Troy Racki

Deep value, long only, special situations, long-term horizon
Troy Racki
Deep value, long only, special situations, long-term horizon
Contributor since: 2009
Company: Troy Racki, DDS
No, I have not heard from WMI Parent Inc. So far there has been no official word from the company about this development. Until they do so, I rather not make any guesses. However if you or others wish to, feel free to comment. Thanks for reading.
What I am referring to is the end game for WMIH once the company exhausts all of its NOLs. Once all the NOLs are gone (so no longer any IRS restrictions), since KKR will be holding a major portion of WMIH common shares, it will likely absorb WMIH in an all equity transaction with holders of WMIH receiving KKR stock.
Thank you for your readership. I only report on securities I have conviction level on as I don't like to see my readers lose money.
Special Purpose Acquisition Company
Additional reading:
T11 Capital On The Remains Of Lehman Brothers:
Arquitos Capital 3Q15 Letter:
Unfortunately it appears you did not read all of the ruling. JPM will get another $419M payday courtesy of the FDIC at the expense of WaMu. Here are some select statements:
"The Plain Language of the Provisions of the P&A Agreement Supports JPMC’s Interpretation"
"Thus, even if the court considered defendant’s extrinsic evidence when it interpreted the P&A Agreement, it still would not have changed the outcome: the P&A Agreement still would have transferred ownership of the Anchor judgment to JPMC."
"For the foregoing reasons, the court holds that the Assignment of Claims Act did not bar the FDIC-R from transferring the Anchor Litigation to JPMC under the terms of the P&A Agreement."
As long as WMIH can remain over $2.25 as it has the last two days, then shareholders will have the minimal most amount of dilution possible concerning the $600M in preferreds.
The question everyone is now asking is at the April 28th shareholders meeting if they will be voting to approve the first M&A and increase in outstanding shares, which will be followed by the uplist to another exchange. As some have pointed out, WMIH needs to hit $4 to be able to be uplisted. As I wrote in my last article, the $4 price point is well supported.
My question is where the stock goes after $4. If the KKR sell of Alliance Boots to Walgreen's is any indication, $8 to $10 in the next 4-5 years may be a real possibility.
Look at the SEC filings and use the search function for "180".
WHEREAS, following the Offering, the Company intends to hold a special meeting of the shareholders of the Company at which the shareholders shall vote whether to approve (i) the Company’s reincorporation from the state of Washington to Delaware pursuant to an Agreement and Plan of Merger to be entered into by and between the Company and a newly formed, wholly owned Delaware subsidiary of the Company (“Newco”) (the “Merger Agreement”) (as the same may be amended from time to time in accordance with its terms), in accordance with which (and subject to the terms and conditions set forth therein) the Company would merge with and into Newco, with Newco continuing as the surviving corporation in the merger, (ii) an increase of the size of the Company’s board of directors from 7 to up to 11 members and (iii) an increase in the number of authorized shares of Common Stock from 500,000,000 to 1,000,000,000, which amount shall be sufficient to permit the mandatory conversion of all the issued and outstanding shares of the Series B Preferred Stock (collectively, the “Reincorporation”); and
WHEREAS, the Company must offer to redeem all outstanding shares of the Series B Preferred Stock if the Reincorporation is not consummated within 180 days of the date of issuance of the Series B Preferred Stock.
SECTION 7. Termination. This Agreement and the obligations hereunder shall automatically terminate on the first to occur of (a) the termination of the Merger Agreement in accordance with its terms, (b) a written agreement between the Company and the Shareholder to terminate this Agreement, (c) the end of the Voting Period and (d) the date that is 180 days from the date of this Agreement.
Section 18.15. Automatic Termination of Agreement Upon Reincorporation. Notwithstanding anything to the contrary contained herein, this Agreement shall terminate and shall have no further force and effect immediately and automatically upon the consummation of the Reincorporation, without any other or further act or deed on the part of the Company, the Guarantor, the Purchaser or any other Person. In the event that the Reincorporation is not consummated, this Section 18.15 shall have no effect. If this Agreement is terminated pursuant to this Section 18.15, such termination shall not affect the Company’s and the Guarantor’s obligations under any Notes outstanding at such time. For the purposes hereof, “Reincorporation” shall mean the reincorporation of the Company, not later than 180 days after January 5, 2015, from Washington to Delaware, resulting in the increase of the size of the Company’s Board of Directors from 7 to up to 11 members and the authorization of a number of shares of the Company’s common stock sufficient to permit the conversion of all shares of the Company’s 3.00% Series B Convertible Preferred Stock offered and sold on December 19, 2014.
