Syncora Holdings Ltd. (fka SYCRF)

[DennyCrane550]

Frederick Hnat:
"Yes, I think, for this year, it's a priority. I think it continues to be a priority.
We want to reduce the interest costs, and we've talked about the negative
carry between the interest paid on the surplus notes and the earnings on our
investment portfolio.
The sooner we pay off the surplus notes, the sooner we can make distributions
to equity not subject to surplus note holder consent. So those are the
objectives. And we'll continue to evaluate it periodically with our board, and
– it will continue to be a priority, and we'll have to balance how our dealings
work with the regulator and our available capital to make distribution."




"We are sharing the feedback we have received with the Board as it determines
the optimal path forward. Over the next several months, the Board will meet
to consider the feedback we have received as well as our strategic options and
we expect to provide an update on our strategic direction no later than our
next earnings announcement which is in March 2019. No final decisions have
been made at this time. As we have said in the past, we are in an exploratory
phase, the Board is considering all options and all options are still on the table
as we evaluate the possibilities. We will continue to proactively communicate
with our stakeholders throughout this process."






Syncora Q3 2018 Transcript

http://scafg.gcs-web.com/static-files/67f9133f-09fb-404f-b70e-c77ebbc042b5






SYNCORA HOLDINGS LTD.
Q3 2018 CONSOLIDATED GAAP EARNINGS CALL
Moderator: Scott Beinhacker
November 15, 2018
8:30 a.m. ET
Operator: Good morning, my name is Jamie and I will be your conference operator
today. At this time, I would like to welcome everyone to the Syncora
Holdings Ltd. Q3 2018 GAAP Financial Conference Call.]
All lines have been placed on mute to prevent any background noise. After
the speakers remarks there will be a question-and-answer session. If you
would like to ask a question during this time, simply press star then the
number one on your telephone keypad. If you would like to withdraw your
question press the pound key. Thank you.
Thank you. Scott Beinhacker, you may begin your conference.
Scott Beinhacker: Good morning and thank you for joining us today for the SHL Q3 2018
consolidated GAAP financial results investor call. I'm Scott Beinhacker, the
Head of Investor Relations at Syncora.
Participating with me on the call today are Fred Hnat, our Chief Executive
Officer; and David Grande, our Chief Financial Officer.
Before I turn the call over to my colleagues, I will remind everyone that
during our call and the Q&A session, management will reference certain
documents that we posted after the market closed yesterday to the Investor
Relations section of our website, syncora.com, specifically on the Investor
Events page.
2
These documents include the Syncora Holdings Ltd. consolidated GAAP
financial statements as of September 30, 2018 and for the nine months ended
September 30, 2018, the associated earnings release, together with the
financial highlights deck.
Please note that, as in the past, while we will not be reviewing the presentation
slide by slide during the call, we will make reference to a number of the slides
as we discuss our financial results.
I would also like to remind everyone that during the call and the Q&A
session, we may make projections or other forward-looking statements about
future results, plans and events. We caution that these forward-looking
statements are not a guarantee of future events and that actual events may
differ materially from those in these statements.
These forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond the company's control, including, but
not limited to, the factors described in our historical filings with the New York
State Department of Financial Services and in Syncora Holdings Ltd.’s and
Syncora Guarantee Inc.'s consolidated GAAP and statutory financial
statements as applicable, which are posted on our website.
You are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date they are made. The company assumes no
obligation to update forward-looking statements, information in the press
release, the financial highlights deck or as presented on the call to reflect the
impact of circumstances or events that arise after the date the forward-looking
statements are made.
References throughout the call to SHL and SGI refer to Syncora Holdings Ltd.
and Syncora Guarantee Inc., respectively, and the NYDFS refers to the New
York State Department of Financial Services. Finally, references to numbers
on the call are generally stated as approximations.
And with that introduction, I would now like to turn the call over to our CEO,
Fred Hnat.
3
Fred Hnat: Thank you, Scott, and welcome, everyone, to our third quarter 2018 earnings
investor call.
