Capital Crossing Preferred Corp: Too Cheap? 20 comments
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Capital Crossing Preferred Corp (CCPCN) is an extremely rare bird. It is a REIT which owns cash and mortgages worth $118 million, as of Sept. 30, 2008, and it has less than $1 million in total liabilities. But the 8.5% Series D non cumulative, exchangeable preferred shares are selling for just $6 million (thinly traded at $4 per share), even though they pay a $2.125 annual dividend. It common stock is 100% owned by Lehman Bank FSB, a well capitalized subsidiary of Lehman Brothers Holdings, Inc. The 8.5% preferred shares (CCPCN) are a separate legal entity with its own board and reporting requirements, trading. This is extremely rare – both because of its severe undervaluation, and also because of its separate reporting and filing status.
In November 2008, CNPCN’s board announced it was going to redeem the 8.5% Preferred shares at $25 per share. But in December the Office of Thrift Supervision said no – Lehman Bank, CCPCN’s parent, needed to keep the “capital” on its balance sheet.
Meanwhile, CCPCN is still paying its quarterly dividend of $0.53125 per share (an annual yield of 53 %!). We think there is a good chance the stock will rise to close to its $25 redemption value over the next year or so. First, it is highly likely that Lehman Bank FSB will be sold (along with its 100% ownership of Capital Crossing’s common stock) to another company, most likely another bank or a private equity fund.
Second, as of Sept. 30, 2008, CCPCN had $63.2 million in cash, plus $54.8 million in mainly commercial mortgages. The total cost to redeem the CCPCN preferred is $37.5 million (at $25 for each 1.5 million preferred share). So the company has more than adequate capital (and virtually no debt).
Third, even if Lehman Bank were to buy the CCPCN shares in the market, they would likely rise to at least $14 - 17 or so. The CCPCN shares would then yield 12 – 15% which is where other bank preferred shares are trading.
Fourth, even if Lehman Bank sold its commercial mortgages at huge discount (even though as of Sept. 30, 2008, all but 1% or so were performing loans), the board has a fiduciary obligation to maintain sufficient cash in Capital Crossing to redeem the CCPCN shares.
This stock is a true value investment along the lines that Ben Graham talked about in his book The Intelligent Investor.
Full disclosure: Hake Capital, Hake Partnership and Hake Investment Research own shares in CCPCN.
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Here was the report and link;
www.ots.treas.gov/?p=E...
Enforcement Information
Issue Date: 01/26/2009
Order Number: NE-09-02
#06069 - Lehman Brothers Bank, FSB
Wilmington, DE
Document
97055.pdf
Order Type
Cease and Desist
In the prospectus for CCPCN, it reads: "The returns from your investment in the Series D preferred shares will depend to a significant extent on the performance and capital of the Bank. A significant decline in the performance and capital levels of the Bank or the placement of the Bank into bankruptcy, reorganization, conservatorship or receivership could result in the automatic exchange of your Series D preferred shares for preferred shares of the Bank, which would represent an investment in the Bank and not in us. Under these circumstances."
So how healthy is the Bank?
The Bank currently has a 2.2 billion claim against Lehman Bros. Holdings, for loans that were to be purchased by them on Sept. 15. But bankruptcy...
Let's assume that the 2.2 billion lawsuit delivers nothing for the Bank. It is then my suspicion that the loans will not be saleable at their carrying value. Sept 30, 2008 data from the FDIC (the most recent available) shows a YOY drop in equity capital of over 1 billion. Current equity capital stands at 1.009 billion. If the 2.2 billion has a 10% haircut, that will wipe out over 20% of remaning equity capital. I'll let you figure the more gruesome scenarios.
This of course still assumes that all the rest of the banks' assets are fine. June 30, 08 to Sept 30, 08 shows a drop of over 700 million in equity capital. In sum, I suspect that the Bank is a couple bad quarters away from receivership.
See Buffett's rule #1--don't lose money. There is a real risk of permanent capital loss on this one.
The 12/31/08 financials will give a better clue of where Lehman Brothers Bank stands.
