A few updates on thoughts on Syncora on areas that I've been emailed on.
Banks including JPM persistently acted like they were (or are) in the land of smiles on their exposure to monoline put backs, right up to settling in the realm of 100% of liabilities in the case of JPM/Syncora. In fact as far as I can tell, JPM has now settled for over 100% of Syncora's gross economic (net of remediation) losses in the relevant deals (JPMF 2007HE1, SACO I Trust 2007-1, and BSSP 2007-r5). Syncora likely had extra leverage given that losses attributable to uninsured CF notes are likely only going to have a shot of recovery through Syncora litigation. All in, as they say in the land of smiles, kapun kraup Mr. Diamond.
I'm not privy to how the 2010 remediation and subsequent deals contracted recovery claims. Without that knowledge I can't say it is impossible that uninsured CF holders won't make a valid claim on part of this settlement. I'm not expecting that though.
Elephants aren't only disappearing in Thailand. I am expecting Syncora will ultimately get another bump in surplus of 250M-400M above current (very low, maybe 25-50M) recovery estimates on their Lehman Greenpoint claim (JPMF 2006 HE1 ax). But that is the only big boy source of upside to Syncora's insured book, which I think has the more problem credits relative to capital than Assured, MBIA, Ambac, Radian Asset, or American Overseas.
In the past, I have described ABV without new biz as analogous to maturity value of a zero coupon, if installment premiums are not included and roughly offset op ex. So that ABV is basically net assets - net ultimate losses which you can get too via adjusting a securities-only BS or working off the statutory statements. This is just one way to think about it and it is not a conservative one because (among other things) the yield on liabilities exceeds the yield on assets. Such an ABV number per share for Syncora is very likely closer to (including under) ten than 20 with a higher risk of being 0 than say Ambac's risk of being worth less than 16.67 in 2023. But there is definitely a wider distribution of possible outcomes both ways for Syncora. Combine that with low liquidity and you've got one spicy dish for sure.
To say the same thing in a new way Syncora could end happier, but Ambac is the better bet for a happy ending.
Showing posts with label Syncora. Show all posts
Showing posts with label Syncora. Show all posts
Friday, March 7, 2014
Wednesday, February 26, 2014
G'day Bond Insurers
There's nothing surprising in Syncora's announcement of a settlement with JP Morgan. The only "new new" to us is the timing, and while that was highly uncertain it can't be called a surprise. As predicted, the stocks are better indicators of news than headlines. Ambac's stock is telling us that JPM's most recent dose of reality in it's litigation reserves may filter through to the their settlement discussions as well.
Syncora is an easier settlement for the banks than some other FGs because of its size, other trouble spots in its portfolio, and the 2009 MTA restructuring which resulted in about half SYCRF common and all of newly created preference shares being issued to structured finance counterparties. In many cases these were the same banks that were across the table in R&W litigation talks. These all provide opportunities to disguise the actual value of the R&W settlement.
Being a smaller insurer also made it easier to compile the deal level loss data on Syncora. I think I've published this before but regardless you can check it out here. Syncora ought to have targeted full recovery of actual and expected paid claims and we would be surprised if they took anything less than 85%. Not counting losses neutralized by previous restructuring, these loses were definitely over 210M and very likely over 225M. (Note this excludes the BSSP 2007 R5 deal because it's been a while since we've reviewed the indenture in this more exotic securitization trust.) Given the size of Syncora's current R&W recovery benefit and it's claims against Greenpoint, Syncora's economic benefit from settlement is very very likely more than 75M above accounting benefit marks and probably closer to double that.
Whether or not this will be clear in Syncora's financial statements will be determined by the structure of the settlement. For example the full cash value that JPM paid could have been reduced by, trading Syncora corporate securities or insured securities that JPM likely carried far below market value and farther below par. JPM could also have indemnified Syncora on other exposures.
Ambac continues to be a harder pill to swallow for its R&W counterparties, mostly because of the dolars involved. However, the results and methods we used in this spreadsheet (originally published in this Sept 2012 post) have been confirmed by Bank of America's new disclosure of "over $2.5B" in R&W of Ambac loss compensation claims. Any overestimation of claims in the spreadsheet are most likely compensated for in there being no accounting for other lawsuits and non-litigious recoveries. Furthermore given Ambac's stated intent and position of strength in its breach of contract cases and preliminary success in its fraud cases, the company will likely experience greater than 100% recoveries if only due to interest and legal cost recoveries and not punitive damages for fraud.
The legacy securities of the DISCs that we recommended buying (and bought) at a rounding error from zero are now at the equivalent of a DISC at 40. And while it's a fair time for a victory lap, Ambac common and especially the warrants still seems like a compelling long-term investment. The warrants offer similar upside to an economic book value as Syncora common, with a higher quality portfolio, better disclosures, and management seemingly more intent on full recoveries of R&W (and maybe even fraud) claims. Both are compelling.
