Asta Funding (ASFI) is a consumer debt investor which manages the receivables while outsourcing the collections to third-party agencies. The company has had a few challenging years, as Asta bought a big portfolio of receivables at the worst possible time in addition to leveraging up the company right before the financial crisis. Despite the recent issues, there is no way the stock should be trading for under the company’s liquidation value. I believe that substantial value and upside exist in these shares at current prices.
- I estimate that the company would generate $12 a share in liquidation – 43% above the current stock price.
- The Company generates a ton of cash, and continued to be cash flow positive during the crisis.
- Management is experienced in the business and has a stellar track record.
- Earnings are starting to stabilize and this should get Wall Street interested in the name soon – there is only one sell-side broker that covers ASFI currently.
Asta Funding’s shares are currently trading at 70% of the $12 liquidation value I put on the shares. Before the crisis hit, the company traded at an average of 2.5x book. If I use that as a valuation metric, I would arrive at a value of $28 per share. If I apply the average book value of the closest comparisons, I would arrive at a value of $27 per share.
Asta Funding, Inc. is a consumer receivable asset management company specializing in the purchase, management and liquidation of performing and non-performing consumer receivables. Asta generates revenues and earnings primarily through the purchase and collection of performing and non-performing consumer receivables that have typically been either charged-off by the credit grantors or not considered to be prime receivables. These receivables include MasterCard, Visa, other credit card accounts issued by banks, telecommunication accounts and other consumer loans issued by credit grantors. Asta may also purchase bulk receivable portfolios that include both distressed and non-conforming loans.
Asta takes a disciplined approach to portfolio acquisitions utilizing a combination of proprietary quantitative and qualitative methodologies, including its extensive database of historical portfolio collections. Asta then actively manages the liquidation of these portfolios, primarily through outsourcing collection activities to its large, national network of collection agencies and law firms, which are closely monitored and managed. This outsourcing model enables Asta to maintain a low-fixed cost structure. In addition, the flexibility of its liquidation strategy maximizes Asta’s portfolio collections.
The non-conforming and distressed consumer receivable market is a growing industry which is driven by increasing levels of consumer debt. Despite generally good economic conditions during the mid to late 1990s, credit card and other consumer receivable charge-offs have increased as overall consumer debt has increased. According to the United States Federal Reserve, American consumers had aggregate indebtedness of more than $2.4 trillion, and that the size of the revolving credit market in the United States was in excess of $820 billion.
Historically, originating institutions have sought to limit credit losses by performing recovery efforts in-house, outsourcing recovery activities to third-party collection agencies and selling their charged-off receivables for immediate cash. From the originating institution's perspective, selling receivables prior to or after charge-off yields immediate cash proceeds and represents a substantial reduction in the time period typically required for traditional collection and recovery efforts. Both non-conforming and distressed receivables are sold at substantial discounts to the balances owed on the receivables, with the purchase price varying depending on the amount that both the purchaser and seller anticipate recovering and the costs associated with recovering these receivables.
The market for buying non-conforming and distressed consumer debt portfolios has expanded due to a steadily increasing volume of delinquent and charged-off consumer debt coupled with a shift by originators or credit grantors toward selling their portfolios of nonconforming and distressed consumer loans.
The Value in ASFI
To put it simply, the value in the company is in the Balance Sheet. The company has a Net Current Asset Value of $142.2 million or about $9.73 a share. The stock is currently trading for $8.34 a share. This usually is not the case unless the company is expected to destroy value going forward or some of its current assets are impaired. Taking a look at the assets, you can see why the market has doubts about ASFI.
The company has nearly $140 million in consumer receivables, the same consumers that have been in a state of pain the past few years. The company also has run into some issues with a very large portfolio (Great Seneca) it purchased right before the recession which has led to doubts about the future collectability of all of the company’s receivables.
Great Seneca Portfolio
The company purchased the portfolio in February of 2007, right before the economic turmoil hit. ASFI purchased the portfolio, which had a face value of approximately $6.9 billion, for $300 million or 4.3 cents on the dollar. The funding consisted of $60 million in cash, $15 million from an existing credit facility, and a $225 million non-recourse loan from the Bank of Montreal. In 2Q08, the first sign of trouble hit. The company had an impairment of $30.3 million in the portfolio because actually collections were slower than original expectations. The next quarter, the company transferred the Great Seneca portfolio to the cost recovery method of accounting from the interest method, as collections were becoming increasingly more difficult to predict.
As the economy continued deteriorating and the impairments started piling up, investors became worried about the Great Seneca debt and that it could force the company into default. This sent the stock into a downward spiral, reaching a low of $1.00. After some negotiations, the company was able to renegotiate the terms of the debt and subsequently there were two more amendments to ease the terms of the debt.
Currently the portfolio is being carried on the books at $87.7 million with the $79.3 million in debt being non-recourse only to the Great Seneca portfolio. CFO, Bob Michel clearly stated that the company theoretically could give back the portfolio to the Bank of Montreal, but it’s not in the company’s best interest to give back capital with the credit markets still tight.
The company seems to have learned its lesson of becoming overleveraged at the wrong time and has been deleveraging since the recession hit. Debt/equity has shrunk from over 137% at the end of FY07 to just under 48% for the last reported quarter. Debt on an absolute basis has shrunk from over $326 million at the end of FY07 to just under $80 million for the last reported quarter. At the same time, the company’s cash on the balance sheet has rose from roughly $4.5 million at the end of FY07 to just over $81 million for the last reported quarter. The balance sheet now is in a lot better and cleaner shape and gives Asta fresh ammunition once prices come down on portfolios.
Impairments and Fully-Amortized Portfolios – The Hidden Asset
Asta recognized more than $200 million in impairments in FY08 and FY09 as the economy was weak and the consumer was on life support. However, even though the portfolios were written down, that doesn’t mean that the company can’t collect on those portfolios. According to a recent conversation with management, the CFO said that when the company impairs a portfolio, it usually means that collections are going slower than expected not that the company won’t collect on the portfolio.
The company has significant cash collections from portfolios that are not even on the balance sheet.
Although ideally I would just take the present value of all of the expected cash flows from zero-based portfolios, it’s hard to get a good grip on what is expected. I can take a multiple of what the company has experienced in the past three years and add it on do the balance sheet. If I take just 1x the past year’s collections from fully amortized portfolios ($35.0 million), this would give the stock upside of nearly 40% from these levels, not taking into considering the tax asset.
I also did a calculation based on my projections of decay of these portfolios and the equity discount rate. I projected three years out, with a decay rate of 4% a quarter and an equity discount of 12%, without taking into account the terminal value. I came up with a value of $68.8 million. For comparison purposes, the quarterly decay rate for the past 2 years was 3.0% and 2.4%.
Liquidation Value of ASFI
I took the value of the receivables on the book and added the value of the cash that I expect the company to receive from the fully-amortized portfolios. I did not include any of the other assets in the calculation because they are harder to value and require a lot more estimates. Although I don’t expect the company to liquidate, I estimate that the stock is worth roughly $12 a share in liquidation. In reality, I think the company is worth much more than that as a going concern with the solid management team in place and the track record of success. Once the company becomes more active in purchasing debt, and earnings show a few quarters of stabilization and no additional impairments, the stock price will reflect the reality and not the ultra-pessimistic view of the company.