Fresh off a challenging quarter, SWS Group Inc. suddenly canceled a $95 million debt offering it had registered two days earlier.
Most of the debt, in the form of senior convertible notes, was to be used to “support the bank's compliance with capital requirements by the Office of Thrift Supervision,” the firm wrote in its registration filing with the Securities and Exchange Commission on Dec. 6.
The offering, which was to be underwritten by Bank of America Merrill Lynch, was canceled “due to recent volatility and unfavorable market conditions,” the company said in a statement.
The statement included no information about the capital requirements at its bank.
Ben Brooks, a spokesman for the firm, said he had “nothing to add beyond the press release” about pulling the debt offering.
Dallas-based SWS, which houses 500 employee and independent reps and provides clearing services for 169 broker-dealers, has struggled recently. It posted a net loss of $20.7 million for the quarter ended Sept. 30, due to elevated loan loss provisions for its banking subsidiary, Southwest Securities FSB.
Last month, it slashed its dividend from 9 cents per share to a penny.
The firm also has seen changes in top management. In August, CEO Donald W. Hultgren resigned after eight years at the helm of SWS. He was succeeded by longtime brokerage chief James Ross, who took over as interim chief executive in August and permanent CEO in October.
That month, Kenneth R. Hanks resigned as its chief financial officer and treasurer after eight years in the job. Stacy M. Hodges, chief financial officer of Southwest Securities Inc., the company's primary broker-dealer, was named interim CFO.
SWS has capital on hand. According to filings with the SEC, Southwest Securities had net capital of $105.4 million as of Sept. 30, with $99.2 million of that being excess net capital, or the amount of capital above the minimum a broker-dealer is required to maintain in order to remain open for business.
The firm's third-quarter loss, compared with a net profit of $3.1 million in the comparable quarter of 2009, “is a pretty big loss for a little company,” said mergers-and-acquisitions attorney Steven Insel, noting that SWS' market capitalization is currently about $135 million.
“It could certainly create a loss of confidence in management's controls and reports,” he added, with management perhaps not accruing loan losses appropriately.
CLEARING LOSS
The firm took a substantial pretax loss in its fiscal 2010 first quarter, stemming from its clearing business, Mr. Insel noted. According to its report for the quarter (ended Sept. 30, 2009), the firm recorded a “pretax loss of $6.3 million as a result of a clearing correspondent's unauthorized short sale of more than 2 million shares of a stock.”
“The short sale and the subsequent trades to cover the short position resulted in a $6.3 million receivable from the correspondent,” the company said. “We determined that collection of this receivable was doubtful and established an allow-ance for this receivable.”
“How does that happen?” Mr. Insel asked.
For the first quarter of fiscal 2011 (ended Sept. 24), SWS' clearing segment recorded pretax income of $493,000. But the company's shares are trading near the low end of their 52-week range. The stock's high in the past year was $12.80 per share and its low was $3.91.
It traded at $4.15 per share last Thursday afternoon.
Mr. Brooks declined to comment about the company's recent loss and decline in stock price.
E-mail Bruce Kelly at bkelly@investmentnews.com.