As an aside it's worth noting that while the surplus notes are now trading near par, the perpetual preferred are now trading at 33 by way of Alliance Semiconductor common stock (ALSC, thank you Stephen Pendergast). The Surplus notes are a senior claim and will eventually have cumulative fixed interest (versus non-cumulative non-fixed). I can't figure out if this is a screaming bargain or a trap. Consider for instance that American Overseas (formerly RamRe) is playing hardball with preferred security holders, placing $3 million in a trust to redeem par value of many times that of preferred securities at maturity in 2066. When in doubt, stay without.
That's all for now.
Syncora is an easier settlement for the banks than some other FGs because of its size, other trouble spots in its portfolio, and the 2009 MTA restructuring which resulted in about half SYCRF common and all of newly created preference shares being issued to structured finance counterparties. In many cases these were the same banks that were across the table in R&W litigation talks. These all provide opportunities to disguise the actual value of the R&W settlement.
Being a smaller insurer also made it easier to compile the deal level loss data on Syncora. I think I've published this before but regardless you can check it out here. Syncora ought to have targeted full recovery of actual and expected paid claims and we would be surprised if they took anything less than 85%. Not counting losses neutralized by previous restructuring, these loses were definitely over 210M and very likely over 225M. (Note this excludes the BSSP 2007 R5 deal because it's been a while since we've reviewed the indenture in this more exotic securitization trust.) Given the size of Syncora's current R&W recovery benefit and it's claims against Greenpoint, Syncora's economic benefit from settlement is very very likely more than 75M above accounting benefit marks and probably closer to double that.
Whether or not this will be clear in Syncora's financial statements will be determined by the structure of the settlement. For example the full cash value that JPM paid could have been reduced by, trading Syncora corporate securities or insured securities that JPM likely carried far below market value and farther below par. JPM could also have indemnified Syncora on other exposures.
Ambac continues to be a harder pill to swallow for its R&W counterparties, mostly because of the dolars involved. However, the results and methods we used in this spreadsheet (originally published in this Sept 2012 post) have been confirmed by Bank of America's new disclosure of "over $2.5B" in R&W of Ambac loss compensation claims. Any overestimation of claims in the spreadsheet are most likely compensated for in there being no accounting for other lawsuits and non-litigious recoveries. Furthermore given Ambac's stated intent and position of strength in its breach of contract cases and preliminary success in its fraud cases, the company will likely experience greater than 100% recoveries if only due to interest and legal cost recoveries and not punitive damages for fraud.
The legacy securities of the DISCs that we recommended buying (and bought) at a rounding error from zero are now at the equivalent of a DISC at 40. And while it's a fair time for a victory lap, Ambac common and especially the warrants still seems like a compelling long-term investment. The warrants offer similar upside to an economic book value as Syncora common, with a higher quality portfolio, better disclosures, and management seemingly more intent on full recoveries of R&W (and maybe even fraud) claims. Both are compelling.
As an aside it's worth noting that while the surplus notes are now trading near par, the perpetual preferred are now trading at 33 by way of Alliance Semiconductor common stock (ALSC, thank you Stephen Pendergast). The Surplus notes are a senior claim and will eventually have cumulative fixed interest (versus non-cumulative non-fixed). I can't figure out if this is a screaming bargain or a trap. Consider for instance that American Overseas (formerly RamRe) is playing hardball with preferred security holders, placing $3 million in a trust to redeem par value of many times that of preferred securities at maturity in 2066. When in doubt, stay without.
That's all for now.
Monday, October 14, 2013
Quick Thoughts on Syncora and Ambac
As expected, Syncora reported its worst quarter since the 2009 MTA last quarter (as measured by change in the Dragon's ABV metric.) If you lightened up in the mid 60s as we suggested, getting back in today at the .52 offer will lock in a good trade. While that trade has been working out, Puerto Rico isn't about to default and JP Morgan is confronting RMBS litigation reality (among other issues) in its litigation reserves. If you made the same trade on Ambac, banking profits there might be wise too. The patient investor will buy and snooze. No need to check headlines, the stocks will tell you when a deal is wrapped up.
Saturday, August 10, 2013
Thoughts from the Back Row
1. Radian's delinquent inventory is now less than half it's peak level. And there are clandestine cures in the current number. Recently we've been thinking a lot about the rescission and denials that never were: the claims that were never reported because the loan files were never found, never delivered to the servicer, and never compiled at all. Eventually, the banks realized robosigning wasn't going to work for them.
At the same time, Radian is writing business at a pace that will likely add close to half a billion in value over the life of the business. In a year, today's headlines about the effect of future capital requirements on Radian will prove to be a fart in the wind. However, a correction would be healthy and could be imminent.
2. Syncora should be reporting it's worst quarter since reorganization. There seems to be a hard bid in the 0.6s. It may be wise to lighten up before an ugly quarter, but we wonder if the bid is JP Morgan or Greenpoint and if it cares how much money the company loses. Meanwhile, Syncora wrapped Detroit COPs trade near 48 for a current yield (variable) of 1% or less. If the paper were 20, 60% of the loss is gone on any repurchased paper. It seems pretty clear where that bid is coming from.