I would like to provide an update on our activities year-to-date and to also
provide some details on our efforts towards achieving our ongoing strategic
objectives before turning the call over to our CFO, David Grande, who will
update you on our financial position.
As you will recall, when talking about the priorities for Syncora, we have
discussed: de-levering Syncora’s overall capital structure, de-risking SGI’s
insured portfolio, asset monetization, reducing operating expenses and
planning for our next phase.
De-levering of the Company by reducing the amount of debt outstanding
remains a major priority for the Company. Under the terms of our surplus
notes, we are required to request a surplus note payment of at least
approximately one hundred and forty million dollars, which is the entire past
due amount along with what is currently owed on the long term and short term
surplus notes for the payment due in December 2018. I am very pleased to
report that the New York Department of Financial Services has just approved
a payment of two-hundred and seventy-five million dollars, to be paid
pursuant to the terms of the surplus notes in December 2018. This second
sizable payment on the surplus notes this year greatly furthers our goal of delevering
and simplifying Syncora’s overall capital structure. On a pro forma
September 30, 2018 basis, after the payment in December, there will be
approximately one-hundred and sixty million dollars of principal and accrued
interest outstanding on Syncora’s surplus notes.
On last quarter’s earnings call in August, we described to you the successful
completion of our efforts to reinsure approximately 90% of our insured
exposure to Assured Guaranty Corp. Notwithstanding that success, we
continue to look for opportunities to further de-risk the Company’s insured
portfolio. To that end, we are continuing to work on possible ways to reduce
our exposure with respect to those credits not reinsured to Assured – including
4
commutations, reinsurance and other hedging strategies. Among the retained
portfolio, we have had recent success in commuting a 100 million dollar
international power and gas exposure after the end of the third quarter. We
also view the recent proposed settlement reached by Puerto Rico with respect
to the COFINA bonds and the recent increase in bond prices for Puerto Rico
general obligation bonds as an indication of overall improvement for our
Puerto Rico exposures.
To improve our financial position, we continue our successful efforts to work
opportunistically to convert to cash more non-core and illiquid assets on our
balance sheet. In July, we announced the closing of the sale of American
Roads LLC for a cash consideration of approximately 220 million dollars,
which you will see reflected on this quarter’s financial statements. As was
disclosed in court filings, we sold reimbursement claims related to prior
payments on Puerto Rico general obligation bonds on terms that were
undisclosed due to confidentiality provisions in the related documentation,
thereby reducing our overall exposure to Puerto Rico obligations. I am also
pleased to announce that we have settled our litigation with Macquarie Capital
(USA) Inc. The terms of this settlement are confidential. We will continue
our asset monetization strategy to further strengthen our balance sheet which,
we believe, puts the Company in a better position to return value to our
stakeholders.
We continue to focus on ways to reduce our operating expenses on a run rate
basis. We are making steady progress in transitioning certain administrative
responsibilities of the reinsured policies that Assured Guaranty will now
administer as part of our reinsurance transaction that closed in the second
quarter. This work is a part of our continued efforts to drive operational
efficiencies throughout our Company and realize the expense reductions,
related to staff, office space, compensation and benefits.
Over the past several months, we met with or spoke to holders of a majority of
our common stock, Twin Reefs preferred and surplus notes as part of our
ongoing shareholder engagement process. We have heard a range of views on
5
Syncora’s strategic direction, including about the potential effect on
stakeholder value from a business focused on investments in CLO equity.
We are sharing the feedback we have received with the Board as it determines
the optimal path forward. Over the next several months, the Board will meet
to consider the feedback we have received as well as our strategic options and
we expect to provide an update on our strategic direction no later than our
next earnings announcement which is in March 2019. No final decisions have
been made at this time. As we have said in the past, we are in an exploratory
phase, the Board is considering all options and all options are still on the table
as we evaluate the possibilities. We will continue to proactively communicate
with our stakeholders throughout this process.
