Wednesday, August 24, 2011

Keeping an Eye on PMI

Times must be bad in Walnut Creek, CA if PMI is the subject of these pages.

Longtime readers know that the prospects of the company have never been discussed here before.


PMI's two main MI subisdiaries have been put under regulatory supervision and into runoff, including a purposefully better-capitalized subsidiary meant to enhance operational agility. This was one reason for the recent sell off in the broader MI group as at least a couple peers had put in place similar "good bank, bad bank" contingency plans.

Things will likely get worse before they get better. The company will likely blow through the rest of its statutory capital in the next 4-6 quarters due to continued loses. The Arizona Department of Insurance, PMI's regulator, will likely appoint a receiver and put the company in rehabilitation before that time is up. That would result in PMI's holdco debt becoming immediately due which will force the company into bankruptcy. And that is what we are waiting for.

The Sr. Hold Co debt (dwatch out, PMI has TruPS outstanding) is currently trading in the mid to high 20s which is as low as its ever been. If you give them the chance, they may go lower.

At the risk of underestimating our readership, we expect the sr debt to trade down to the teens if not  single digits at or around the time of bankruptcy. This will be despite holding company resources providing about 30 cents on the dollar of potential recoveries. Those resources include paper money and its equivalents of $68M plus the QBE note due for redemption into paper money in September of $158M (after subtracting the first lien loan due when the note matures.) There may be some value here, Objectivism and Steve Smith notwithstanding.

Smith and the HoldCo board may play the part of Jim Taggart and his cronies before all is said and done; that is, they may smooth a deal with regulators to downstream some last assets for just a little more borrowed time. While Smith is quite an expert on the mortgage market, we'll think this a better investment when Hayward Executive Airport flies in one less Georgian on Sundays (perhaps on the company's dime.) Some type of inglorious shenanigans here wouldn't be surprising.

PMI may be cheap now but it could be much cheaper soon. And with Radian and MGIC both trading at about a toonie a share, the opportunity cost for the unconstrained investor is high. Stay tuned.

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