3. If you wiggle the numbers around (student loan losses were higher but surplus note repurchases more than offset that), the most recent report on the rehabilitation of Ambac's segregated account looks better than Scenario One. Scenario One was a projection of Ambac's performance under a base case scenario which was made at the commencement of rehabilitation. Surplus was projected to exceed outstanding notes by $4B in 2020, with another $1.2B in qualified statutory capital. That now looks more likely to happen has soon as the company wraps up its R&W claims, especially considering that reserves on repurchased wrapped paper are not released, and there is a lot of it.
4. Obama's support for the principles of the Corker-Warner bill makes a fall or winter vote a real possibility. It won't rally the house republicans around those principles, but it will pin them into being the only opposition to a bill that rids the nation of the ugly legacy of Fannie and Freddie. That's a brand that neither Hensarling nor Boehner is shooting for.
At the same time, Radian is writing business at a pace that will likely add close to half a billion in value over the life of the business. In a year, today's headlines about the effect of future capital requirements on Radian will prove to be a fart in the wind. However, a correction would be healthy and could be imminent.
2. Syncora should be reporting it's worst quarter since reorganization. There seems to be a hard bid in the 0.6s. It may be wise to lighten up before an ugly quarter, but we wonder if the bid is JP Morgan or Greenpoint and if it cares how much money the company loses. Meanwhile, Syncora wrapped Detroit COPs trade near 48 for a current yield (variable) of 1% or less. If the paper were 20, 60% of the loss is gone on any repurchased paper. It seems pretty clear where that bid is coming from.
3. If you wiggle the numbers around (student loan losses were higher but surplus note repurchases more than offset that), the most recent report on the rehabilitation of Ambac's segregated account looks better than Scenario One. Scenario One was a projection of Ambac's performance under a base case scenario which was made at the commencement of rehabilitation. Surplus was projected to exceed outstanding notes by $4B in 2020, with another $1.2B in qualified statutory capital. That now looks more likely to happen has soon as the company wraps up its R&W claims, especially considering that reserves on repurchased wrapped paper are not released, and there is a lot of it.
4. Obama's support for the principles of the Corker-Warner bill makes a fall or winter vote a real possibility. It won't rally the house republicans around those principles, but it will pin them into being the only opposition to a bill that rids the nation of the ugly legacy of Fannie and Freddie. That's a brand that neither Hensarling nor Boehner is shooting for.
Sunday, June 9, 2013
JeffCo Addendum for Syncora
Within the Plan Support Agreements alone, Syncora looks to be taking a loss of $60M-90M for a net reserve release of $40M-$70M based on our read of the deal. This seems like a reasonable settlement as it would be better than the terms of Syncora's 2010 commutation of JeffCo exposure, and rightfully so since this agreement releases J.P. Morgan from all related litigation.
Still there is an outside chance of there being an agreement outside of the PSAs, but we don't think so. On the upside this would mean further compensation for releasing JPM from litigation. On the downside it would mean having recently commuted exposure for a substantial sum prior to this deal.
Indeed, we had previously thought that the April commutation contained Jefferson County exposure as commutation payments are typically the sum of net unearned premiums and loss reserves. About $10M of the $91.5M April payment is unearned premiums and only Jeff Co reserves could account for that type of payment. It now seems to us more likely that this $80M excess over unearned premiums was in compensation for some insured or underlying asset. This means most of the bump to surplus from this deal is coming from contingency reserves. Contingency reserves would be considered cookie jar accounting shenanigans under GAAP, so the April commutation appears to us to be a non-event.
So there it is. The deal leads to $40M-$70M reserve release unless we are wrong on there being an additional agreement.
Thursday, August 16, 2012
And They're Off!
Sometimes a man has to try not to shit himself. Normally looking at numbers doesn't make that so hard. Anyway, let's look at Syncora's big quarter...
Surplus increase from Q1: $321M
Liquidation Value of Sr. Interests Acquired: ~$115M ($105M par)
Gain to be recognized next quarter: $10M
Total benefit to Hold Co common: $445M
Now lets plug the quarter's numbers into a calculation of Adjusted Book Value. This has not been a positive number in the past:
(SGI Surplus) + (SGI & SCA Contingency Reserves) + (SGI & SCA Unearned Premium) - (Surplus Notes at Liquidation Value) - (Preferred Stock at Par) =
$514M + (100+234M=) 334M + (233M+332M=) $565M - $640M - $390M +$10M = $393M
We believe this quarters numbers include the full excess of the cash portion of the countrywide settlements above booked recoveries. This "Type I - Subesquent Event" does not appear to have influenced expected recoveries on non-BofA repurchase requests. As evidence we point out the reduction in outstanding repurchase requests from $1.6B to $0.9B - presumably from the countrywide settlement - while the booked reserve adjustments fell to a piddly $95.5M. In fact, the reserve adjustments fell from $233M or 59% compared to the 44% fall in outstanding requests.
