MoneyGram Rescue Plan At Risk

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The total losses ($200 million) on the sale of securities between September and January would seem to imply additional write-downs of roughly $1.5 billion, Credit Suisse analyst Paul Bartolai said in a Jan. 15 note. But losses could be higher since the securities sold were probably the most liquid in the portfolio, said Bartolai, who has a market weight rating on the stock. (Credit Suisse does and seeks to do business with the companies it covers in its research reports.)

Sproule at Thomas Weisel said he believes MoneyGram will be able to get around 85 cents on the dollar for the commercial and prime residential loans and the corporate debt it sells, and between 20 and 30 cents on the dollar for the subprime and Alt-A loans and collateral; debt obligations it still has in its portfolio.

That’s not surprising, considering the last pricing in the market was E*Trade Financial’s (EFTC) sale of $3.0 billion in second lien, subprime, double-A rated loans for $800 million, or about 27 cents on the dollar, just after Thanksgiving, he said.

Overall, he believes the company will be able to contain its writedowns to about $1.5 billion, most of which will be taken in the fourth quarter, and that’s the reason it arranged for waivers through Jan. 31 on its debt covenants that required it maintain certain minimal income levels.

The waivers allow the company to breach those income thresholds temporarily until the end of January, when the contract with the investor group led by Thomas H. Lee is expected to become definitive, with the funding to materialize in early February, Sproule said.

The deal with private equity firms such as Thomas H. Lee could fall apart given there’s no assurance MoneyGram will be able to sell the rest of its investment portfolio at an acceptable price, given the collapse of the market for some of the securities in that portfolio, Rana wrote in a research note on Jan. 15.

If a bailout doesn’t come from the group led by Thomas H. Lee, it’s likely to come from another “white knight,” given that the disclosure of the portfolio exposure will give potential suitors a better idea of what they’d be getting, Calyon Securities said in a Jan. 15 note.

Euronet Worldwide (EEFT), which made an unsolicited bid in December to acquire MoneyGram in an all-stock deal initially valued at $20 per share, is presumably still interested in the company’s money transfer business. Other suitors willing to swallow potential losses on the portfolio in exchange for the scale of the money transfer business could also appear, analyst Craig Maurer wrote in Calyon’s note. He upgraded the stock to neutral from sell, saying the shares had reached his $6 price target.

Despite an optimistic view of the money transfer business, Standard & Poor’s Equity Research cut its 2007 earnings estimate by 32 cents to $1.20 per share and shaved its target price by $14 to $12, saying its ability to forecast future profits was poor.

Bogoslaw is a reporter for BusinessWeek's Investing channel .