financial institutions has turned sour. MoneyGram now faces larger losses after reinvesting money it receives for bank transfers in risky investments such as subprime mortgages.

After the market close on Jan. 14, MoneyGram announced an additional net unrealized loss of $571 million on its investment portfolio since Sept. 30, bringing total net unrealized losses to $860 million. The Minneapolis-based company is in the process of shifting its portfolio away from asset-backed securities and into highly liquid assets such as government bonds. So far this month, it has sold $1.3 billion of securities, resulting in a realized loss of about $200 million, double the $100 million unrealized loss it recorded at the end of November.

To preserve its liquidity, MoneyGram said it’s in negotiations with a group led by buyout firm Thomas H. Lee Partners to get capital infusions of $750 million to $850 million in convertible preferred stock and $550 million to $750 million in debt from third-party lenders. With $350 million available under credit agreements, the company believes it has ample liquidity to meet its daily needs.

An investment by Thomas H. Lee Partners would be contingent on MoneyGram’s liquidation of a major portion of its investment portfolio, which would result in losses much larger than the $860 million loss reflected in its Nov. 30 valuation, the company said. The investors would initially be getting a 60% to 65% equity stake in MoneyGram, depending on the amount invested and the size of the losses on the sale of assets from its securities portfolio.

The shares plummeted 49.5% to close at $6.15 on Jan. 15, after tumbling to an all-time low of $5.66 earlier in the day. The stock had traded as high as $30.93 within the past year.

In response to the company’s recapitalization plan, Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on MoneyGram to ‘BB’ from 'BBB' and said the rating will remain on CreditWatch Negative, where it was placed on Dec. 13, 2007. (Standard & Poor’s, like BusinessWeek, is a division of McGraw-Hill Companies (MHP).)

The portfolio losses are related to MoneyGram’s Payment Systems business, which processes money transfers for home sales and other transactions between banks, reinvesting the money at higher yields for the seven to 10 days required for the transfer and earning a profit on the spread between the yields. Some of those higher-risk securities it had been investing in have turned out to be radioactive due to the subprime meltdown, Anurag Rana, an analyst at KeyBanc Capital Markets, told BusinessWeek.com in an interview.

Now, instead of investing the money in those high-risk securities, MoneyGram plans to move to safer assets. The realigned portfolio is expected to consist mainly of government, government agency and municipal bonds, but the lower yields would substantially reduce the company’s profit margin.

In the third quarter, the company’s investment yield was almost 6.5%, but with the switchover to government securities, it will come very close to the Fed funds rate, said Mark Sproule, an analyst at Thomas Weisel Partners in New York. That would virtually wipe out any spread from which it had been making a profit.

The company expects to partially offset the shrinking interest rate spread by no longer processing transfers for the larger banks and focusing instead on smaller, regional banks that pay a slightly higher commission, Sproule said. “I expect the majority of the profitability from the Payments business to disappear,” he said.

Meanwhile, some analysts wonder if MoneyGram’s losses in its portfolio could be even worse.