These remaining outstanding requests are now primarily with GreenPoint (Capital One) and EMC (JP Morgan). We believe there to be significant upside to these reserves, though probably not in the same recovery-to-request ratio as the BofA deal (which would imply a final cash recovery of $482M.)
But lets get back to the numbers that were published. ABV means nothing if a company loses it all before it is accessible to shareholders. To that end, we note combined SGI and SCA statutory income statement numbers:
Q2 2012 YTD investment income minus non-loss expenses = $8.5M or $17M annualized
Surplus note accretion will be about $36M in 2012 if all remain outstanding.
Combined SGI & SCA 2012 installment premiums will be roughly $50M.
Pre loss earnings without unearned premium release or accretion would then be $17M-$36M+50M= $31M.
This tells us that our ABV number would grow by $31M per year before considering loss developments and extraordinary items. This is without considering the effect of increasing invested assets by $375M (and thereby investment income). Better yet, this could translate into an increase in invested assets of $200M and retiring the short term surplus notes at outstanding liquidation value and accreted interest. There may of course be the opportunity to tender the notes below that value. This is no stretch of the imagination considering that the NYDFS apparently allowed Syncora to trade some asset for surplus notes, preferred stock, and even Hold Co common.
In prior quarters, we described Syncora common stock as a an at the money or near the money call option. It now looks solidly in the money. Said in terms of loss provisions, there is now value to common that can be lost rather than recoveries necessary for value to be realized. Meanwhile, Syncora's loss cycle has turned. We believe that there are significant recoveries to be realized from not just GreenPoint and EMC but also Jeff Co sewer. The basis for that is the ultimate strength of the rate covenant and net revenue pledge - upholding either one would be enough for full (FULL) recovery; Q2 Jeff Co loss reserves were $132M. The real threats to that recovery are Syncora's ability to see it through rather than the security of the credit. There is (a lot) more to that story and that is for another time (... in part on this page and this page (but not really this page.))
Surplus increase from Q1: $321M
Liquidation Value of Sr. Interests Acquired: ~$115M ($105M par)
Gain to be recognized next quarter: $10M
Total benefit to Hold Co common: $445M
Now lets plug the quarter's numbers into a calculation of Adjusted Book Value. This has not been a positive number in the past:
(SGI Surplus) + (SGI & SCA Contingency Reserves) + (SGI & SCA Unearned Premium) - (Surplus Notes at Liquidation Value) - (Preferred Stock at Par) =
$514M + (100+234M=) 334M + (233M+332M=) $565M - $640M - $390M +$10M = $393M
We believe this quarters numbers include the full excess of the cash portion of the countrywide settlements above booked recoveries. This "Type I - Subesquent Event" does not appear to have influenced expected recoveries on non-BofA repurchase requests. As evidence we point out the reduction in outstanding repurchase requests from $1.6B to $0.9B - presumably from the countrywide settlement - while the booked reserve adjustments fell to a piddly $95.5M. In fact, the reserve adjustments fell from $233M or 59% compared to the 44% fall in outstanding requests.
These remaining outstanding requests are now primarily with GreenPoint (Capital One) and EMC (JP Morgan). We believe there to be significant upside to these reserves, though probably not in the same recovery-to-request ratio as the BofA deal (which would imply a final cash recovery of $482M.)
But lets get back to the numbers that were published. ABV means nothing if a company loses it all before it is accessible to shareholders. To that end, we note combined SGI and SCA statutory income statement numbers:
Q2 2012 YTD investment income minus non-loss expenses = $8.5M or $17M annualized
Surplus note accretion will be about $36M in 2012 if all remain outstanding.
Combined SGI & SCA 2012 installment premiums will be roughly $50M.
Pre loss earnings without unearned premium release or accretion would then be $17M-$36M+50M= $31M.
This tells us that our ABV number would grow by $31M per year before considering loss developments and extraordinary items. This is without considering the effect of increasing invested assets by $375M (and thereby investment income). Better yet, this could translate into an increase in invested assets of $200M and retiring the short term surplus notes at outstanding liquidation value and accreted interest. There may of course be the opportunity to tender the notes below that value. This is no stretch of the imagination considering that the NYDFS apparently allowed Syncora to trade some asset for surplus notes, preferred stock, and even Hold Co common.
In prior quarters, we described Syncora common stock as a an at the money or near the money call option. It now looks solidly in the money. Said in terms of loss provisions, there is now value to common that can be lost rather than recoveries necessary for value to be realized. Meanwhile, Syncora's loss cycle has turned. We believe that there are significant recoveries to be realized from not just GreenPoint and EMC but also Jeff Co sewer. The basis for that is the ultimate strength of the rate covenant and net revenue pledge - upholding either one would be enough for full (FULL) recovery; Q2 Jeff Co loss reserves were $132M. The real threats to that recovery are Syncora's ability to see it through rather than the security of the credit. There is (a lot) more to that story and that is for another time (... in part on this page and this page (but not really this page.))
