Syncora Holdings (SYCRF) – Asset Sale – 8% Upside

Current Price: $4.88

Estimated Value: $5.25

Upside: 8% Upside

Expiration Date: TBD (distribution expected in H1 2020)

Asset sale and price increase press releases

This idea was shared by Writser.

 

Let me start with a bit of history. Syncora is an OTC-listed holding company that owns Syncora Guarantee, a ‘monoline insurer’, i.e. an insurer of debt, cdo’s, mortgages, etc. Surprise, surprise, the monoline insurer subsidiary basically blew up during the GFC because they insured a ton of US-based residential mortgage backed securities. Ever since, the company has basically been in run-off mode, suing the debt issuers that got them into trouble while restructuring to stay afloat. On top of that they were also involved with insuring Detroit and Puerto Rico debt. Basically a total disaster.

But the past two years some steps forward were made. Syncora settled a big mortgage-backed securities case with Greenpoint Mortgage funding for ~$300m, they entered a reinsurance agreement to get rid of their Puerto Rico exposure, sold excess assets and started a strategic review. This culminated in the announcement, on August 15, that they were selling their insurance subsidiary. The price was considered a disappointment by the market and shares actually dropped ~15% after the announcement. On September 5, the company announced better terms for their subsidiary sale. The purchase price was increased from $392.5m to $429m and the buyer (GoldenTree Asset Management) will also retire all Syncora preferred shares outstanding. A quote from the asset sale press release:

The amended agreement results from negotiations between Star Insurance and Syncora following receipt of an additional unsolicited proposal. As part of its amended agreement with Star Insurance, Syncora agreed to terminate the period during which it was permitted to entertain alternate acquisition proposals.

So basically there was another interested party out there and GoldenTree sweetened the deal to stave off a competitor but Syncora had to terminate their go-shop period (whether that was a good deal for Syncora I don’t know!). Anyway, the opportunity:

The thesis is very simple. As can be deduced from the press releases, Syncora has $45m - $60m in other assets, approximately half of which is cash. Other assets are an 80% interest in Swap Financial Group LLC and waterfront land in Detroit (received in Detroit bankruptcy proceedings). Thanks to the GFC the company had $2.6b in NOL’s. Due to some technicalities it was not favourable for the holding to retain all NOL’s when selling their monoline subsidiary but the company still expects to retain ~$300m of NOL’s post-transaction.

A few key quotes from the asset sale press releases:

Syncora expects to distribute substantially all of the cash sale proceeds, net of transaction-related expenses, as soon as practicable after the closing of the sale.

The closing of the transaction remains subject to customary conditions, including approval by the New York State Department of Financial Services, and clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and is expected to take place by the end of the fourth quarter of 2019 or during the first quarter of 2020.

I don’t foresee any regulatory problems with a US asset manager buying a small US debt insurer. Assuming the guidance given by management is more or less correct there should be a large distribution coming in H1 2020. Given the accumulated losses and NOL’s I think taxes are not an issue. That gets me to approximately to the IRR calculated below (to the reader: make your own assumptions and redo it yourself!). Share-count stands at 87m.

SYCRF

As per the latest conference call management will focus on monetizing the non-cash assets at Pike Pointe, the main asset being the Chene Street Detroit waterfront property which the company is looking to sell / develop with a partner. Earlier this year they sold 2.75 acres for $5m, implying their remaining 8.9 acres are worth ~$16m.

Swap Financial LLC is, according to the company, a stable business and a source of taxable income that benefits from the NOL’s and they are planning to hold on to it. A complete liquidation is not in the cards given the value of the NOL’s.

An 8% IRR might not look spectacular but I am assuming a ~5% bankers fee, whereas according to the FT the average fee for a sell side deal of this side is quite a bit lower.

Banker fee estimate

I’m modelling another $5m in liquidation costs and I apply a 30% haircut to the stub that. In other words, I assume the market values the stub at $33m, while it should hold: ~$32m in cash, land worth ~$16m (partially monetized this year), $300m in NOL’s and an 80% interest in a profitable company (though details about the LLC are hard to find). I think the stub is worth more and even in this conservative scenario your IRR would be around 8%.

To conclude, if you buy now I suspect that you will recoup basically your entire investment in a few months and are left with a stub that has a nav of $0.40 - $0.70 and could make another substantial distribution. I think a ~8% IRR is a quite conservative estimate of expected return and I think that the downside is limited. Just the way I like it. I own a decent amount of shares.