As I have just described, we continue to make large strides in our various
efforts to create value for our stakeholders and believe that we have been
successful at doing so in the last year. In looking at our stock price over the
last year, it has nearly doubled in that time period. As with monoline insurers
generally, the share price of our common equity trades at a discount to our
adjusted book value, but it is worth noting that today our discount is less than
that of all the other public monolines. Those two facts, together with the sixhundred
seventy-five million dollars of payments we will have made to third
party surplus noteholders in 2018, show that our strategic efforts have created
significant value for stakeholders.
I am very pleased to report all the progress we have made, and especially the
just-approved surplus note payment for December 2018. I will continue to
work with our outstanding team at Syncora on the initiatives I just described
and update you on further developments.
With that, I would like to turn the call over to David Grande to discuss our
third quarter 2018 financial performance and provide insured portfolio
highlights.
David Grande: Thank you Fred. As Scott mentioned, yesterday after the market closed we
posted to our website four documents: our third quarter 2018 GAAP earnings
6
release, SHL’s consolidated GAAP financial statements, our financial
highlights deck and SGI’s statutory-basis Quarterly Statements as of
September 30, 2018.
Jumping right into our results, for the nine months ended September 30, 2018
we closed the period with a GAAP net loss attributable to SHL of 19.3 million
dollars or a loss of 22 cents per common share, as compared to a net loss of
125.7 million dollars or 1 dollar and 45 cents per common share for the same
period last year.
Non-GAAP operating loss was 11.7 million dollars or a loss of 13 cents per
common share, as compared to a loss of 123.5 million dollars or a loss of 1
dollar and 42 cents per common share for the same period last year.
Non-GAAP adjusted book value per common share was 6 dollars and 3 cents
as of September 30, 2018 as compared to 7 dollars and 2 cents as of December
31, 2017.
A full description of the limitations in using non-GAAP financial measures
and the adjustments made to derive our non-GAAP operating income and loss
and Adjusted Book Value, is included in the earnings release.
Two of the more significant drivers of our results this period include:
First, the closing of the sale of American Roads on July 16th. The gain on the
sale was 64.4 million dollars and is consistent with the amount I disclosed on
last quarters’ earnings call. This gain is included in the caption “income from
discontinued operations” on the Income Statement.
And second, net recoveries, including loss adjustment expenses, are reflective
of public finance positive developments in the third quarter, including the
effect of the sale of reimbursement claims related to prior payments on Puerto
Rico General Obligation bonds as Fred already mentioned.
Other highlights worth mentioning include:
7
First, net premiums earned of 26.1 million dollars for the nine months ended
September 30, 2018, which was lower than the 38.6 million dollars of net
premiums earned for the same period last year primarily as a result of higher
premiums ceded of 5.1 million dollars and lower earned premiums from the
continued run-off of our book of business. Total premium accelerations
decreased by 4.2 million dollars to 15.7 million dollars for the nine months
ended September 30, 2018.
Second, net investment income decreased by 2.9 million dollars from 34.0
million dollars for the nine months ended September 30, 2017 to 31.1 million
dollars for the nine months ended September 30, 2018. The decrease was
primarily due to lower income on remediation bonds as compared to the prior
period.
Third, 25.5 million dollars of mark-to-market losses on our CDS contracts, as
compared to 45.6 million dollars of mark-to-market gains for the same period
last year. The decrease was primarily due to the accounting effects of entering
into the reinsurance agreement with Assured Guaranty Corp. and lower nonperformance
risk spreads.
Fourth, as discussed last quarter, we recorded a 91.4 million dollar loss on
debt prepayment as a result of the payment made on SGI’s long-term surplus
notes in the second quarter which have not yet been fully accreted to par. The
total payment made last quarter was 400 million dollars. As a result of the
recent approval by the NYDFS of a two-hundred seventy-five million dollar
payment for December as Fred mentioned, we would expect another loss on
debt prepayment in the fourth quarter.
And lastly, even though we’ve implemented significant cost reduction
initiatives, operating expenses were slightly higher as compared to the same
period last year primarily as a result of expenses incurred in connection with
the reinsurance agreement.