Saturday, August 11, 2012
Ah Yes, Syncora
Many particulars and more importantly the entire statutory financial impact of Syncora's settlement with BofA should be evident in the next week when the company reports statutory results for Syncora Guaranty (SGI).
Based on recent RMBS recoveries at SGI, we expect that the announced $325M cash portion of the deal will result in more than $280M ending up with SGI while the rest flows to reinsurers and uninsured certificate holders. This number may overestimate the amount going to certificate holders due to the asset exchange, the still largely undisclosed portion of the deal.
Regardless, the cash numbers are impressive on their own and fall at the top of our previous range discussed here. We have continued to play with our spreadsheets for our own investments even while we were uninspired to write. Syncora's numbers haven't been changed for Q1 2012 but you can still get an idea of what is going on here.
All in, our rough estimate is for the cash portion of the deal to raise statutory surplus by $125M to $175M. Expected put-back recoveries from other counterparties may increase as well. There is no way to gauge the effects of the other remediation mentioned in Syncora's July 17th press release.
We speculate that the asset exchange portion of the deal will have a partially offsetting effect on surplus as surplus supporting assets were exchanged for interests that never reduced surplus. Syncora likely exchanged substantially all of their BofA insurance cash flow certificate and BofA uninsured cash flow certificates for some or all of BofA's interests in Syncora companies. This is what would really make this an earth-shattering, immediate-decimal-place-shifting event for the stock.
At the time of the 2009 MTA agreements, Bank of America and Countrywide would have been small to absent counterparties in the agreements on their own. The 2009 MTA agreements focused on CDS which largely was underwritten on CDOs, not the RMBS securities that the present settlement focuses on. However, BofA had already acquired the big player in CDOs, Merrill Lynch, whose salesmen crisscrossed the country in 2007 getting insurers to "derisk" their CDO warehouses.
Ken Lewis and John Thain shook hands in the fall of 2008, only to learn that two rocks tied together still sink. But BofA's acquisition of ML may be what brings Syncora to the surface in 2012. Based solely on historic market share, ML could easily be the holder of 1/4 or more of the roughly $900M (liquidation value - doesn't include common stock) of previously outstanding 2009 MTA securities.
While none of the securities involved in the asset exchange have any effect on statutory surplus and all are subordinate to claims payments, we view it as positive that per the press release Hold Co securities were included in the asset exchange. This could only be common stock, 40% of which was included in the 2009 MTA. We find it unlikely that Hold Co securities would have been included if all SGI securities were not also included.
This asset exchange portion of the settlement also has positive implication for Ambac debt holders as the establishment of its segregated account has a similar legacy as Syncora's 2009 MTA.
Next week's statutory statement should bring a pretty good idea of the impacts of the asset exchange. In the meantime, there were about 200k shares offered at 0.34 late Friday. We might chip away at those next week.
Based on recent RMBS recoveries at SGI, we expect that the announced $325M cash portion of the deal will result in more than $280M ending up with SGI while the rest flows to reinsurers and uninsured certificate holders. This number may overestimate the amount going to certificate holders due to the asset exchange, the still largely undisclosed portion of the deal.
Regardless, the cash numbers are impressive on their own and fall at the top of our previous range discussed here. We have continued to play with our spreadsheets for our own investments even while we were uninspired to write. Syncora's numbers haven't been changed for Q1 2012 but you can still get an idea of what is going on here.
All in, our rough estimate is for the cash portion of the deal to raise statutory surplus by $125M to $175M. Expected put-back recoveries from other counterparties may increase as well. There is no way to gauge the effects of the other remediation mentioned in Syncora's July 17th press release.
We speculate that the asset exchange portion of the deal will have a partially offsetting effect on surplus as surplus supporting assets were exchanged for interests that never reduced surplus. Syncora likely exchanged substantially all of their BofA insurance cash flow certificate and BofA uninsured cash flow certificates for some or all of BofA's interests in Syncora companies. This is what would really make this an earth-shattering, immediate-decimal-place-shifting event for the stock.
At the time of the 2009 MTA agreements, Bank of America and Countrywide would have been small to absent counterparties in the agreements on their own. The 2009 MTA agreements focused on CDS which largely was underwritten on CDOs, not the RMBS securities that the present settlement focuses on. However, BofA had already acquired the big player in CDOs, Merrill Lynch, whose salesmen crisscrossed the country in 2007 getting insurers to "derisk" their CDO warehouses.
Ken Lewis and John Thain shook hands in the fall of 2008, only to learn that two rocks tied together still sink. But BofA's acquisition of ML may be what brings Syncora to the surface in 2012. Based solely on historic market share, ML could easily be the holder of 1/4 or more of the roughly $900M (liquidation value - doesn't include common stock) of previously outstanding 2009 MTA securities.