On Feb 05 07:30 PM User 351933 wrote:
> Despite the fact that the potential return has grown on this play,
> I still do not find the risk-return favorable.
>
> In the prospectus for CCPCN, it reads: "The returns from your investment
> in the Series D preferred shares will depend to a significant extent
> on the performance and capital of the Bank. A significant decline
> in the performance and capital levels of the Bank or the placement
> of the Bank into bankruptcy, reorganization, conservatorship or receivership
> could result in the automatic exchange of your Series D preferred
> shares for preferred shares of the Bank, which would represent an
> investment in the Bank and not in us. Under these circumstances."
>
>
> So how healthy is the Bank?
>
> The Bank currently has a 2.2 billion claim against Lehman Bros. Holdings,
> for loans that were to be purchased by them on Sept. 15. But bankruptcy...
>
>
> Let's assume that the 2.2 billion lawsuit delivers nothing for the
> Bank. It is then my suspicion that the loans will not be saleable
> at their carrying value. Sept 30, 2008 data from the FDIC (the most
> recent available) shows a YOY drop in equity capital of over 1 billion.
> Current equity capital stands at 1.009 billion. If the 2.2 billion
> has a 10% haircut, that will wipe out over 20% of remaning equity
> capital. I'll let you figure the more gruesome scenarios.
>
> This of course still assumes that all the rest of the banks' assets
> are fine. June 30, 08 to Sept 30, 08 shows a drop of over 700 million
> in equity capital. In sum, I suspect that the Bank is a couple bad
> quarters away from receivership.
>
> See Buffett's rule #1--don't lose money. There is a real risk of
> permanent capital loss on this one.
If you don't agree with this, please explain why there was a recent cease and desist order for the parent company, how the parent bank will fund themselves without new certificate of deposits, how a sale to another company while under distress or receivership won't translate into the transfer of preferred into a less valuable parent company preferred.
Please prove to us how you can get comfortable that...
"Lehman Bank FSB, a well capitalized subsidiary of Lehman Brothers Holdings, Inc." is still "well capitalized?" It isn't, its in terrible shape right now.
Why did the 3 member board all leave that post in the last 2 months?
The OTS required Capital Crossing not to pay out the funds because the parent company NEEDs that capital and will likely keep it when they go into 'stress'.
Why would the parent company purchase CCPCN on the open market? They will not be able to afford it and it would retire the outstanding capital which the OTS requires they keep.
For the individual who said the below contractual statement is boilerpoint, please show other examples of such boilerpoint - I challenge you.
"A significant decline in the performance and capital levels of the Bank or the placement of the Bank into bankruptcy, reorganization, conservatorship or receivership could result in the automatic exchange of your Series D preferred shares for preferred shares of the Bank, which would represent an investment in the Bank and not in us."
A buyer of CCPCN needs to be able to understand and deal with these problems and risks.
"how a sale to another company while under distress or receivership won't translate into the transfer of preferred into a less valuable parent company preferred" So you believe the FDIC or OTS would sell a troubled asset to a bank that is in worse shape< does that make sense to you on any level? Sale to another institution, sure, but a weaker one, why?
www.ots.treas.gov/?p=I...
Enforcements
Order Number Issue Date Type
NE-09-03 02/04/2009 Prompt Corrective Action
NE-09-02 01/26/2009 Cease and Desist
#1 is very strong financially, however it is linked to #2 which may be so weak right now that FDIC/OTS needs to step in. If it is sold to another company which FDIC/OTS gives their blessing to, surely that purchaser would be better off than #2, but not #1.
Should whatever sale/action occur the #2 bank would be wise to flip the #1's preferred into their own preferred and deem that more or less worthless a moment later, then complete the transaction with FDIC/OTS or new buyer. They could leave that preferred behind in an old independant unit. The scenarios are endless, but the legality exists to save the new owner $38 million of headache without anything that I have seen to stop them.
Washington Mutual was taken over by FDIC and then transfered to JP Morgan Chase. What happened to their bonds and preferred securities? nothing good, they are tied to the remaining WaMu entity which went bankrupt the next day and are likely to get nothing or pennies back.
