Syncora Holdings Ltd.

Introduction

Syncora Holdings Ltd. through its subsidiary, Syncora Guarantee  Inc., a monoline financial guarantee insurance provider, provides credit enhancement for the obligations of debt issuers worldwide. (1) http://www.syncora.com/

In the past month or so the stock trading under the ticker SYCRF has plummeted due to fears regarding their Puerto Rico exposure. The stock trades over the counter and is very illiquid with an average volume of about 18k and a market cap of about $42M. Investing in a name such as Syncora Holdings involves significant risk and management acknowledges that they are operating as a going concern.

Quote from the auditor, PWC:

“The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.”

Syncora Guarantee Inc. & Syncora Capital Assurance Inc.

The primary business of Syncora Holdings lies within their insurance structure. The business has been in ”run off” since the financial crisis and has been working stabilize the firm ever since. A complete corporate structure can be found on their investor relations website operating supplements, but currently we will be discussing this part of the business:

Insurance Structure

Here is the progress on their outstanding below investment grade book.

SGI NPO Graph

SGI NPO Table

SCAI NPO Graph

SCAI NPO Table

An important note to make regarding these visuals is that although the exposure is declining, both Syncora Guarantee and Syncora Capital Assurance are still highly levered in relation to their qualified statutory capital requirements. Of course, this capital requirement does not take into account any unearned premium or loss adjusted reserves which would help in claims payments as well.

Puerto Rico Exposure

The fear surrounding mono line insurers such as Syncora revolve around their exposure to Puerto Rico. Here is a quote from Claude LeBlanc, CFO and Chief Restructuring Officer:

“as of December 31st, 2014, Syncora’s total insured exposure to Puerto Rico included approximately $229 million of Puerto Rico general obligation bonds, $200 million of Puerto Rico Electric Power Authority, or PREPA, and $41 million of other mixed state and revenue bonds.

These exposures include inbound re-insurance guarantees of approximately $145 million.

As part of our remediation activities, Syncora purchased approximately $42 million of its insured PREPA and other Puerto Rico bond exposures as of December 31st, 2014. In 2014, we also established reserves of $56.7 million on our PREPA exposures. This reserve represents a greater than 20 percent weighted average loss given default on our total pre-remediated PREPA exposures.”

The ability for Syncora to muddle their way through the situation is not within my core competency to assess, but it is clear that management will take steps to reserve heavily against losses and take steps to work with Puerto Rico to ensure losses are minimal.

Also, from the further disclosures provided by PREPA, Syncora has even stepped in and further invested directly in bonds to help provide further liquidity. Please find this disclosure here.

Additionally, from the proposals going back and forth from the creditors and PREPA, there at least appears to be constructive negotiations going on within the country. It is unclear to me though if Syncora is partaking in those negotiations. Please find the latest disclosure here.

It would appear that management may already be taking into account losses in that region. This is a reference to Schedule T in SGI’s financial statements, in Puerto Rico a loss occurred for about $29M in Q4 and has continued to carry over as an unpaid loss in Q115. It’s interesting because I can’t seem to tie it to any of the consolidated statements to this value, but it may not be related to loss adjustment at all. I will just leave it as an unknown until I determine what is actually going on there.

Valuation

As far as valuation goes, mono line insurers all appear to be valued the same way, using an adjusted book value. This is a very static way to view the valuation of the company, but it allows us to look at the company as conservative as we deem necessary. In addition we can add all of the potential litigation related put backs the company might be soon achieving.

ABV Valuation Total

The above is simply consolidating SGI’s and SCAI’s balance sheets and adjusting the end result. Conservatively, the end result remains higher than the current share price. The result will show an ABV valuation of $1.37/share, if we continue to think that Syncora will achieve put backs from Lehman & Greenpoint we are looking at a share price of $6.70/share.

ABV valuation from Syncora

Syncora management has provided their won ABV valuation, valuing the common shares at $2.67/share.

An important point is that I mentioned potential put backs that raise the valuation in price per share; the amount and likely hood of this seems to be changing. If anybody has been following RESCU, it appears that assuming a 100% put back is unrealistic even if the RMBS’s dealt with were fraudulent. Take this addition to the valuation with a grain of salt.

Alternative Investment Structure

Throughout the life of Syncora’s restructuring management has taken advantage of assets that they had previously insured. In an interesting twist though, management has also gone off the beaten path to invest like a venture capitalist, purchase equity in existing businesses, and acknowledged the potential value underlying with their massive amount of deferred tax assets.

AIS Structure

American Roads

The biggest of the bunch is Pike Point and the holdings of American Roads.

“Pike Pointe is a wholly owned subsidiary of the Company, a Delaware limited liability company, which holds 100% of the equity ownership of a number of subsidiaries that ultimately own and operate certain toll road facilities located in the United States and Canada (collectively, “American Roads”).

On July 25, 2013, American Roads LLC and certain of its affiliates filed “pre-packaged” bankruptcy cases under Chapter 11 of the United Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Company insured approximately $830 million of bonds and interest rate swap liabilities issued by American Roads LLC. On September 3, 2013, the approved bankruptcy plan went effective and the Company as an indirect owner of the American Roads LLC interest rate swaps and issuer of related insurance policies received 100% equity ownership of the reorganized American Roads. The policyholders of the bonds originally issued by American Roads LLC, which have been discharged in bankruptcy, continue to benefit from the Company’s insurance policy, as Syncora Guarantee is obligated to pay 100% of all future principal and interest payments.” – SGI Financial Statement

These toll road facilities have been the bright spot of the company’s operations, but it doesn’t appear to have been reflected under Syncora Holdings Ltd. stock price.