While none of the securities involved in the asset exchange have any effect on statutory surplus and all are subordinate to claims payments, we view it as positive that per the press release Hold Co securities were included in the asset exchange. This could only be common stock, 40% of which was included in the 2009 MTA. We find it unlikely that Hold Co securities would have been included if all SGI securities were not also included.
This asset exchange portion of the settlement also has positive implication for Ambac debt holders as the establishment of its segregated account has a similar legacy as Syncora's 2009 MTA.
Next week's statutory statement should bring a pretty good idea of the impacts of the asset exchange. In the meantime, there were about 200k shares offered at 0.34 late Friday. We might chip away at those next week.
Friday, June 24, 2011
More Work on Syncora
Since our last look at the company, Syncora published the hold co annual report for the period ending 2010. This was the first financial statement release containing either GAAP or consolidated numbers since the 2009 release was published on 3/31/10. Better late than never.
The information is exceptionally useful. Despite management warnings to the contrary, this information suggests that Syncora common may be an in-the-money call option rather than the at-the-money option we considered it earlier.
Here's a spreadsheet we've been working on https://spreadsheets.google.com/spreadsheet/ccc?key=0AlFMaAd3v9o0dHhxN1BqSHdUQWZmdm85WXJPcWlPYkE&hl=en_GB#gid=3.
To start, look at Syncora's operating and adjusted common equity book values. With all of the standard adjustments for FAS 163, FAS 46, and unearned premiums, we added the full liquidation value of preference shares and surplus notes. This is somewhat economic as Syncora will likely not be allowed to repurchase even surplus notes until its financial profile has noticeably improved and holders demand lower discounts. Finally, we made adjustments to Syncora's loss reserves and related balance sheet items to fully reflect the economics of the Insurance Cash Flow Certificates (Certificates). The accounting involved is unique and a bit murky so we made two stabs at it.
The first method took a comment in the notes in isolation referring to the accrual of a deferred gain on Certificates in the amount of $421M. We simply added it. But since the certificates are showing up in several accounts, a second method replaces the GAAP loss reserve (and reinsurance assets, including Certificates) with statutory loss reserves. This gets us around another problem: no credit impairment is given for the FAS 163 accounts but statutory reserves account for those expected payments. OBV is ($35M) and $60M in method 1 and 2 respectively. ABV is $742M and $847M respectively.
ABV of a company in runoff is akin to maturity value of a zero coupon bond if interest income and premium accretion offset operating expenses and net loss developments including accretion. Investment income including JeffCo Sewer warrants was approximately $66M in 2010 while operating expenses including surplus notes but not (unpaid non-cumulative) preferred dividends was approximately $86M. This indicates a zero coupon treatment would be too generous but that residual value will flow to common absent excessive adverse loss developments.
Finally, we created a securities only balance sheet with assets at fair value and liabilities at full liquidation value that shows net assets of over $200M and more investment income than interest costs.
Then there is what we did not do. We gave absolutely no value to the company's real option of eventually repurchasing liabilities. We also have given no credit to Syncora continuing to manufacture Certificates. And we have left the upside we see in repurchases and JeffCo Sewer untouched.
As a quick and final note, we saw some suggestions recently that the county's withholding of $75M from the sewer system as a final step towards bankruptcy and grave concern to sewer debt as rather funny. The reason is that they are both part of the same municipal corporation, which means it would all be quite schizophrenic. Meanwhile, this $75M will effect the timing of some repayment, but the sewer system receiver will see the bonds and warrants paid regardless - bankruptcy or not.
Correction 6/24: Added "a zero coupon bond if" to first sentence of fourth to last paragraph.
The information is exceptionally useful. Despite management warnings to the contrary, this information suggests that Syncora common may be an in-the-money call option rather than the at-the-money option we considered it earlier.
Here's a spreadsheet we've been working on https://spreadsheets.google.com/spreadsheet/ccc?key=0AlFMaAd3v9o0dHhxN1BqSHdUQWZmdm85WXJPcWlPYkE&hl=en_GB#gid=3.
To start, look at Syncora's operating and adjusted common equity book values. With all of the standard adjustments for FAS 163, FAS 46, and unearned premiums, we added the full liquidation value of preference shares and surplus notes. This is somewhat economic as Syncora will likely not be allowed to repurchase even surplus notes until its financial profile has noticeably improved and holders demand lower discounts. Finally, we made adjustments to Syncora's loss reserves and related balance sheet items to fully reflect the economics of the Insurance Cash Flow Certificates (Certificates). The accounting involved is unique and a bit murky so we made two stabs at it.
The first method took a comment in the notes in isolation referring to the accrual of a deferred gain on Certificates in the amount of $421M. We simply added it. But since the certificates are showing up in several accounts, a second method replaces the GAAP loss reserve (and reinsurance assets, including Certificates) with statutory loss reserves. This gets us around another problem: no credit impairment is given for the FAS 163 accounts but statutory reserves account for those expected payments. OBV is ($35M) and $60M in method 1 and 2 respectively. ABV is $742M and $847M respectively.
