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HomeValue InvestingMost popular Overhang, Money Shell w/ Optionality

Most popular Overhang, Money Shell w/ Optionality

Many readers will know this case, Altisource Asset Administration (AAMC) is a money shell with roughly $80MM within the financial institution after their solely asset administration consumer, 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 personal fairness (Ares and Pretium) which possible will change into an awesome deal (even after they hiked the supply) for the patrons given how single household leases have traded since.  Buddy of the weblog, Andrew Walker did a superb podcast (and even answered one in all my questions on it) with Thomas Braziel and Jeff Moore pitching AAMC.  They go into a few of the background, notably on the controversial Invoice Erbey, who was previously an government (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 hassle pressured him out of the day-to-day operations.

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

(b)    Every holder, at its possibility, shall have the suitable, in its sole discretion, to require the Company to redeem all of its excellent Sequence 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 Sequence A Most popular Shares on such Redemption Date (every, a “Holder Redemption Discover”) which can 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 Sequence 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 Sequence 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 out there therefor, all, however not lower than all, of the excellent Sequence A Most popular Shares held by such holder at an quantity equal to the Redemption Worth.

The bigger holders did certainly request redemption final 12 months.  However the trick is AAMC has to redeem the complete 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 mix 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 vital holdout is Luxor Capital which is pursuing litigation towards AAMC.

I’ve by no means subscribed to the “most well-liked inventory has no enamel” thesis, right here is the place my views differ (once more, I am usually completely incorrect):

  • Luxor just isn’t anchored in any method to the earlier two settlements, they’re the most important holder (principally 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 scenario, 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 probably be on the hook for the total $150MM down the street or at a minimal will increase the restoration price for Luxor.  I do not see something occurring till Luxor settles, possibly there is a settlement and merger concurrently but it surely feels extremely unlikely that the popular can simply sit on the market till 2044 (for both aspect).  So this can be a recreation of rooster till then, and people conditions can last more than folks wish to imagine (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 in the present day, at this value the thesis appears extra fascinating (principally 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 scenario, clearly the capital construction is the wrong way up at full face for the popular, I am discounting the web money for 2 quarters of money burn, sellers alternative there.

How I am excited about a post-settlement proforma: I am assuming that the Putnam settlement is the most effective case.  Putnam held $81.8MM of the popular inventory and obtained 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’d 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 as if an inexpensive low cost, for those who did a aim 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 invest on a deal goal, the podcast interview I referenced does a little bit of that for those who’re , however AAMC included within the beneath of their Q3 earnings launch:

Mr. Thomas Ok. McCarthy, Interim Chief Govt Officer, said, “The Firm’s consideration and focus continues to be the analysis and pursuit of sure enterprise alternatives and acquisition targets wherein 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.

Through the third quarter, the Firm additionally engaged the companies of each an funding financial institution, Cowen and Firm, LLC, and the legislation agency, Norton Rose Fulbright, LLP, to help us in figuring out and reviewing potential acquisition and merger alternatives. Whereas no last choice 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 identical time (in the event that they take shares, they might take part within the upside, eradicating the litigation overhang will possible 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 in the present day’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, might be difficult to get a deal performed and there might be a frustratingly lengthy stretch with no information.

Disclosure: I personal shares of AAMC 



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