We intend that the net proceeds of this offering will be deposited into an escrow account and initially invested in United States “government securities” with the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”) having a maturity of 180 days or less, in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act or cash items. These net proceeds will be released from escrow to us in amounts to finance our efforts to explore and fund, in whole or in part, acquisitions whether completed or not, including reasonable attorney fees and expenses, accounting expenses, due diligence and financial advisor fees and expenses.
We are required to reincorporate as a Delaware corporation within 180 days after the Issue Date. We may not be able to consummate the Reincorporation for any reason, including because we do not obtain the requisite shareholder approval. If we are not able to consummate the Reincorporation, we will remain a Washington corporation and you will not receive many of the anticipated benefits associated with our being a Delaware corporation, including greater efficiency, predictability and flexibility with respect to our legal affairs; access to Delaware’s specialized courts for corporate law; an increase to our competitiveness in attracting talented and experienced directors and officers; an increase to our ability to raise capital; and the opportunity to reduce legal fees and administrative burdens. In addition, if we do not consummate the Reincorporation, the Note Purchase Agreement related to the Company’s subordinated 7.50% PIK notes (the “Subordinated Notes”) will not terminate and the Subordinated Notes, if issued, will rank senior to the Series B Preferred Stock in terms of interest payments and upon a dissolution. In addition, if we do not achieve the Reincorporation, the size of our Board will remain at seven and the new KKR designees will not join our Board and the holders of the Series B Preferred Stock will not be able to elect two additional directors upon certain payment failures by us.
if, prior to the consummation of a Qualified Acquisition, the Post Closing Covenants below have not been satisfied on or prior to the date that is 180 days following the Issue Date (the “Post-Closing Covenant Default”).
On Jan 5 WMIH may issue a press release that the Series B transaction is complete. I think the move up on Jan 2 was in anticipation of this. If Jan 5 is anything like when WMIH released a PR about the Series A and warrants being complete pre-market on Jan 31, 2014, then Jan 5 should have high volume and volatility. I don't think we will see $1.80 again unless there is a long dry spell of information from WMIH between Jan 6 and Mar 19. I have a feeling that the first acquisition is already known by WMIH's board they just have to announce to the public. The earliest the announcement would be is Jan 6. A lot will likely happen in Jan. Usually the main downward driver on WMIH price is a lack of new information but Jan looks busy, so maybe February? If ever at all? Today's close of $2.20 may be the lowest it will ever be again. Shares between Jan 2 and Mar 20 2014 moved up 17% during that time period over deal anticipation. It could happen again. Price eventually came down in April 2014 when no deal materialized. This time there is a 180 day time frame so the clock is ticking start Jan 6.
The higher shares trade right now the less dilution there will be so the more they are worth.
I can't see much downside if C and KKR are putting in this amount of money. They aren't investing $600M to make or lose 10%. They are looking for a large positive return in the course of several years. KKR just made 4x on selling Alliance Boots to Walgreens.
(link to Wall Street Journal on Boots deal)
KKR made 5x on Dollar General. But they also struck out on TXU Corp.
20% down would be 5 to 1 debt to equity. I field a large number of private messages from retail investors. Consequently I make my articles and comments as easy to understand as possible since I know who is reading them.
Given that KKR is 20 to 1 debt to equity, the amount of leverage could be anywhere with WMIH. I doubt it will be so low as 1 to 1. Most banks are 15 to 1.
WMIH is abandoning $275M of 7% financing which means someone has likely already given them the same or more capital at a lesser rate. My guess is Citigroup at 3 to 5% based on what the Series B yield is.
Don't underestimate the power of the leveraged buy out (LBO). If $647M is 20% down on a company ($3.2B) doing a pre-LBO PE of 14 (231M) the NOLs would supercharge the the earnings to 355M. Let's say the interest is 5% ($128M) and its interest only payments so earnings is now 227M so the NOLs would be used up in 26 years.
However in 3 years of 227M earnings, the company now has 681M of cash available. It does another LBO and gets a company ($3.4B) doing a pre-LBO PE of 14 ($243M). Let's say the interest is 5%, so earnings is now $238M. So now the company is doing $227M and $238M or $465M a year from its two subsidiaries.