ABV of a company in runoff is akin to maturity value of a zero coupon bond if interest income and premium accretion offset operating expenses and net loss developments including accretion. Investment income including JeffCo Sewer warrants was approximately $66M in 2010 while operating expenses including surplus notes but not (unpaid non-cumulative) preferred dividends was approximately $86M. This indicates a zero coupon treatment would be too generous but that residual value will flow to common absent excessive adverse loss developments.
Finally, we created a securities only balance sheet with assets at fair value and liabilities at full liquidation value that shows net assets of over $200M and more investment income than interest costs.
Then there is what we did not do. We gave absolutely no value to the company's real option of eventually repurchasing liabilities. We also have given no credit to Syncora continuing to manufacture Certificates. And we have left the upside we see in repurchases and JeffCo Sewer untouched.
As a quick and final note, we saw some suggestions recently that the county's withholding of $75M from the sewer system as a final step towards bankruptcy and grave concern to sewer debt as rather funny. The reason is that they are both part of the same municipal corporation, which means it would all be quite schizophrenic. Meanwhile, this $75M will effect the timing of some repayment, but the sewer system receiver will see the bonds and warrants paid regardless - bankruptcy or not.
Correction 6/24: Added "a zero coupon bond if" to first sentence of fourth to last paragraph.
Wednesday, May 25, 2011
Can Syncora Clear That Hurdle?
The multiple viewpoints of pluralism bring perspective to the sovereign. Or is pluralism the myopic, schizophrenic in-law in the family of political economy?
If the mention of a schizophrenic in-law brings one or several real faces to mind, I recommend reading more statutory financial reports. Other than averting injury to your non-blood-related kin, this will offer you an opportunity to reconsider a security that was written off for having suffered an intense permanent impairment of capital.
For background, Syncora struck a deal with its most toxic CDS counterparties with the help of former parent and one-time namesake XL Group to tear up contracts. This deal - the 2008 Master Transaction Agreement - was in fact effected with $1.1B of assistance from the one-time parent. XL also threw its remaining ownership interest into a bucket - a fancy word for trust - for the benefit of other would-be commutation counterparties. As 2008 rolled off and 2009 progressed, those shares proved uncompelling. So a second, 2009 MTA was struck in which 23,736,349 shares were issued to counterparties, diluting shareholders by almost half. Additionally, surplus notes were issued to the counterparties of which $680M in face value is still outstanding (at a carrying value of $625M).
After the 2009 MTA closed, only an unfathomable positive loss recovery development could propel cash to the holding companies shareholders. Two years of repurchase litigation has made a few investors scratch their chin. Then consider that a Statutory Based Adjusted Book Value (of sorts see our inputs here) of $6.25 per share. If you assume the company recovers all of its Jefferson County Sewer exposure then tack on another $110M or about $1.75 per share. In September, a receiver was appointed with the power to raise rates and increase revenue to pay those obligations off.
Now there's the good ol' repurchase litigation upside. Here's a notable quotable from the latest SGI statutory filing:
"As of March 31, 2011 and December 31, 2010, the amount of mortgage loans that the Company is seeking sponsors to repurchase aggregated approximately $1.5 billion and $1.3 billion, respectively; the sponsors of a substantial majority of such mortgage loans are Countrywide (as defined in Note 21.C.), GreenPoint Mortgage Funding, Inc. (“GreenPoint”), and EMC Mortgage Corporation (“EMC”). No assurance can be given that the Company will be successful in enforcing its rights to require sponsors to repurchase the mortgages discussed above."
Using this as the basis for a calculation of possible total recoveries is flawed by more than the normal reliance on assumptive extrapolation of peer financials. Syncora has the additional skew of their past rehabilitation efforts reducing possible recoveries. With that this next excerpt tells us the benefits they have marked on their books:
"As of March 31, 2011 and December 31, 2010, the Company estimated that it would realize a net benefit from such recoveries aggregating $209.3 million and $168.5 million, respectively."
If we assume they are booking amongst the higher recovery-to-incurred-loss ratios of their peers, it looks to us that they still have over $100M of additional paid losses on the table with creditworthy counterparties. We think that the real number is probably closer to double that plus poor counterparties could cough up material amounts as well.
ABV is a large exaggeration of shareholder value for an inactive guarantor. In fact, if operating expenses and investment income match, ABV is something like par for a zero coupon bond. Still the size of ABV in Syncora's case and the lack of a bankruptcy threat (there are no bonds or loans outstanding) make this $0.4 - $0.5 priced stock something of an attractively priced call option on recoveries. This is very similar to how we continue to view Ambac's Sr. Debt (see earlier posting.)
