The main risk to my bull thesis on Imperial Holdings (NYSE:IFT) is that the company may be forced to do a secondary offering at the current discount to tangible book value. After reading the 8-K, this risk appears to be off the table:
Income (loss) was driven by a ($17.5 million) aggregate decline in the fair value of the Company's portfolio of 212 life insurance policies to $102.3 million. This decline resulted from applying updated life expectancy reports, which the Company BEGAN PROCURING IN ANTICIPATION OF A CAPITAL RAISING TRANSACTION.
While it isn't great to see fair value of the policy book decrease by 15%, I consider the update of life expectancy reports (and the concurrent adjustment to life expectancy) as a necessary step to getting potential lenders more confident about the collateral. Now that fair value is accounted for even more conservatively than before, I think Imperial's probability of getting a premium funding facility is more than 90%. Not that I had any real doubts about this anyway; why would Imperial continue to add new policies to the portfolio (and outlay more cash for premiums) if it wasn't absolutely certain of getting funding? It certainly wouldn't be adding new policies to the book only to end up doing a secondary offering and diluting the stock.
Incidentally, I provided the important metrics of IFT's situation to several private equity funds and they all saw the value of lending to IFT. It's a math problem, just like underwriting any other type of loan. It's just that the asset is more esoteric than, say, a real estate project and the list of potential lenders is therefore not as long. But there are enough smart people who understand life settlements, the actuarial assumptions and the timing of cash flows who can build in a margin of safety and provide the facility at a low rate (maybe 4% above LIBOR?), plus a small participation in the death benefits.
More from the 8-K:
Antony Mitchell, CEO, commented, 'Our financial results during the quarter were impacted adversely by non-cash adjustments to the fair value of our investments in life settlements. The decrease in portfolio value resulted from updating certain life expectancy reports in anticipation of a potential financing transaction. Moving forward, we are keenly focused on our cash position and are pursuing financing opportunities to ensure the preservation and maximization of the value of our balance sheet assets.'
I think the stock will ultimately rise over 50% after a premium funding facility is in place. Even then, at $6 per share, the stock would be cheap. The policy book fair value is $102 million and is sure to rise as the discount rate drops at least 8 percentage points. There's $20 million in cash and equivalents. In total, there is over $150 million in assets. IFT is trading at a 40% discount to that.