Investing.com -- Mizuho analyst Dan Dolev on Tuesday defended SoFi Technologies against claims made in a short seller report published last week by Muddy Waters.

The activist short-selling firm published a report on March 17 entitled "SOFI: A Financial Engineering Treadmill Leaving Management Fat, Shareholders the Biggest Loser." The report made several arguments primarily regarding a $312 million loan sale, which it argued was unrecorded debt, as well as comments regarding use of too low of a discount rate for student loans, and potentially understated charge-off rates.

Dolev said that while the report has an impressive amount of detail and analysis, upon further investigation these arguments could likely be refuted using SoFi's public disclosures.

On the $312 million loan transaction, Muddy Waters suggested that a JPM loan sale was not actually a third-party sale, arguing that it was a refinancing or borrowing. The short seller argued that SoFi appears to have a material misstatement of at least $312 million of unrecorded debt, noting that SoFi appears to have borrowed $312 million that is not reported in its financials.

Dolev said his understanding is that this is a sale of a senior loan. He noted that on the third quarter 2024 call, the CFO stated that SoFi sold $312 million of senior secured loans at a par execution.

The analyst said he would argue that as a heavily regulated bank like SoFi is, such a statement requires true sale opinion. The criteria for true sale are discussed in Note 1 in SoFi's 10-Ks from 2023 and 2024, under the Variable Interest Entities header, according to Dolev.

SoFi also discusses the sale criteria in both Note 1 and Note 4 in its 10-K, in both cases under the Transfers of Financial Assets header. In Note 1, SoFi identifies the sale criteria and states that transfers that do not qualify for sale accounting are reported as secured borrowings. In Note 4, SoFi again states that it accounts for transfers as either sales or secured borrowings depending on facts and circumstances.

In the third quarter 2024 10-Q, SoFi noted that the company sold a secured loan at par during the three and nine months ended September 30, 2024, which had an unpaid principal balance and accrued interest of $312.5 million.

On the student loan discount rate, Muddy Waters argued that in 2025, for student loans SoFi used a discount rate of 3.89%, which was 27 basis points below the 10-year U.S. Treasury yield.

Dolev said that since the weighted-average life of SoFi's student loans is around four years, SoFi is reasonably using four-year SOFR and not 10-year Treasury as its benchmark rate.

Regarding charge-off rates, Muddy Waters calculated SoFi's Personal Loan charge-off rate as really being approximately 6.1%, compared to the 2.89% it reports. The short seller argued that SoFi manipulates the rate by disposing of loans days before the charge-off threshold and by seemingly parking defaulted loans off balance sheet.

Dolev noted that management specifically called out 4.4%, compared to 2.89%, of loans excluding $90 million of late-stage delinquent personal loans. The report also points to a 4.7% annualized charge-off rate. Dolev said he sees more evidence for 4.4%, in line with management's comments, using the following calculation: 8.4% Fitch cumulative gross loss multiplied by 0.90 recoveries divided by 1.8 weighted average life of the loan equals around 4.2%.

The analyst said his view is that the short report could potentially be mixing charge-offs from loans on the balance sheet with 30-day delinquencies for loans that were originated by SoFi, subsequently transferred, but for which they have continued involvement through servicing. He said he believes that SoFi does not publish 30-day delinquency data for loans on the balance sheet.

Muddy Waters described SoFi as a financial engineering treadmill, not a healthily growing origination business. The firm alleged that SoFi shareholders face constant dilution so management can achieve bonus targets through loan marks and off-balance-sheet structures that disguise borrowings as revenue.

Mizuho maintained an Outperform rating on SoFi and a $38 price target.