But what is the likelihood of such recoveries? At times, there is no accounting for the actions of management to impair a companies value. But the incentives seem clear to The Blue Dragon that the inactive guarantors should assert their full rights to recovery. We will let Assured off the hook for their BoA deal, as that guarantor has rating agency and pricing issues at hand.
Then consider that our government the Cerberus has one head now peering ever closer at the guarantors putback claims. With obstinate banks refusing to cough up the demanded $20B settlement, attorney generals and bank-bashing political opportunists everywhere would view the banks atoning for their sins to anyone as rather palatable. With that backdrop, if I were an attorney general I would send subpoenas and task forces all over such an issue. And when the rulings and settlements were inked, I would stamp the state seal on the headlines.
It seems that the political pressure is pushing for resolution to these settlements, but they are pushing against the stone wall of Civil Procedure. The time that has already elapsed is their more powerful ally. Both forces could make a leveraged bet on repurchases very rewarding at some unknown time over the next couple years.
If the mention of a schizophrenic in-law brings one or several real faces to mind, I recommend reading more statutory financial reports. Other than averting injury to your non-blood-related kin, this will offer you an opportunity to reconsider a security that was written off for having suffered an intense permanent impairment of capital.
For background, Syncora struck a deal with its most toxic CDS counterparties with the help of former parent and one-time namesake XL Group to tear up contracts. This deal - the 2008 Master Transaction Agreement - was in fact effected with $1.1B of assistance from the one-time parent. XL also threw its remaining ownership interest into a bucket - a fancy word for trust - for the benefit of other would-be commutation counterparties. As 2008 rolled off and 2009 progressed, those shares proved uncompelling. So a second, 2009 MTA was struck in which 23,736,349 shares were issued to counterparties, diluting shareholders by almost half. Additionally, surplus notes were issued to the counterparties of which $680M in face value is still outstanding (at a carrying value of $625M).
After the 2009 MTA closed, only an unfathomable positive loss recovery development could propel cash to the holding companies shareholders. Two years of repurchase litigation has made a few investors scratch their chin. Then consider that a Statutory Based Adjusted Book Value (of sorts see our inputs here) of $6.25 per share. If you assume the company recovers all of its Jefferson County Sewer exposure then tack on another $110M or about $1.75 per share. In September, a receiver was appointed with the power to raise rates and increase revenue to pay those obligations off.
Now there's the good ol' repurchase litigation upside. Here's a notable quotable from the latest SGI statutory filing:
"As of March 31, 2011 and December 31, 2010, the amount of mortgage loans that the Company is seeking sponsors to repurchase aggregated approximately $1.5 billion and $1.3 billion, respectively; the sponsors of a substantial majority of such mortgage loans are Countrywide (as defined in Note 21.C.), GreenPoint Mortgage Funding, Inc. (“GreenPoint”), and EMC Mortgage Corporation (“EMC”). No assurance can be given that the Company will be successful in enforcing its rights to require sponsors to repurchase the mortgages discussed above."
Using this as the basis for a calculation of possible total recoveries is flawed by more than the normal reliance on assumptive extrapolation of peer financials. Syncora has the additional skew of their past rehabilitation efforts reducing possible recoveries. With that this next excerpt tells us the benefits they have marked on their books:
"As of March 31, 2011 and December 31, 2010, the Company estimated that it would realize a net benefit from such recoveries aggregating $209.3 million and $168.5 million, respectively."
If we assume they are booking amongst the higher recovery-to-incurred-loss ratios of their peers, it looks to us that they still have over $100M of additional paid losses on the table with creditworthy counterparties. We think that the real number is probably closer to double that plus poor counterparties could cough up material amounts as well.
ABV is a large exaggeration of shareholder value for an inactive guarantor. In fact, if operating expenses and investment income match, ABV is something like par for a zero coupon bond. Still the size of ABV in Syncora's case and the lack of a bankruptcy threat (there are no bonds or loans outstanding) make this $0.4 - $0.5 priced stock something of an attractively priced call option on recoveries. This is very similar to how we continue to view Ambac's Sr. Debt (see earlier posting.)
But what is the likelihood of such recoveries? At times, there is no accounting for the actions of management to impair a companies value. But the incentives seem clear to The Blue Dragon that the inactive guarantors should assert their full rights to recovery. We will let Assured off the hook for their BoA deal, as that guarantor has rating agency and pricing issues at hand.
Then consider that our government the Cerberus has one head now peering ever closer at the guarantors putback claims. With obstinate banks refusing to cough up the demanded $20B settlement, attorney generals and bank-bashing political opportunists everywhere would view the banks atoning for their sins to anyone as rather palatable. With that backdrop, if I were an attorney general I would send subpoenas and task forces all over such an issue. And when the rulings and settlements were inked, I would stamp the state seal on the headlines.
It seems that the political pressure is pushing for resolution to these settlements, but they are pushing against the stone wall of Civil Procedure. The time that has already elapsed is their more powerful ally. Both forces could make a leveraged bet on repurchases very rewarding at some unknown time over the next couple years.
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