New ValueInvestorsClub.com 7 page writeup on Syncora posted this morning.
Some excerpts:
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Following are management’s comments on the retained credits (from the 1Q18 call): “There are certain credits that are in salvage mode, meaning that we have paid claims on those. We now have rights to reimbursement on those claims. So, we obviously wouldn't want to trade away those rights to reimbursement. There are also a few credits where we expect a refunding in the near-term and it would make sense to pay for reinsurance on those credits. So at the end of the day, we are very comfortable with the credits we have retained, the level of reserves we have on those”. Prior to this transaction, ending asset value was far more difficult to ascertain. "
The large drop from the prior quarter is due to the reinsurance transaction and related unearned premium assumptions coming off the books. We also need to add in $.75/share from the sale of American Roads (as mentioned on 2Q18 call, this will hit books in 3Q18), so NAV is ~$5.75/share .
Additionally, Syncora has $2.5bn in NOLs, potential for Puerto Rico reserves to be released, and potential gains from the Macquarie litigation going to trial early 2019. These outcomes shouldn’t be counted on, but provide some additional upside. Potential Outflows Main outflow risks are Puerto Rico exposure and ongoing operating expense. For Puerto Rico, remaining insured exposure breaks down to: $110mm PREPA, $85.7mm GO, $25.3mm mixed state and local. Management has not given great color when asked on reserves except that they are “appropriately reserved” and that they feel confident in their conservatism. What we do know is that in 2Q16 PREPA was reserved with a loss given default of 26%, and GO bonds with 25%. Of course, since then the adverse developments in Puerto Rico have necessitated substantial additional reserves, none of which have been reversed. In late July, PREPA came to an agreement with an ad hoc group of lenders which exluded the monoline insurers (Syncora, Assured, etc.). In the new deal, the non-monolines were offered 77.5 cents on the dollar, essentially providing a floor for the monolines who have more bargaining power. The General Obligation bonds are murkier but should be well reserved for considering the recent positive developments in PR.