New 8-K Report 02/10/09 (01/26/09)
yahoo.brand.edgar-onli...
On February 5, 2009, Capital Crossing Preferred Corporation (the “Company”) and Lehman Brothers Bank, FSB (“Lehman Bank”), entered into an Asset Exchange Agreement (the “Agreement”) pursuant to which the Company will transfer 220 loans secured primarily by commercial real estate and multifamily residential real estate (together, the “Loans”) to Lehman Bank in exchange for 205 loans secured primarily by residential real estate (the “Bank Loans,” and the exchange of Loans for Bank Loans, the “Exchange”). The Loans represent substantially all of the Company’s assets, excluding cash and interest bearing deposits, as of December 31, 2008. The Exchange is subject to certain conditions to closing and, while there can be no assurances that such conditions will be satisfied, if such conditions are satisfied, the Exchange is expected to be consummated on or after February 13, 2009. ...................>...
yahoo.brand.edgar-onli...
CCPCN is getting a net present value of $12 Million additional dollars by exchanging its corporate loans to Lehman in exchange for the residential ones that Lehman currently owns. Lehman is transferring a net $12 million dollars of capital INTO CCPCN (netting out the 2 sets of loans), as per OTS' orders, in order to raise Tier 1 capital.
Additionally, those residental loans are currently less than 1% in arrears. Furthermore, OTS views residential loans as being more stable than the commercial ones, for purposes of Tier 1 capital levels.
Long story short, I believe that Lehman Bank, FSB, is once again trying to redeem the Preferred D shares (CCPCN), so that it can cash out its underlying position as sole shareholder of Capital Crossing.
DISCLOSURE: I am long CCPCN, and continue buying at these levels.
The transaction is a creative way to saddle CCPCN with lower quality loans and stregthen the parent company. The figrues and statistics shows in the 8K are not neccesarily a lie but are NOT the entire picture. The old CCPCN loans we nearly no defaults and were from the 2002-2005 vintage...that means they are time tested and well in the money. The new loans are absent that information, but they are likely to be loans from 2004-2008. One would rather be a lender under 2003, 2004 standards vs. 2006-2008 standards.
(docket 3074)
By this Motion, LBHI seeks authorization, but not direction,
pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy Code and Bankruptcy Rule
6004, to enter into a master repurchase agreement with the Bank (the “Repurchase
Agreement”) under which LBHI will purchase from the Bank a portfolio of residential
mortgage loans for up to an aggregate amount of $325 million
LBHI expects that the cash that will be made available
to the Bank under the Repurchase Agreement will enable Aurora to satisfy its advance
obligations, a significant portion of which will begin to become due on March 16, 2009.
Less than six months ago, the value of LBHI’s equity interest in
the Bank was reported at approximately $1 billion with total assets of approximately $7.2
billion and total liabilities of approximately $6.2 billion. See September 30, 2008 TFR,
Schedule SC. On that same date, the Bank was considered “well capitalized” with a total
risk based capital ratio of 10.57% in full compliance of its capital regulations.
Notwithstanding the decline of the Bank’s capital levels reflected on the Bank’s
December 31, 2008 TFR, the value of LBHI’s equity interest was still reported at
approximately $467 million.
Due to the recent collapse of the financial markets, LBB lacks the
ability to access the funding sources it would normally rely upon to finance Aurora. If
Aurora is not be able to satisfy its monthly Advance Obligations, which will begin to
peak on or about March 16, 2009, Aurora’s Counterparties may, under certain
circumstances, declare Aurora to be in default under the Mortgage Servicing Agreements.
If that happens, the Counterparties could take precipitous actions that would threaten the
value of Aurora’s business and the Bank’s enterprise as a whole and the Bank’s
Regulators may also take regulatory action out of concern that the Bank may no longer be
able to rely on Aurora’s business.
>>NEW YORK (Reuters) - Bankrupt Lehman Brothers Holdings Inc is auctioning a thrift and an industrial bank it owns, and the process is in the early stages, a source familiar with the matter said on Monday.
The sale of Lehman Brothers Bank FSB, a Delaware-based thrift, and Woodlands Commercial Bank, a Utah industrial bank, is being handled by investment bank Lazard Ltd, the source said.
A transaction will have to go through the U.S. bankruptcy court process, said the source, who asked not to be named because the sale process is not public.
A Lehman spokeswoman said the company was selling all assets as part of Lehman's wind-down in bankruptcy.
"We're looking to realize value whenever we can get it," Lehman spokeswoman Kimberly Macleod said.
"We're going to hold it until someone comes with fair value and the creditors' committee approves it," she said, noting Lazard was running the sales process for this and other assets.
Lazard declined to comment.
"Relief Requested
12. By this Motion, the Debtors seek authorization, but not direction,
pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy Code and Bankruptcy Rules
9019 and 6004, to execute the following actions to support the Bank’s capital level:
• LBHI’s entry into one or more assignment agreements (the
“Assignment Agreements”) with Aurora to transfer all or part of a
portfolio of LBHI’s unencumbered mortgage servicing rights to
Aurora;
• LBHI’s entry into a settlement agreement (the “Settlement
Agreement”) with the Bank and Aurora, pursuant to which LBHI
will convey to and confirm Aurora’s ownership of certain funds;
• LBHI’s investment of cash up to $15 million in one or more capital
contributions (the “Cash Contribution,” and together with the
Assignment Agreement and the Settlement Agreement, the
“Capital Contribution”);
docket 3194:
"ii. As part of its next quarterly financial report, LBB must
report its capital level as of March 31, 2009 to the
Regulators. It is expected that LBB’s capital on such
date will be below the 8% level that is considered to be
adequate under the applicable regulations and required by
the PCA. If the Bank is not in compliance with the PCA,
the Bank’s Regulators may take actions to restrict or
control the Bank’s activities that could jeopardize the
value of LBHI’s equity interest. To preserve the value of
LBHI’s equity interest and to avoid the risks associated
with a failure of the Bank, including the potential
exposure of LBHI’s equity interest in Woodlands, the
Debtors have determined to take certain actions intended
to support the Bank’s capital level on March 31, 2009
and to thereafter maintain the Bank’s capital at the
adequacy level in connection with a long term business
strategy for the Bank (the ¨Capital Maintenance
Actions”). The Capital Maintenance Actions are
primarily non-cash capital contributions.
iii. Ensuring that the Bank’s capital is adequate on March 31,
2009 avoids the risk of regulatory action that could
jeopardize the value of LBHI’s equity interest. Also, by
making the investment prior to the quarter ending on
March 31, 2009, LBHI will obtain the added benefit of
satisfying, starting with the quarter ended March 31,
2009, a portion of the commitment obligation required of
it under the PCA to ensure that the Bank maintains
adequate levels of capital for a period of four consecutive
quarters.
iv. Under Bankruptcy Rule 2002(a), motions to use property
of the estate outside the ordinary course require twenty-
days’ notice. Due to the risks associated with an
inadequate capital level for the Bank on March 31, 2009
and the benefits to the Debtors of the Bank attaining an
adequate capital level on such date, the Debtors require
authorization to take the Capital Maintenance Actions
prior to March 31, 2009."
Docket 3962 - Aurora Bank
The Bank is required to report to the OTS its capital levels as of June 30,
2009 on its next quarterly thrift financial report (the “TFR”). Although the Bank’s condition has
improved as a result of various actions taken by the Bank and LBHI’s prior actions in support of
the Bank, there is a possibility that, due to the effect of fair value accounting, which subjects the
Bank’s capital level to the volatility of the marketplace, the Bank could fall somewhat below the
“well-capitalized” mark that is contemplated in the business plan. To avoid potential adverse
consequences from a dip in the Bank’s capital level on approval of the business plan by the OTS
and to ensure that implementation of LBHI’s business strategy for the Bank is not delayed as a
result, LBHI seeks authorization to make a capital contribution of up to $25 million to the Bank
prior to June 30, 2009. As explained below, LBHI believes that this capital investment is
appropriate and necessary to protect its prior investments in the Bank and to realize the value of
its equity interest in the Bank for the benefit of creditors."