ValueWalk has learned some possible Activist Rumblings in the Small Cap World: Syncora is an interesting NOL play that may now be fully seasoned and reaching the harvesting phase. At this stage, Syncora’s Board of Directors and its Large Shareholders’s views are now coming into full view as each become more vocal. In just the last few months, Syncora’s Management and Board has issued a number of Press Releases after having been virtually radio silent since the 2008 Great Financial Crisis, while ValueWalk has Obtained a Shareholder Letter sent this past weekend (from a shareholder with a very large stake in the company) 10/8/2016 reacting to the latest announcement, see below – per request the name of the hedge fund has been redacted.
Syncora also announced that its Annual General Meeting of Common Shareholders will be held on Tuesday, October 18, 2016 at 8.30 a.m. ET at the offices of Weil, Gotshal & Manges LLP, 767 5th Avenue, New York, NY, which should further push stakeholders to reach a firm view for the future:
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Syncora Announces Leadership And Board Structure Changes Following Successful Completion Of Comprehensive Financial Restructuring – Link
Syncora Holdings Ltd. Announces Second Quarter 2016 Interim GAAP Consolidated Financial Results – Link
Syncora Holdings Ltd. and Syncora Holdings US Inc. Announce Successful Completion of Comprehensive Restructuring Transactions – Link
Our source adds this quick overview of this Post Reorg Equity:
Syncora Holdings Ltd. (“SYCRF” or “the HoldCo” and together with its consolidated subsidiaries “Syncora” or “the Company”) is a monoline insurer that is in run-off currently and not underwriting new business. Syncora was a former subsidiary of XL Capital until August 2008 when it was split off and recapitalized. Due to significant losses caused by the Great Financial Crisis (Monoline that insured RMBS and exotic securities), Syncora entered remediation in 2009 and the New York Department of Financial Services issued a claims suspension order. Syncora executed a series of master transaction agreement (“MTA II”) which commuted $15B of CDS contracts that accounted for loss reserves of $4.6B for cash consideration of ~$1.3B, short and long term surplus notes of $625mm and 40% of SYCRF stock. In addition, Syncora tendered for billions in RMBS for pennies on the dollar, effectively commuting those policies. $40B more in CDS policies written and the majority of Syncora’s public finance and global infrastructure exposure was novated to a newly formed insurance subsidiary call Syncora Capital Assurance Inc. (“SCAI”) which was capitalized by the original insurance subsidiary Syncora Guarantee Inc. (“SGI”). The claims suspension order was lifted and Syncora satisfied all unpaid claims in 2010. Commutations and the runoff continue into the present with net par outstanding of $165B in 2008 falling to $45B at 3Q14 now to 2Q16 ~$24B. Consolidated policyholder surplus during this time fell from -$2.4B in 2008 to -$3.9B in 2009 and by 2Q16 had risen to positive $1.1B.
SYCRF is a liquidation where the catalysts and sources of recovery are numerous: claims commutations, litigation recoveries (Greenpoint/CapitalOne, MacQuarie), better than expected book runoff results and utilization of SYCRF’s significant NOLs ~$2.5B ($1.7b of which have been transferred to the HoldCo in the recent Debt for Equity Exchange). A reason this opportunity may exist is that it is a small situation that is assumed by some to be dead equity. Additionally, it is hardly worth it for most Large Institutional funds to do the necessary work on it since there are limitations on ownership to under 5% to protect the NOLs. SYCRF is basically a basket of options on any of its sources of recovery with tremendous leverage to the upside.
This could be an uncorrelated trade with numerous sources of upside.
The downside is limited to the value of the NOL but the upside could easily exceed one’s high case by multiples considering the leverage in the capital structure, the large amounts of potential recoveries and the small market cap.
