Thursday, September 12, 2019

Syncora Holdings: Operating Business Sold, Cash and NOL Stub

Syncora Holdings (SYCRF), through its subsidiary Syncora Guarantee ("SGI"), is a provider of bond insurance that ran into a whole bunch of trouble following the financial crisis.  Like the other bond insurers, Syncora branched out beyond municipal insurance (to be fair, they did also suffer with Detroit and Puerto Rico) to subprime RMBS, CDOs and other toxic securitizations of the pre-crisis era.  During and following the recession, many of the supposedly AAA structured securities were impaired and Syncora was called upon to make good on their guarantee which forced the insurer to the brink of insolvency.

In the decade since, Syncora has been in constant litigation (they scored several huge settlements with banks that issued subprime RMBS) and restructuring mode.  Previously a bit of a black box, Syncora last month sold SGI to an affiliate of credit manager Golden Tree Asset Management for $392.5MM with a go-shop period through September 13th.  It then re-struct the sale price higher with Golden Tree this past week to $429MM plus the assumption of some preferred share pass-thru securities that wasn't originally included in the deal after receiving an unnamed unsolicited offer (the go-shop was also cancelled).  Once the transaction with Golden Tree closes in Q4/Q1, Syncora plans to distribute the sale proceeds to shareholders, all that will remain is $30+MM of cash and miscellaneous assets (valued at $45-60MM total including the cash) plus around $300MM of net operating losses.

Syncora has 87 million shares outstanding, assuming about $20MM in leakage and other deal related expenses, the company will likely distribute cash back to shareholders roughly equaling today's $4.70 share price.
Assumes no value attributed to the NOL
What is the company going to do with the stub after the SGI deal closes?  Anyone's guess, it will be a tiny shell with a few random assets (waterfront raw land in Detroit, 80% of Swap Financial), management claims to be in active conversations with their advisers on a transaction, but the NOL monetization dream is elusive for many if not nearly all similar NOL shell stories.  So maybe the 30% discount to NAV needs to be a touch higher, at a 50% discount I come up with a 16% IRR, still an attractive situation.

Disclosure: I own shares of SYCRF

10 comments:

  1. you could have horrible tax consequences from the distribution so if you are not marked to market be wary

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    1. I assume you mean capital gain tax at the corporate level incurred because of the sale of assets. I believe the gain from that transaction could be offset by the $300M NOLs, so no problem.

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  2. I think the distribution might be considered an unqualified dividend for US investors since SYCRF isn't "readily tradable on an established securities market in the United States". But not a US tax expert...

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    1. If that's the case, then one could sell the stub post distribution at a big realized loss since their tax basis would be the original amount, essentially offset the dividend. But I think it should be a return of capital, good point to investigate.

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  3. Hi, its is curious that the stock price fell heavily on the day the first offer was announcement (but there was also a confounding earnings announcement at the same day so its not clear that all of this can be attributed to the transaction). Outside shareholders might not be happy with the transaction. Can this derail the liquidation? There is no shareholder vote on the transaction though, if I understand correctly (is this because the company is unlisted?)

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    1. The original deal (and the raised offer) were done at a big discount to book value, shareholders were expecting more and it sounds like some of them banded together on the unsolicited offer that drove the raised offer. Potentially shareholders could go hostile on it, but I'd guess that's only a positive for the stock.

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  4. http://scafg.gcs-web.com/news-releases/news-release-details/syncora-holdings-ltd-announces-additional-information-regarding

    Costs seem in line with expectations. Management is looking at tax implications and will release the intended tax treatment before the distribution.

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  5. Hi MDC,

    Have you looked at YTRA merger? I think it is an interesting situation.

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    1. I haven't - thanks for the idea, I'll take a look

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    2. Really interesting deal - EBIX seems like a black box to me, any thoughts on their credit profile to meet that put option in 25 months?

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