Sunday, November 20, 2022
HomeValue InvestingMost popular Overhang, Money Shell w/ Optionality

Most popular Overhang, Money Shell w/ Optionality

Many readers will know this example, Altisource Asset Administration (AAMC) is a money shell with roughly $80MM within the financial institution after their solely asset administration shopper, Entrance Yard Residential (RESI), terminated their exterior administration settlement with AAMC leading to RESI being internalized (AAMC was a 2012 spin, was fashionable on the time to spin the administration firm).  Entrance Yard later bought itself to non-public fairness (Ares and Pretium) which doubtless will turn into an ideal deal (even after they hiked the provide) for the consumers given how single household leases have traded since.  Good friend of the weblog, Andrew Walker did a wonderful podcast (and even answered one in all my questions on it) with Thomas Braziel and Jeff Moore pitching AAMC.  They go into a number of the background, significantly on the controversial Invoice Erbey, who was previously an govt (again within the early-to-mid 2010s, Erbey ran Ocwen and some satellite tv for pc entities like AAMC), however now could be *simply* a 39% shareholder in AAMC after authorized bother pressured him out of the day-to-day operations.

Lengthy story quick, Altisource has a big most popular overhang (initially $250MM, at present $150MM after two exchanges), the inventory beforehand traded north of $1000/share (now for $17.90) and issued a zero coupon convertible most popular inventory with a strike value of $1250.  The money from the convertible most popular was used to buyback shares, presumably to spice up the shares above the strike value making everybody completely satisfied, however as a substitute the inventory collapsed.  Now that piece of paper is hopelessly out of the cash, it’s mainly a zero coupon bond with a compulsory redemption date of three/15/44.  Nevertheless beginning in March 2020, each 5 years the popular holders can request a full redemption:

(b)    Every holder, at its possibility, shall have the fitting, in its sole discretion, to require the Company to redeem all of its excellent Collection A Most popular Shares by offering written discover to the Company inside fifteen (15) Enterprise Days (however no more than thirty (30) Enterprise Days) previous to a Redemption Date of its intent to trigger the Company to redeem such holder’s Collection A Most popular Shares on such Redemption Date (every, a “Holder Redemption Discover”) which is able to specify (i) the identify of the holder delivering such Holder Redemption Discover and (ii) that such holder is exercising its possibility, pursuant to this Part 5, to require the Company to redeem shares of Collection A Most popular Shares held by such holder. The Company shall, inside fifteen (15) Enterprise Days of receipt of such Holder Redemption Discover, ship to the holder exercising its rights to require redemption of the Collection A Most popular Shares a discover specifying the date set for such redemption, which date shall be not more than thirty (30) Enterprise Days after the Holder Redemption Discover (the “Holder Redemption Date“). The Company shall redeem for money on the Holder Redemption Date, out of funds legally accessible therefor, all, however not lower than all, of the excellent Collection A Most popular Shares held by such holder at an quantity equal to the Redemption Value.

The bigger holders did certainly request redemption final yr.  However the trick is AAMC has to redeem your entire class directly, and clearly they can not redeem the $150MM excellent with solely $80MM in internet money.  The popular inventory is intently held, two holders (Putnam and Wellington) have settled with AAMC and exchanged for both a mixture of money and inventory within the case of Putnam or simply money within the case of Wellington.  Each labored out to roughly 11-12 cents on the greenback.   The remaining important holdout is Luxor Capital which is pursuing litigation in opposition to AAMC.

I’ve by no means subscribed to the “most popular inventory has no enamel” thesis, right here is the place my views differ (once more, I am typically completely improper):

  • Luxor just isn’t anchored in any option to the earlier two settlements, they’re the biggest holder (mainly the one remaining holder) of the popular inventory and nonetheless have leverage.  I am a structured finance man, they’re nearly the “controlling class” on this state of affairs, with out them the overhang is not resolved.  Moreover, Putnam included a “most favored nation” clause of their settlement which successfully hitches their settlement to Luxor, it will get Putnam out of the lawsuit but additionally permits them to retain the optionality of a greater deal.
  • Altisource will not threat consummating a brand new enterprise mixture/merger earlier than the popular inventory overhang is resolved.  If the deal is profitable, then AAMC might doubtlessly be on the hook for the complete $150MM down the street or at a minimal will increase the restoration charge for Luxor.  I do not see something occurring till Luxor settles, possibly there is a settlement and merger concurrently nevertheless it feels extremely unlikely that the popular can simply sit on the market till 2044 (for both aspect).  So it is a sport of hen till then, and people conditions can last more than individuals wish to consider (I might have thought RHE would have settled by now).

However the value has fallen significantly within the final a number of weeks to $17.90 at the moment, at this value the thesis appears extra fascinating (mainly again to the place it was earlier than Wellington settled) and permits some margin of security within the circumstance that Luxor strikes a considerably higher deal than both Putnam or Wellington did.

This is the present state of affairs, clearly the capital construction is the wrong way up at full face for the popular, I am discounting the online money for 2 quarters of money burn, sellers selection there.

How I am excited about a post-settlement proforma: I am assuming that the Putnam settlement is the very best case.  Putnam held $81.8MM of the popular inventory and acquired 288,283 shares of inventory and $2.863MM in money (break up in two funds), if we utilized that ratio to the remaining $150MM excellent, I get a couple of $25 NAV.

But when Luxor was going to accept the Putnam deal, they might have already, so making use of a a number of to that, as an instance they negotiate a 25% or 50% higher deal than Putnam, I get an NAV of $23.28 and $21.50 respectively.  Towards a $17.90 inventory, that looks like an inexpensive low cost, if you happen to did a objective search on the multiplier to get to the present value, Luxor would wish to strike a deal greater than 100% higher than Putnam (additionally contains the incremental profit to Putnam for MFN clause) to get to the present share value.

I am not going to take a position on a deal goal, the podcast interview I referenced does a little bit of that if you happen to’re , however AAMC included within the beneath of their Q3 earnings launch:

Mr. Thomas Okay. McCarthy, Interim Chief Government Officer, said, “The Firm’s consideration and focus continues to be the analysis and pursuit of sure enterprise alternatives and acquisition targets during which to focus the Firm’s assets and improve shareholder worth. The Firm has liquidated its fairness holdings and is now in an all-cash place in preparation of an acquisition occasion.

Throughout the third quarter, the Firm additionally engaged the providers of each an funding financial institution, Cowen and Firm, LLC, and the regulation agency, Norton Rose Fulbright, LLP, to help us in figuring out and reviewing potential acquisition and merger alternatives. Whereas no last resolution has been made, the Firm is in discussions with a number of potential acquisition or merger targets together with cryptocurrency and brokerage associated companies”.

The corporate might be mid-process, I am guessing {that a} settlement with Luxor is introduced on the similar time (in the event that they take shares, they might take part within the upside, eradicating the litigation overhang will doubtless trigger the inventory to bounce considerably), plus there are some “meme ready” buzzwords in there and a comparatively low float, I agree that one thing loopy might occur with this one and at at the moment’s value you are not paying a lot, if something, for that optionality.  However there are lots of of SPACs additionally competing for comparable buzzy offers, so who is aware of, could possibly be difficult to get a deal finished and there could possibly be a frustratingly lengthy stretch with no information.

Disclosure: I personal shares of AAMC 



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