MuniMae to sell assets, limit business to save cash

The Baltimore Sun

Municipal Mortgage & Equity LLC, the real estate and alternative energy project financier, said yesterday that it is selling certain financial assets and curtailing parts of its business to conserve cash as it deals with the ripple effects of the souring credit market.

The company said in a regulatory filing that lenders and investors who take positions in the funds it manages are pulling back from the business as they deal with credit problems. As a result of that and other difficulties, the Baltimore-based company, best known as MuniMae, is launching fewer funds, doing fewer deals and conserving cash until the situation stabilizes.

Those actions likely will result in reduced revenue, earnings and, most likely, shareholder dividends until the market recovers.

That means the company's board might reduce dividends on top of the 37 percent reduction announced in January. The dividend was reduced to 33 cents at that time, marking the company's first dividend cut in 43 consecutive quarters.

The company's troubles are linked indirectly to the subprime mortgage meltdown - even though it doesn't have such mortgages in its portfolio.

"What we're finding is the folks we work with to invest in our funds and who lend us money so we can relend it to our customers do have subprime exposure, and that's leading to a credit contraction, which is impacting us," said Michael L. Falcone, MuniMae's chief executive officer.

The company also disclosed that it is close to finishing a more than yearlong effort to restate earnings for 2005 and report previously undisclosed earnings for 2006 to comply with accounting standards.

Delays in resolving the accounting problems caused the New York Stock Exchange to delist its shares this year. It hasn't filed financial statements since August 2006.

The company, which employs about 150 in Baltimore and about 500 companywide, expects the earnings adjustments to reduce its reported year-end shareholder equity for 2005 by about $45 million to $723.3 million.

However, the calculation includes about $78 million of noncash depreciation charges, which have no economic effect on the company's operations. The results are unaudited and preliminary. The company has not disclosed earnings for 2005.

Year-end shareholder equity will fall to $704 million for 2006, the filing said. Net income for the year will be about $22 million.

Falcone said the company has trimmed 15 to 20 jobs during its recent troubles. Yesterday's filing also said certain employees whose income is linked to business volume would be compensated differently as a result of the credit market difficulties.

MuniMae is a complex financial business that relies heavily on credit markets - which have been anything but stable in recent months. The company acts as a sort of middleman in arranging financing for real estate and renewable energy projects, which have become a growing source of new business. It also buys and sells tax credits from affordable housing projects and other deals it finances.

Credit problems have caused banks and investors to stop putting money into MuniMae's funds, which are used to finance housing projects. As a result, the company said, it has not formed any new funds this year and plans to curtail efforts to do so except with respect to its renewable energy investments and international housing business.

Affordable-housing loans that it originates and sells to Fannie Mae, Freddie Mac and other government entities have increased.

In other areas, the company has seen its ability to borrow increasingly cut off by banks and other lenders who are trying to clear outstanding loans from their books in light of credit market volatility. As a result, MuniMae has paid off some of its credit lines, replacing some - but not all - of them with new sources.

MuniMae disclosed last month that the recent decline in the value of municipal bonds forced it into a deal with Merrill Lynch to cover its debt to the firm. MuniMae borrows from Merrill, using the value of its tax-exempt bond holdings as collateral.

When the value of those holdings declined with the market, MuniMae faced what is called a "margin call" - a requirement that it put up more cash to cover its borrowings.

The company said it gave Merrill a stake in its MuniMae TE Bond subsidiary in place of cash to cover its debt.

But yesterday's filing says the company put up $51.5 million in cash collateral before that deal was struck.

To raise cash and prevent future margin calls, the company has been struggling to sell its state housing agency tax-exempt bonds.

However, it has been forced to sell those bonds at a loss because of changes in the market.

The company said it needs to keep raising cash for $185 million in construction projects it has already agreed to finance. It also faces a $54.1 million bill for consulting and accounting expenses incurred getting its books in order.

The company's shares, which are traded over the counter, fell 28 cents to $5.17 per share. The shares are down 65 percent this year.

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