Downey Financial's Cushion Not So Soft After All

Downey (DSL), the U.S. savings and loan holding company, has seen its share price plummet in the past year - from 75USD in July 2007, to 8USD today. Surely another victim of the subprime fiasco, Thestreet.com said on April 25th that the company, which is also involved in real estate investments, may soon join the growing list of financial institutions seeking an additional capital cushion against souring loans.

In previous entries, the journalist writing for TheStreet noted Downey's loan quality was not as bad as it appeared on the surface, but based on the partial set of first quarter numbers, Downey's loan quality and capital ratios paint a more grim picture compared to the last quarter.

Short investors have cottoned on to this observation, increasing their positions in Downey significantly since mid-April this year, when the percentage of Downey's Market Cap out on Loan (%MCOL) to short investors increased from 23% (already a sizeable figure) to 35% today. Utilisation is at 73%, so it could be hard and moreover expensive to borrow this stock. In context, the average Utilisation for the rest of the Russell 2000 is 34%, and for the rest of the North America Banks it is 22%.

For those investors who believe that Downey's price will rise, resulting in a large demand for shares to be returned, there are 25 Days to Cover, a high number which if the sentiment towards Downey's price becomes positive, could galvanise a short squeeze. 21.83% of the Market Cap is still Lendable.

Comments

[User 108901]

Jessica -

This is not another victim of the 'sub-prime fiasco - DSL promoted itself as non-subprime lender.

DSL's wounds are self inflicted - poor underwriting evidenced by no-doc, neg-am loans originated thru outside brokers. Their loans portfolio is self-destructing.

According to the Q1_10Q, 36% percent of loans hitting their recast go delinquent.

[Wez]

Stocks can and do go to zero.

www.creditbubblestocks...

[The Jackal]

I agree with WEZ, DSL is a ZERO. I've heard rumors that there are people pulling their accounts from retail branches.

[anastos]

I have a friend in the banking industry and it they won't even take calls from Downey anymore. When a company thinks CFC is a good buy but keeps putting your calls into VM, that's all I need to know about the metrics of their business. Wez is dead right on this.