8
Also, it is worth noting that subsequent to quarter close, the company entered
into a transaction for the sale of the majority of its private equity investment
program for approximately 33 million dollars which is the carrying value at
September 30, 2018. The private equity program began in 2015 and was
established primarily to enhance our asset and liability management for longer
dated liabilities. The sale is expected to close during the fourth quarter.
Moving on to our retained insured portfolio, and as outlined on slides 11 and
12 of the financial highlights deck, as of September 30, 2018, SHL reduced its
total net par exposure by 13.8 billion dollars, to 1.0 billion dollars primarily as
a result of the reinsurance cessions to Assured. Post-reinsurance, the average
internal rating of our retained portfolio was bb, which is lower than the bbb+
from year end 2017, and total credit count decreased from 495 credits as of
December 31, 2017 to 20 credits as of September 30, 2018. I should note that
these amounts do include a 100 million dollar international power and gas
exposure that was commuted after September 30th, so the effects of that
transaction will be reflected in our fourth quarter reporting.
Our below investment grade credits, or BIG exposures, were 0.5 billion
dollars as of September 30, 2018, a reduction of 0.7 billion dollars from year
end also primarily as a result of the reinsurance agreement. In addition, our
BIG flag list leverage ratio, as shown on slide 15 of the deck and defined as
our BIG exposure divided by our claims paying resources, decreased
significantly by 39 percent in total to 0.43 as of September 30, 2018. In
addition, 5 percent and 0.09 of this decrease to our BIG flag list leverage ratio
has taken place post-reinsurance.
With that, let me turn the call back over to Scott for a brief question and
answer period.
Scott Beinhacker: Thank you, David. With that, operator, let's open the call to questions.
Operator, would you please provide instructions for those analysts on the call?
Operator: At this time if you would like to ask a question press star then the number one
on your telephone keypad.
9
Your first question comes from Andrew Gadlin with Odeon Capital. Your
line is open. Andrew Gadlin, your line is open. Andrew Gadlin, please
unmute your line.
And your next question comes from Rob Halder with NatAlliance Securities.
Robert Halder: Good morning, guys. Hopefully I am not stealing Andrew’s question.
Congrats on the surplus note approval to start, but I did have a couple
questions. On the noncore and illiquid asset sales, you mentioned that you
were able to sell and I see in the court filings the Puerto Rican GO claims
salvage. It looks like that's about half of the net claims paid already in Puerto
Rico. Do you think there are other opportunities to either sell this or other
assets held in salvage?
Frederick Hnat: Good morning, Rob. We're happy to come back to Andrew, if he's able to
join the question with a question. But we are always looking for opportunities
to sell less liquid assets at the right price and enhance the company's credit
profile. And there are different types of assets held in salvage bankruptcy
claims, repurchased bonds, PREPA had a concept of bridge bonds or
relending bonds. They were purchased to fund past debt service. The GO
claim that we were able to monetize earlier this year was a volatile asset, and
the timing and price made sense for us. We have a strategy to monetize assets
to facilitate payments on the surplus notes. And we think that enhances our
ability to obtain approvals from the NYDFS to pay surplus notes. Clearly, it
didn't monetizing that GO claim didn't hurt us in our last approval cycle with
them. So yes, this is something we'll continue to be focused on. There may
be opportunities on Puerto Rico or other illiquid assets that we have in our
balance sheet.
Robert Halder: OK. And then the follow up on the private equity sale. Can you guys provide
any more information? It sounds like it's going to boost cash when it closes,
but kind of a de minimis impact on surplus. Am I thinking about that
correctly?
10
David Grande: Yes, that's right, Rob. As I mentioned on the – during my prepared remarks,
the PE program was established primarily to better match our assets and
liabilities. And it primarily involved small dollar purchases of minority
positions in relatively young companies. From the outset, the program has
been extremely successful, and it has yielded an IRR on the sales of an excess
of 20 percent, I think maybe 23 percent to be more accurate on that.
But from an accounting perspective, the gain on the sale in the fourth quarter
is not expected to be material, but that's – and that's because we've – from the
beginning, we elected the fair value option on those investments. And so
we've been marking them to market through the P&L against – since the
beginning.