Two years later the company now has $930M of cash (has not paid any debt just interest only) and does another LBO. All the same above factors. $325M earnings. So now the company is doing $227M, $238M, and $325M with the three subsidiaries or $790M a year.
Two years later the company now has $1.58B and does another LBO. $552M earnings. So now four subsidiaries doing $227M, $238M, $325M, and $552M or $1.34B a year.
NOLs Rolling Usage:
Year 1: 227M
Year 2: 454M
Year 3: 681M
Year 4: 1146M (4*227+238M)
Year 5: 1611M (5*227+2*238M)
Year 6: 2401M (6*227+3*238M+325M)
Year 7: 3191M (7*227+4*238M+2*325M)
Year 8: 4533M (8*227+5*238M+3*325M+5...
Year 9: 5875M (9*227+6*238M+4*325M+2...
So in 9 years and 1 quarter the NOLs will be used up.
Now I used conservative numbers. If the LBO is only 10% down, it buys a company doing a PE of 13, it gets debt at 3%, any of these factors being more "aggressive" means the above schedule would go faster.
The series B is 3%. Does that mean that WMIH is going to be able to borrow debt at 3%? Then that means faster earnings. If 10% down that means twice the size of a company so twice the earnings so twice the speed.
647M * 10 = $6.74B company with PE of 13 would be $518M post-tax earnings. So it would be $797M pre-tax. Minus $182M of 3% interest is $615M a year of taxable income or $615M a year in direct earnings after NOLs use. So a single company LBO with these factors would use up the NOLs in 10 years. However, after getting $615M for two years the company would have $1.23B in cash and could do another LBO and buy a $12.3B doing $946M post-tax, $1.45B pre-tax, or $1.1B after interest expense. So now its doing $1.7B a year in earnings tax free. So in 5 years the NOL would be gone (2 years at 615M, 3 years at $1.7B).
I think 10% down, 13 PE, and 3% interest are all too aggressive but in this low interest environment with the right partners finding the right undervalued targets, anything is possible. KKR is the king of LBO. I doubt they are going to waste much time on using up the NOLs. If KKR does all the money loaning they could just buy out WMIH in 5 years like they bought out KFN and retire the debt in the buy out.
WMIH is going to go on a target spree. No where does it say they can only buy one company in 61 years. KKR and C know what they are doing.
Due to article complexity I decided to focus on the most "firm" information from WMIH's Dec 19 purchase agreement. There are other more "ambiguous" details such as why two members from Capmark Financial are joining the board but I purposefully left them out to keep the above article on point. I will comment on the board changes and other details such as WMIH's abandoment of $275M in financing in a follow up article.
I think you moved a decimal. The $600M has a mandatory conversion built in to become common stock at $1.75 to $2.25/share. This works out to 266,666,667 to 342,857,143 new shares. Hence you see share price currently between $1.75 to $2.25.
I have not heard/read about this $3.5B so I can't comment on it. The only things I consider building an analysis on is what is available thru the SEC or formerly KCCLLC pre-emergence. Generally message boards are rife with misinformation and shouting matches, time not well spent.
If such an amount does exist it likely belongs to the liquidating trust and therefore would not go to WMIH. In the off chance that the $3.5B is in reference to the money that WMI had on deposit in WMB, that amount was settled in the GSA and went towards paying off senior creditors in WMI so it's gone.
My apologies for not being more help on this. I don't know anything more than anyone else who reads the SEC filings. If I did know more I would have insider knowledge and therefore could not write for Seeking Alpha.
I have an article in the works but it is on delay due to the due diligence involved, the holiday season, and the sheer length of writing and editing. This will be my longest article written on SA to date. I will try to get it out as soon as possible but am not willing to sacrifice quality for speed. It should be on SA by the 29th at the latest.
Currently there are no real fundamentals to go by. That should change once the company makes its first purchase. Book value is the only thing I can come up with. After the serious dilution I have a value of $4.08. I know price is all everyone really wants to know so I posted it earlier before the market opened this morning.
Revised Six Month Price Target: $4.08.
Article to come but delayed due to extensive due diligence.
WMIH appears that it is going to go into banking again. They are adding two board members from Capmark Financial (CPMK). Either they are going to buy Capmark or Capmark is buying part of the $200M of preferred stock that is listed under "KKR affiliates".
