During the quarter, Asta wrote down the value of the Great Seneca portfolio by $10.2 million to $46.3 million which they identify as the net realizable value. Then below is the explanation for the transaction they completed with BMO:
Although the 6/30/13 financials show $105 million in cash and securities, Asta paid BMO $15 million this past week as part of the revised agreement and now has $94 million in cash/securities (presumably after $4 million in cash inflows). In essence Asta is reinvesting in this portfolio, while it might not be counted as a new portfolio purchase, its almost the same thing.
Going forward the first $12 million (net of $3 million in previous payments) will go to BMO, following that Asta will get the next $15 million and recover the prepayment, then the remaining revenue will go 70/30 to Asta/BMO. So given the Great Seneca's net realizable value is $46.3 million, the first $27 million is allocated to BMO first, then Asta, leaving the remaining $19.3 million to be split 70/30, or $13.5 million to Asta Funding. Asta's accounting is generally conservative (still making $9.75MM this quarter in zero basis assets), I think the $13.5 million number is likely an appropriate value for the end recovery value of the Great Seneca portfolio and may end up being a bit low.
Asta currently receives about $3 million a quarter on the Great Seneca portfolio, if this continues, BMO will be paid off in one year, and Asta will recover its $15 million prepayment in about 9 quarters. If the $3 million quarters continue from there its about another 8 quarters (or 4 years from now) before the net realized value would be recovered in the 2nd quarter of 2017. While it might initially feel generous to assume the $3 million can continue that far into the future, I've been pleasantly surprised the zero basis portfolios have continued to produce consistent cash flow for the past several years, and show little evidence of slowing down. So assuming a $3 million a quarter run rate, Asta would earn about a 33% IRR on it's initial $15 million investment over the next 4 years, or an NPV of just over $7.1 million using a 20% discount rate. The prepayment will make the balance sheet look a little weaker in the next few quarters, but I would say this is clearly a smart transaction for Asta.
Based on how I've previously valued Asta Funding, removing out the Great Seneca portfolio and adding in the NPV of the zero basis portfolio, I've made another attempt and included a line for the NPV of Great Seneca given the new arrangement.
Disclosure: I own shares of ASFI