Mizuho Defends SoFi Technologies After Short-Seller Report

Investing.com – Mizuho analyst Dan Dolev defended SoFi Technologies on Tuesday, countering the allegations made in a short report released last week by short-selling firm Muddy Waters.

This aggressive short seller published a report on March 17 titled “SOFI: A Financial Engineering Runway That Profits Management and Leaves Shareholders as the Biggest Losers.” The report raised several key points, mainly concerning a $312 million loan sale transaction, which it considers an unrecorded debt, as well as comments on the low discount rate used for student loans and potentially underestimated charge-off rates.

Dolev stated that although the report contains impressive detail and analysis, further investigation suggests these points can likely be rebutted with publicly available disclosures from SoFi.

Regarding the $312 million loan transaction, Muddy Waters believes that the loan sale to JPMorgan Chase was not truly a third-party sale but rather refinancing or borrowing. The short seller argues that SoFi appears to have a material misstatement of at least $312 million in unrecorded debt, indicating that SoFi seems to have borrowed $312 million but did not report it in its financial statements.

Dolev explained that his understanding is that this was a sale of a senior loan. He pointed out that during the Q3 2024 conference call, the CFO stated that SoFi sold $312 million of senior secured loans at face value.

The analyst said he believes that, as a regulated bank like SoFi, such statements require genuine sale opinions. According to Dolev, the standards for genuine sales are discussed in Note 1 of SoFi’s 2023 and 2024 10-K reports, under the heading of variable interest entities.

SoFi also discusses sale standards in Note 1 and Note 4 of its 10-K report, both under the heading of financial asset transfers. In Note 1, SoFi identifies the sale criteria and states that transfers not qualifying for sale accounting are reported as secured borrowings. In Note 4, SoFi again states that it accounts for transfers as sales or secured borrowings based on facts and circumstances.

In its Q3 2024 10-Q report, SoFi noted that it sold a secured loan at face value during the three- and nine-month periods ending September 30, 2024, with an unpaid principal balance and accrued interest of $312.5 million.

Regarding the discount rate on student loans, Muddy Waters believes that SoFi’s discount rate for student loans in 2025 is 3.89%, which is 27 basis points lower than the 10-year U.S. Treasury yield.

Dolev said that because the weighted average maturity of SoFi’s student loans is about four years, it is reasonable for SoFi to use a four-year SOFR as its benchmark rate instead of the 10-year Treasury.

On the charge-off rate, Muddy Waters calculated that SoFi’s personal loan charge-off rate is actually about 6.1%, whereas its reported figure is 2.89%. The short seller claims that SoFi manipulates this ratio by disposing of loans just before the charge-off threshold and by seemingly keeping defaulted loans off-balance sheet.

Dolev pointed out that management specifically mentioned a 4.4% rate, not 2.89%, which is the figure after deducting $90 million in late personal loan delinquencies. The report also cited an annualized charge-off rate of 4.7%. Dolev said he sees more evidence supporting the 4.4% figure, consistent with management’s comments, calculated as: Fitch’s 8.4% cumulative total loss multiplied by a 0.90 recovery rate, divided by a 1.8-year loan weighted average maturity, roughly equal to 4.2%.

The analyst stated that he believes the short report may have conflated the charge-offs on loans on the balance sheet with the 30-day delinquency rate of loans issued and subsequently transferred but still serviced by SoFi. He said he does not believe SoFi publicly discloses the 30-day delinquency data for loans on its balance sheet.

Muddy Waters describes SoFi as a financial engineering treadmill rather than a healthy growing lending business. The firm accuses SoFi shareholders of ongoing dilution, enabling management to achieve bonus targets through loan markups and off-balance-sheet structures that disguise income.

Mizuho maintains a Buy rating on SoFi with a target price of $38.

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