ECC Capital: Liquidation, De-Listing Could Present Buy Opportunity

| About: ECC Capital (ECRO)

On March 9, I started accumulating shares of ECC Capital (OTCPK:ECRO) on dips near the 40 cent level and have accumulated 50,000 shares so far. I bought my shares in three lots of 10,000 shares and one lot of 20,000 shares.

At first, I planned to use Fidelity, but they add a surcharge of 0.005 per share for stocks trading under a dollar. So to buy 10,000 shares of ECR at 0.40 would add an extra $50 to the usual $8 commission. If you buy 50,000 shares, the total surcharge is $250 (ouch!).

Fortunately I also have an account at Foliofn, and I was able to buy my shares there for $3.95 an order, since ECR was a tier2 stock. The total commission for my four orders at Foliofn was only $15.80, versus the $282.00 that it would have cost me at Fidelity. I use Fidelity for a lot of my trading, but they are not competitive for stocks trading under a dollar.

ECC Capital used to trade on the NYSE under ticker ECR. But it was de-listed yesterday from the NYSE, and now trades on the bulletin board under ticker ECRO.OB. I thought the de-listing might depress the share price and I was hoping to accumulate more shares at 40 cents or less, but I was disappointed and the price rose yesterday instead.

ECC Capital recently sold its sub-prime loan business to Bear Stearns and effectively paid Bear Stearns $7 million to take the business off their hands. The two companies originally agreed on a sale price of $26 million, but since ECC Capital sold some loans for less than expected, it owed $33 million to Bear Stearns which had lent money to ECC to fund the loans.

So if you net the two payments out, ECC actually paid Bear Stearns $7 million to unload the business. But further adjustments are still being made, so the final net purchase price is not decided yet.

In a press release on March 9, ECC management summarized the latest status of their liquidation distributions. ECC distributed 0.24 back in December as part of a previously announced intended distribution of 0.80 per share. They have declared another distribution of 0.07 per share to be paid on March 30.

The remaining intended 0.49 cent distribution remains dependent on a variety of factors, and will probably be delayed until late this year. Management also estimated the remaining loans were worth around 0.80 cents, so the total (estimated) remaining distributions after the 0.07 distribution total around $1.29 per share.

But because of the recent turmoil in the sub-prime markets, I applied a “haircut” to the $1.29 payout. I checked the value of the ABX-HE-BBB- 07-1 Index Index which measures the value of the lowest rated mortgage debt. The last price of this index is around 70 (down from around 95 earlier in the year), so a haircut of 30% seems reasonable. So my rough estimate of the future ECR payouts is around 95 cents over the next 18 months.

If you can buy ECRO around 40 cents a share, you will get back 7 cents next week, so your remaining risk is only 33 cents. If things go well, I think you can triple this investment. Of course, this is a highly risky investment and is not for widows or orphans. There may be litigation risk, or further price drops of lower rated mortgage debt prices.

Full Disclosure: I am long ECC Capital.

ECRO.OB 1-yr chart: