Imperial Holdings IPO: Line of Business, Heavy Losses Cause Disinterest

Feb. 9.11 | About: Emergent Capital, (EMG)

This analysis of Imperial Holdings (IFT) was provided to TradingIPOs subscribers in advance of its Monday Feb.7 IPO. The company sold 16.7 million shares priced at $10.75, in the middle of the $10 to $12 expected range.

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Imperial Holdings plans on offering 19.2 million shares at a range of $14-$16. FBR, JMP and Wunderlich are leading the deal. Post-IPO IFT will have 27.3 million total shares outstanding for a market cap of $410 million on a pricing of $15. 2/3's of the IPO proceeds will be used to support IFT's finance transactions, with 10% to support IFT's settlement transactions.

Management and directors will own the non-floated shares.

IFT will not pay a dividend.

From the prospectus:

We are a specialty finance company founded in December 2006 with a focus on providing premium financing for individual life insurance policies issued by insurance companies generally rated “A+” or better by Standard & Poor’s or “A” or better by A.M. Best Company and purchasing structured settlements backed by annuities issued by insurance companies or their affiliates generally rated “A1” or better by Moody’s Investors Services or “A−” or better by Standard & Poor’s.

IFT finances life insurance premiums and also purchases structured settlements.

Revenues are earned from interest charged on financing loans and fees affiliated with those loans.

IFT historically funded their business by floating debt. Since 2007, the cost of debt financing has risen dramatically as lending rates and requirements such as collateral have increased.

IFT's financing costs in 2010 were 31.1% per annum of the principal balance of loans compared to 14.5% per annum in 2007. The result of these increased costs is that IFT has lost money on the bottom line in each of 2008, 2009 and 2010. Going forward, IFT plans on using IPO proceeds to fund future financing transactions, lower the cost of capital and increase the spreads.

IFT offers financing to individual life insurance premium holders, allowing policy holders to retain coverage and miss scheduled payments for a period of time. Average principal balance is $213,000. Loans are approximately 2 years in duration and collateralized by the underlying policy. An individual receiving a loan is not required to make any payments during the term of the loan. Average loan interest rate past two years has been 11%. At end of term either payment is made in full or default occurs and IFT takes control of the policy. IFT is generally required by lenders to insure policies upon lending and collects the insurance in case of default. This of course assists in increasing the cost of capital to that 31% annually.

Cost to IFT is 31% to finance loans with an average interest rate of 11%. IFT charges origination and agency fees as well, which allowed them to make a profit pre-2008 when cost of capital was 14.5% annually. At double+ the cost of capital, IFT needed to come up with an alternative. This IPO is that alternative, giving them capital to fund their own part of their life insurance loan program.

What a racket this appears to be. For loans that matured during the first nine months of 2010, 97% defaulted. No wonder IFT's cost of obtaining financing for these loans is so high, the loans nearly universally default. I don't care how much money IFT is making (they are not making any money since 2007), I don't want to invest in this type of business which essentially is taking advantage of individuals in a desperate situation.

Going forward IFT does not plan on obtaining insurance, rather they will fund their own purchases and grab the life insurance policy when the individual defaults. IFT will look to either sell the policy or hold it for maturity. This IPO is allowing them to change their business plan from one of financing life insurance loans, to a self-funded lender.

Structured settlements - 2nd segment, IFT purchases structured settlements at a discount and flips them and/or finances them through third parties. 2010 purchases were at a 19% discount to settlement. IFT generally resells the majority of their purchases and in 2010 the average sell price to discount was 9.1%. IFT does not generate a full 10% profit as they market heavily on tv, radio, print and internet to locate potential structured settlement sellers.

Bulk of revenues historically has been from IFT's life insurance loan segment.

Financials

$5 per share in net cash post-IPO. As noted above this cash will be used to alter the business model to self-funding loans.

2010 - $76 million in revenues, a decline from 2009's $96 million. IFT has not been profitable since 2007, losing more annually since. Losses in 2010 of $0.59.

Conclusion - Distaste for both the line of business and the hefty losses in 2008, 2009 and 2010. Business model going forward will be self-funding short term life insurance loans with nearly universal default rates. IFT plans on holding a portion of these defaulted loans, making payments on them until the defaultee expires....then IFT cashes in. No interest.