Letter to Syncora’s Management and Board of Directors:
This letter was sent this weekend to Syncora’s Mgmt + Board of Directors:
Mr. Michael Esposito, Chairman, and the
Board of Directors, Syncora
Dear Mr. Esposito and Board Members,
I realize that letters from shareholders, such as this letter, are generally, a waste of time for all involved. Nonetheless, as I have reasonable capital commitment to Syncora Common (approximately 1,000,000 shares), I feel compelled to voice my concerns. The recent announcement of management changes was a quite a shock, and honestly, disappointing.
The role of Claude Leblanc
Specifically, Claude Leblanc is the one individual at Syncora that won my confidence, and the reason that I felt comfortable investing in Syncora. It appeared to me that it was Claude that drove the commutations, the credit restructurings, and the recoveries. Further, I know that Claude earned the respect of others in this industry outside of Syncora. I suspect that other common holders share my confidence in Claude. I hope that they too will express both such confidence, and their disappointment in the Board’s actions.
One concept for growth, moving forward.
To date, I have helped to introduce Claude to two well regarded capital players that might be third party sources of capital should Claude identify opportunities to acquire stressed muni’s and exchange the those bonds for real assets, such as was accomplished in Detroit. If Claude was successful in one such transaction, he may well have the foundation for a public infrastructure fund, managed by Syncora. The management fees for such a fund could grow to become significant sources of income to be sheltered by the NOL’s. All of this would be accomplished with no dilution to the common holders. Such strategy is clearly within the firm’s fairway.
The complimentary strategy:
A true complimentary strategy to the above is to view the unregulated capital of the firm as a disciplined “value” investment fund, which has the opportunity to compound its returns, sheltered by the NOL’s. The key to such is the term “disciplined”, and requires investment acumen and a clear understanding of the “margin of safety”.
This is a very different strategy to that which has been suggested in the firm’s releases. Specifically, there has been discussion of raising additional capital and making an acquisition. The timing of such discussion is remarkable in that many of the brightest investment minds (Soros, Gross, El-Erian) are publicly cautioning on asset bubbles. Would Syncora really dilute holders at today’s value and make a substantial acquisition in today’s market?
To execute either strategy, Syncora needs a Board and management team that have strong investment acumen and experience. It is possible the Fred Hnat has such skills. On the other hand, if as suggested, he has a long tenure with Synocra, then he was part of the team that lacked the discipline to step back from the insurance markets in the mid 2000’s when the risk/reward metrics were not attractive. It is that lack of discipline that caused substantial destruction of shareholder capital, at Syncora, and throughout the industry.
Who will invest in Syncora Common or notes, on a going forward basis?
As a former CEO of a publicly traded firm, I know that identifying and attracting solid, patient, well regarded investors, is one of the keys to building shareholder, and in this case, noteholder value. In the recent press release, Syncora highlights Mr. Hnat’s strong relationships with the investment community in England and presumably, Europe. Hopefully, he has the reputation and contacts to attract capital investment from those sources.
Within our US markets, we have some very fine value investors, both funds, and family offices, that could become substantial investors in both Syncora notes and common. While the firm has attracted some early adopters, more conservative players await substantial improvement in corporate governance. Among the best practices, I suspect are required by conservative investors are: a functional and rational Board size; substantial investment in the firm on the part of Directors; and a reasonable, and fully disclosed, compensation plan, for both management and Board.
I suspect that Syncora was beginning to attract the interest of the larger value investors in the US (I can definitely state that I suggested Syncora to at least three). I also suspect that the recent announcement will diminish the interest of these funds and families for the time being. Perhaps that is not of concern to the firm, but I imagine that is of concern to both common and note holders.
Until the announcement of last week, I had been an enthusiastic holder of Syncora, and a public advocate. That is no longer the case. Perhaps Mr. Esposito and Mr. Hnat can win my confidence, I certainly hope so. I look forward to listening to both. Or perhaps, I will learn from a major holder or two, why they support the proposed changes. Or perhaps, Claude himself, will explain to me why this is good for stakeholders. I may well be wrong in my thinking.
In the interim, all I can do is implore the Board to rethink its decisions, further I will abstain from voting at this AGM, and write this letter.