Company Profile & Key Executives for CPMK (From Bloomberg)
Capmark Financial Group, Inc. owns and manages a portfolio of commercial real estate properties. Through a subsidiary bank, the Company offers loans secured by commercial and multifamily real estate properties throughout the United States, and trust services to commercial real estate mortgage servicers.
Note that Eugene I Davis "Gene" is the CEO of CPMK, the same Davis that was more forthright with information than Willingham at the last few shareholder meetings.
CPMK might have some real estate on its books that it wants to sell and WMIH's NOLs will make it so they can liquidate properties without having to pay any corporate taxes.
As far as the warrants, the only warrants WMIH has out right now belong to KKR and are not public.
While every effort will be made to get a report to market before the opening bell on Monday, all SA articles don't go live until editorial approval. At this time I'm still doing the DD because there is a lot to angles cover in developing a new price target.
After further reading, WMIH will be terminating both the $125M AOC credit facility and the $150M PIK notes with KKR. These were both @7% whereas the Citi financing is 3%. Lower yield signals lower risk and also less interest expense for WMIH.
WMIH is saying that they don't need this expensive financing when they can get money elsewhere for less.
I haven't had a chance yet to read and digest the documentation other than at first glance I see that they are terminating the $150 PIK Notes from KKR when the company reincorporates from Washington to Delaware. Reincorporation will take place within 180 days. As soon as the company makes its first M&A the preferred stock will convert to common.
I'll be doing the due diligence this weekend and placing a report with SA on Sunday evening. It will be up to SA editors if it makes it online before the opening bell on Monday. I'll have a new price target at that time.
Well, /it/ (finally) happened. Congratulations to everyone who held out for the year's wait.
It's not the M&A but its... "approximately $568.7 million, to explore and fund, in whole or in part, acquisitions, whether completed or not, including reasonable attorney fees and expenses, accounting expenses, due diligence and financial advisor fees and expenses."
So, capital to start making purchases. Citigroup and KKR are now in the wheelhouse. You can bet your bottom dollar they are going to do something with that money. Only 3% yield signals that Citi sees this as fairly low risk.
WMIH will have approximately $660M available, $+125M from the AOC, +$150M from KKR. So the total "buying power" of WMIH moves up to $939M.
There are no updates to provide as the company has not released any significant information since this article was written. There is no change in the NOL valuation at this time.
Thanks for all of your hard work Joyce in getting the equity committee formed. If it was not for your efforts equity may have gotten nothing at all out of the reorganization.
Nice to see someone else covering WMIH after being the only writer for years. I wonder what KKR has in store for WMIH in 2014?
WMIH, when it concludes its first merger, will likely acquire the other company's name, symbol, and exchange. For example, SBC took over AT&T but kept the AT&T name and symbol. I doubt WMIH wants to keep a name that is tied to FDIC seizure. With the recent KKR Financial buy out by KKR, I wonder if WMIH is going to be vacuumed up completely by KKR, just not 26%.
Time will tell.
Given your strong opinion, I would encourage you to write a piece for Seeking Alpha on WMIH along with any price targets you may have.
If the NOLs are valued at $1.10/share, why would KKR pay full value for them? They would pay less than $1.10. So they must value them more than $1.10. Their warrants are a $1.38/share (blended) strike price. That indicates again, more value to the NOLs than $1.38 because who would want a strike at company's full value? I don't see KKR getting involved if they can't at least double their money. So far they almost have.
1. Yes, the warrants do not exist yet. Nothing exists yet. The deal could fall through tomorrow. This entire article assumes the deal will go through. KKR will immediately bank a lot of profits on their warrants if it does go through. I can't see them turning back now at this point. Do you?
2. KKR is planning to put up $95M for 26% of the company. If share prices continue to rise as they do, if a 3rd party is going to be brought in, they are going to be paying more than what KKR does. The whole $1B for 42% is ambiguous like I said but I ran the numbers for it regardless to see what share value it produced. There's no assurance it will get that valuation so that's why I included a more grounded $2.99/share figures.
Your buying criteria states NOLs at zero value. WMIH is a NOL and nothing more. So there appears to be no reason to buy WMIH based on your buying criteria.
Such as?
To each their own. For every buyer there is a seller. Good luck with your short.
If you assign $0 value, then by all means short this to oblivion.
Meanwhile KKR, a $7.2B company, is putting up $95M in preferred and warrants. In a "ZERO" company?
I'm going to side with KKR on this one.