Giving Back

I know, you think this is the annual call for donations.

Come to think of it, Justice for Children could certainly use your help, and I can’t think of anyone more deserving than a child forced by our peculiar legal system to continue to live with their attackers.

But I’m really talking about my potential to give back to the market the sudden trading profits it handed me since last Friday morning.  In other words, this is my crazy trade for the day.

I took those trading profits and put them into today’s bloodbath.  Either that money will become a tribute to the market gods, or it will turn into even more money so I can spend it on floozies and high living, and waste the rest.

Anthracite Capital (AHR) formally defaulted on $79.25 million in debt today.  They told us a month ago that this would happen, but the market seems surprised that they did not pay the debt during the 30-day “curing” period.

At the front of the line is Deutsche Bank, with $68 million in repo financing outstanding, and collateral pledged against that debt.  Anthracite and its management (Blackrock) expect that to happen, and then we can expect that Deutsche will not be trying too hard to sell the collateral at top dollar.

Having said that, I was intrigued by the Q3 filing AHR made with the SEC that listed a common equity book value of $3.69 per share.  On 93 million shares, that’s some real money that would be theoretically left over after satisfying all debt and preferred stock at face value.

So why would I think that the $3.69 might be somewhere in the realm of reality?

Before I go further, let me say again for the record:

THIS IS PURE SPECULATION

Do not risk the grocery money on this !!!!

Having given the warning, here’s my thinking:

Blackrock has made a major business of evaluating structured bonds.That business brings in tens of millions in profit for them each year, and the most wonderful opportunities a consulting firm ever had — no-bid contracts entered by a distressed counterparty under extreme time pressure.

In case you forgot, they have the contract to evaluate the JP Morgan holdings of Bear Stearns bonds that the Fed provided $29 billion in financing for during that shotgun wedding, and other contracts like it.

Anyway, looking at the “book value” of  AHR at $3.69 per share of common as of Sep 30, my thinking is that the entire capitalization of AHR is less than the yearly profit at Blackrock Solutions, so the only thing they really don’t want is a situation that calls their valuations into question — like liquidation of AHR for zero dollars to the common shareholders would do.

So I’m thinking that even a fire sale might well pay out fifty cents or a dollar or more per share.

For now, they will “poor mouth” every announcement, in order to frighten debt and pref holders into taking deeply discounted payoffs, so don’t expect any encouragement at all from the company if you buy into this stuff. On the other hand, with a face amount of $25 and a trading price well under a buck, that pref might be pretty sweet if they were to make a ten cent on the dollar offer…..

Let me repeat so you know for sure you’ll need a strong stomach:

They will now do everything they can to terrify their debt holders. As a common or preferred stock holder, you should be fully prepared to hear from the company that you will never see a dime for your stock.

Good luck to us all, and do think about supporting Justice for Children.

I’ve known the founder of the organization for 30 years, and he has managed to organize the only charity I know of that speaks only for abused children.  They operate on a virtual shoestring, handling whole cases beginning to end for a couple of hundred bucks.  Every dollar makes a difference, and if you have a thousand of them to give, you could save up to 50 children’s lives right here in America.

Full disclosure:  I’m on the Board of JFC.

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2 Responses to Giving Back

  1. Chris Drucker says:

    Howard, as much as I like a good lottery ticket, AHR raised some red flags that make me wonder if there could really be anything at all left for shareholders. Here’s what struck me:

    1. Their “book value” may be $3.69; but their last 10K says they have $1BB commercial mortgage pools held: “at amortized cost”. Thus I assume they could really be worth pennies on the dollar. How about the other assets? I wonder how much all their assets are really worth, then wonder what a “realistic book value” is based on realistic asset valuations. Maybe not even positive?

    2. In todays PR, Deutsche Bank indicated they will keep the AHR collateral for their repos. The Q3 10K shows $68MM owed to DB in repos. Now what happens when DB takes those assets? Will all other creditors of AHR’s $300MM+ repos now have to rush to do the same?

    3. They have only $293K in unrestricted cash. They defaulted on a $1.6M cure period payment. If Blackrock was to come to the rescue out of concern for their reputation, would they have not done so before the default? Seems that the face-saving horse has left the barn. (Just ask Calpers about Blackrock.) I would think that if the AHR bond valuations are bad, how could Blackrock come to the rescue to make it seem otherwise?

    So, lottery ticket, or inevitable negative equity?

    • hhill51 says:

      1) That ‘amortized value’ is the most questionable among all the elements of the balance sheet, but any overstating vs. market value is likely to be mitigated by similarly overstated values carried for the CDO’s that finance them. Alternatively, if the bonds are not financed with AHR’s CDO’s (permanent, non-call, non-recourse financing), then the values are associated with positions that were marked to market by repo lenders at the time the repo is entered, and every day since. For those bonds subject to market prices, market value at auction is likely to be close to or maybe even a little higher than the Sep 30 values.

      2) How much do you think DB could screw up the sale of the bonds it holds as collateral on its repo line? 20%? 40%?…. again, that line requires nightly marks (by DB at its sole discretion) and maintenance of a haircut, which was probably 25%, 33%, or 50%. In other words, I doubt seriously that DB would have any lines offering more than 1:1, 2:1 or AT MOST 3:1 leverage. If the sale price is 30% under the last marks, then AHR would owe a few bucks if 3:1 leverage was in place (which I doubt). If the sale price is 30% under marks and less leverage was used, AHR will actually get some cash back after the slaughter.

      3) It sounds like they met margin calls right along until the end, so I’d be willing to assume (for lottery analysis) that repo liquidation vs. pledged collateral leaves some cash left over…

      I’m not talking about a Blackrock rescue, just that Blackrock had every reason to be conservative filing a valuation with the SEC on AHR that, if way too high, could screw up a major profitable business for them.

      Anyway, what’s done is done. Those valuations as of Sep 30 were either on the mark or too optimistic. Given Blackrock’s large and growing valuation business, I think they would have been biased toward the conservative end of the spectrum. Only time will tell, but I thought it was worth risking the last few trading days’ windfall.

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