American Roads Valuation

In order to come up with these multiples I had to become a good friend of Google, and searched for comparisons of deals or analyst presentations discussing toll road valuation. To be honest, didn’t realize people pay such a high multiple. Another really interesting note to make regarding toll roads, the typical capital structure seems to be somewhere around 75% debt to 25% equity (no source, just my assessment from reading). Here are some the toll road sources I found while scouring the internet: Macquarie and PiperJaffray.

The Two Equity Investments

Syncora management also has made a venture capital investment into a tech company called Credit Sesame. As of the Series D funding Credit Sesame was valued at approximately $161M, a growth of 60% from their Series C funding round in 2012. Although I can’t find the exact investment size, for some reason $7M is coming to mind. Not sure how to value a venture investment, but any similar growth over the next few years I would think the valuation would be about $9-10M or about $0.17/share.

Management also bought into Swap Financial Group. Approximately $7M a year in revenue, but am not really sure about the details of the transaction. More importantly, the investment in Swap Financial Group is something that can actually grow and contribute to the bottom line.

Net Operating Losses

Syncora’s most valuable asset is actually its NOLs. Syncora had $2.8B in net operating losses as year end. Bringing down the NOLs to a DCF analysis gives a pretty hefty valuation per share of $7 using a very conservative discount rate.

NOL valuation picture

Management has stated a few times now that utilizing the company’s NOLs is part of its ongoing strategy.

(iii) realize maximum value from its illiquid assets, including but not limited to its net operating losses, investments in subsidiaries and various legal proceedings described in Note 21.I. and from any other rights and remedies the Company may have, whether through litigation, settlement or other monetization”

Catalyst

There isn’t a specific catalyst that we are waiting for, but this is what we want to see going forward:

  • Continued mitigation of losses, any mildly positive outcome regarding Puerto Rico
  • Some resolution regarding Lehman and Greenpoint RMBS
  • A deal with preferred shareholders for common shares
  • Spin off of American Roads and/or develop a way raise funds outside of the 2009 MTA

Questions

Management has not given investors the opportunity to ask questions on the calls, but there are a lot of questions investors want answered. Here are just a few questions I have and would hope that they can be addressed on a future investor call.

  • Is there any opportunity to raise funds using preferred shares, or does the 2009 MTA restrict that as well?
  • It was previously stated that ABV is not a metric that management benchmarks off of, what metrics should we actually be looking at?

Conclusion

First off, didn’t think this write up was going to get this long. Overall the Syncora Holdings Ltd. is an interesting investment with an overall sum of the parts valuation somewhere above $10/share. With this type of potential return from the current share price of $.70/share it’s risky.

NOL Val Pic

I think the coolest part of Syncora as an investment is its underlying assets beyond its insurance contracts, management seems to be trying to transform Syncora into a multi strategy asset firm and it will be very interesting to see how it evolves from here.

Here is my ongoing Syncora Workbook

Here is a link to my previous post for Syncora.

Disclosure: Syncora Holdings Ltd. (SYCRF) is a position currently held in my personal portfolio. Although I do not believe I was biased in any way, it is best for you to do your own due diligence before making an investment decision.

Disclaimer

This website is about my personal investing ideas. Under no circumstances is this an offer to sell or a solicitation to buy securities discussed on this site. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. Thelearninginvestor.com, its editor and/or related parties may have positions in companies discussed. All data, information and opinions are subject to change without notice.

3 thoughts on “Syncora Holdings Ltd.”

  1. Hi,

    Interesting and thorough valuation of the stock about which there seems to be very little information on. Why do you think the stock is so drastically undervalued and how will the amendment to the MTA announced recently change things in your opinion?

    1. Hi Andy,

      Besides the obvious Puerto Rico overhang and lack of liquidity of the stock I think there are two factors contributing to SYCRF’s current market valuation. There appears to be quite a large selling shareholder, this has been documented quite well by DennyCrane on Twitter although I couldn’t find the exact post. The second factor is maybe a little more of my opinion, but I don’t really think bond insurance is that great of business. Now maybe I am misunderstanding the product a little, but essentially they will wrap the riskiest bonds and insure them for a fee (why else would someone buy insurance if its not risky). Syncora or any bond insurer is saying hey that bond you think might default is not going to default. That just seems like a really rough business to be in and its worse off in a low interest rate environment. Of course, the somewhat failure of this business model is why Syncora has so many additional great assets today.

      The amendment to the MTA really just allows Syncora to free up cash and move things around. I think overall it doesn’t really change too much (short term) except now we can start to speculate about corporate structure changes. Personally I am hoping for some kind of significant acquisition or divestiture, but that’s mostly because I see the NOLs as its most valuable asset.

  2. Well its been over a year and the pps is now $1.90. Continued improvement accounts for part of it. Sector improvement some of it. However it is still heavily discounted to its peers. there is an argument it should trade at a minumum of its ABV $6.50~ in the current market sentiment. personally i think much higher but we will see.

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