But again, the monetization of the liquid assets is consistent with our stated
strategy, and we believe that it was and will be helpful in getting surplus notes
paid quicker.
Robert Halder: Got you. And then just following up on that. After the approval in the surplus
notes, I know that about 6 months ago you guys have gotten approval from
some of the surplus noteholders for a transaction, a single transaction—Twin
Reefs. I didn't know where stood. Is there any progress that you guys can
report on that? Is that something that you're thinking about? And how are
you thinking about that?
Frederick Hnat: Well, we have until May of 2019 to do a onetime tender, as you mentioned,
Rob. And we can make a purchase for up to $65 million in cash. We don't
plan to move forward on that this year, as it will require NYDFS approval.
We felt the best use for our cash at the station was just maximizing our
surplus note pay down, and we're, obviously, pleased with the outcome of that
process.
But as we get into next year, we'll again be looking for ways to repurchase
Twin Reef Securities at a meaningful discount to par. In the meantime, they
are a cheap financing vehicle. They are perpetual and noncumulative. So
clearly, the economics have to be beneficial, and we'll continue to review it
together with other strategic initiatives and capital allocation.
11
Robert Halder: And just as you guys are talking about to you talking about it, it sounds like,
obviously, the focus for now is on redeeming the surplus notes. Should we
continue to expect that into next year where the surplus notes remain kind of
the #1 priority? And then the auction rates, the Twin Reefs, come after that?
That's of kind of what it sounded like.
Frederick Hnat: Yes, I think, for this year, it's a priority. I think it continues to be a priority.
We want to reduce the interest costs, and we've talked about the negative
carry between the interest paid on the surplus notes and the earnings on our
investment portfolio.
The sooner we pay off the surplus notes, the sooner we can make distributions
to equity not subject to surplus note holder consent. So those are the
objectives. And we'll continue to evaluate it periodically with our board, and
– it will continue to be a priority, and we'll have to balance how our dealings
work with the regulator and our available capital to make distribution.
Robert Halder: Ok, great, thank you, guys.
Operator: Your next question comes from Andrew Gadlin with Odeon Capital.
Andrew Gadlin: Hey, guys, sorry about that earlier. I just wanted to ask a follow-up question
about the existing portfolio. And you mentioned some of the stats and
derisking the company for that portfolio. Can you give any more color on the
remaining credits? And what additional work you can do to derisk further?
Frederick Hnat: Hey, Andrew, the remaining portfolio, obviously, there's some Puerto Rico.
That picture I think is improving somewhat. The other credits, even the below
investment grade credits, are fairly stable on our view.
We've reinsured 90 percent of our book to Assured and now we're exploring
multiple ways to derisk that stub-piece, that remaining portfolio, looking at
things like reinsurance, commutations, there are other hedging strategies that
we can use or the risk can run off on their own, and we explore ways to work
with the issuers to do that like we did with Reliance Rail in 2017.
12
So yes, we think pursuing these kinds of opportunities make sense, it adds
further value to our stakeholders by, David alluded to it, increasing the speed
of distributions that are approved by the New York Department of Financial
Services. We noted the one recent success we had, which was to commute an
international power and gas credit.
One way to approach this is to focus on lower hanging fruit policies that are
held by a single policy holders, single policy holder, because it simplifies
negotiation and execution and some of our larger European infrastructure
credits are ones that are held by single policy holders to we can approach and
hopefully make more progress on. So we're going to continue to look for
those types of opportunities not at any price obviously, but opportunistically
and at the right price.
Operator: There are no further questions. I will now turn the call back over to Scott
Beinhacker.
Scott Beinhacker: Thank you, operator, and thanks, everyone, for joining us on the call. We
look forward to talking to you again after the release of our year-end 2018
financial statements.
In the meantime, if you have any questions, please feel free to reach out to me
at [phone] or through our dedicated Investor Relations e-mail,
[e-mail]. A transcript and replay of this call will be
available on our website later today. Thank you all for listening.
Operator: This concludes today's conference call. You may now disconnect.
END