As for why this is an opportunity: who likes an illiquid, OTC-listed, GFC relic that has been dragging along for a decade, announced a disappointing asset sale, doesn’t file financials with the SEC and owns a hotchpotch of other assets? I do.

Of course there are always risks - the deal could hypothetically fall through. I’m not really worried about that and even if it happens there were other buyers interested. I think the main risk is that management will squander some of the company assets. However, at current prices you effectively buy a very small position in the stub at prices that I consider attractive, and management indicated they are focused on monetizing assets. And even if management does something stupid you basically run break-even. And, on the flip side, there is some optionality in the NOL’s in case management actually does some good.

 

Further resources:

2018 VIC Pitch;

Alluvial Capital newsletters;

H1 2019 Presentation;

Company Financials;

Detroit waterfront property;

 

11 COMMENTS

  1. ActOfWill

    Does anyone have an idea what the worst case tax implication could be?

  2. Terence

    Volume today 4,846,000, yesterday 8,600! Yesterday’s volume is, yes, unusually low, but still. Today’s press release must have some significance for this change of hands.

  3. Writser

    Q3 results out: http://scafg.gcs-web.com/news-releases/news-release-details/syncora-holdings-ltd-announces-third-quarter-2019-interim-gaap
    call transcript: https://seekingalpha.com/article/4307037-syncora-holdings-ltd-sycrf-ceo-fred-hnat-q3-2019-results-earnings-call-transcript?part=single

    Not much news. They still hold on to the original timeline and $32m in cash on top of the net sale proceeds. A minor positive was this tidbit about the remaining non-core assets:

    “I thought it might be helpful to provide a brief update on the status of what we expect to be the assets retained by SHL. Last week, SHL’s subsidiary Pipe Pointe sold one of its interests in Detroit for $2 million cash. Pipe Pointe still holds options on property along the Detroit riverfront and it’s in active discussions to monetize these options.
    We are also looking to monetize the credit certificate for use on real property for sale by the City of Detroit. Finally, SHL is evaluating its strategic options to respect to its ownership interest in Swap Financial.”

    Seems like they want to ‘monetize’ everything. It remains to be seen how exactly and at what pace and whether they want to liquidate everything or have some plans with the huge NOL’s.

    All in all I think this still is compelling, probably a low-risk, market neutral high-single or low-double digit IRR. There’s a tail risk regarding the tax treatment of the distribution. I don’t live in the US and that risk doesn’t concern me but it might be important for others.

  4. Writser

    http://scafg.gcs-web.com/news-releases/news-release-details/syncora-holdings-ltd-announces-closing-sgi-sale-and-timing

    “ In addition, Syncora today announced that it anticipates distributing the net proceeds of sale together with a portion of its remaining liquid assets, which Syncora estimates will total approximately $415 million in the aggregate, shortly following the approval of a plan of liquidation by its board of directors and by its shareholders at a special general meeting expected to be held in January 2020. The plan of liquidation is intended to qualify as a plan of liquidation under Section 331 of the Internal Revenue Code of 1986, as amended. Syncora expects to make one or more subsequent liquidating distributions of its remaining assets to shareholders in the future.”

    Seems to be about $4.75 / share in an initial tax-free (at least for me) distribution.

  5. Terence

    Sale of insurance sub closed. $415m (or $4.77/sh, 87m total shares) distribution shortly after shareholder approval in Jan 2020, followed by one or more distributions of remaining assets. Price closed at $4.98 today, less 4.77, leaving 21c for the stub, which is worth about 48c as I understand per DT/Writser’s analysis (and assuming the risk of tax treatment, if any, of this Bermuda based company’s distributions).

    Any new judgments as to benefit-risk, given current price?

    https://finance.yahoo.com/news/syncora-holdings-ltd-announces-closing-213010327.html

  6. Zulu Investment Partnership

    Does anyone see a compelling thesis for the remaining stub? The stub is being sold for about 40 cents and their should be about 48 cents worth of assets still remaining in there, if I following the write up correctly. So that is a 20% upside. I am not sure what the plan is going forward with the stub whether they intend to liquidate, or what the time frame we are looking at is.

  7. dt

    I am moving Syncora out from the active ideas. The initial thesis played out well resulting in 6% return.

    The stub now trades at c. 20% discount to the conservative estimates of the remaining distributions, however management believe that it might take a year to fully liquidate the company and any distribution estimates are very sensitive to assumptions of cash burn and non-core asset liquidation values. The risk is far higher compared to initial situation.

    Management did not provide any estimates of the remaining distributions.

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