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Troy Racki  

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  • WaMu's $600M Private Rebirth [View article]
    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.
    Jan 2, 2015. 05:47 PM | 2 Likes Like |Link to Comment
  • WaMu's $600M Private Rebirth [View article]
    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.
    Dec 30, 2014. 10:38 PM | 2 Likes Like |Link to Comment
  • WaMu's $600M Private Rebirth [View article]
    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.
    Dec 29, 2014. 04:38 PM | 2 Likes Like |Link to Comment
  • 4 Stocks That Should Outperform The Market [View article]
    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?
    Dec 30, 2013. 10:17 PM | 2 Likes Like |Link to Comment
  • Dissecting The Washington Mutual KKR Deal [View article]
    Class 16 (PEIRS) are actually junior subordinated bonds, so they are their own class of creditor. Class 19 are the shareholders. Preferred and common used to have their own classes, but they have now been lumped together. Class 19 has also been a dumping ground for the judge if she doesn't want to keep something as class 12 but doesn't want to have a lengthy battle over it. A lot of bogus claims have been shoved down to 19 to keep the judge from having to make a lot of definite rulings. Instead class 19 keeps the claim "alive" and gives it a "we will cross that bridge when we get there" status but right now no one is worried about the claims because there isn't any money to pay them at this time. If and when there is any money to pay class 19, expect all sorts of lawyers to come flocking to Delaware to rack up their professional fees for whatever tiny slice they think they can carve out for whom they represent. It's hard to imagine that after they are done billing that there will be anything left for anyone in Class 19. Hopefully so, for those who have "escrow" shares, but don't hold your breath.

    I used to be an adjunct professor but moved to a different region because of the economics of teaching. After teaching at a major institution, the local community college is just not the same.
    Dec 15, 2013. 11:38 PM | 2 Likes Like |Link to Comment
  • Dissecting The Washington Mutual KKR Deal [View article]
    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.
    Dec 23, 2014. 01:36 AM | 1 Like Like |Link to Comment
  • Dissecting The Washington Mutual KKR Deal [View article]
    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.
    Dec 19, 2014. 09:54 PM | 1 Like Like |Link to Comment
  • Dissecting The Washington Mutual KKR Deal [View article]
    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.
    Dec 20, 2013. 02:52 PM | 1 Like Like |Link to Comment
  • The Wait Continues For WaMu Shareholders [View article]
    I am currently working on a break down of the new WMIH/KKR deal.
    Dec 15, 2013. 01:56 AM | 1 Like Like |Link to Comment
  • LeapFrog Enterprises, Inc.: Expensive Products; Inexpensive Shares [View article]
    LF IPOed Aug. 21, 2002 at $13/share. In Jan 2009, it sold for $.80/share. Its high since then, $12.28. Anyone unfortunate enough to buy on the IPO and hold stubbornly onto this "growth" stock has not seen any meaningful appreciation in the last 11 years. The company is going to have to start making some progress at breaking through its IPO price before burnt investors give it a second chance.
    Sep 10, 2013. 12:39 AM | 1 Like Like |Link to Comment
  • The Wait Continues For WaMu Shareholders [View article]

    I have also seen this conversation as well on the forums from time to time. It is much more speculative in my opinion because the Debtor nor the Equity Committee ever made any significant mention of the use of "ordinary losses" and carrying them forward like they have regarding the NOLs. The Debtor had a whole 3rd of a page in small font on the NOLs and IRC 382 alone as a footnote, with pages of legalese to accompany the NOLs explanation more broadly thereafter, even as much as they tried to lowball their value and devalue the issue in front of the judge as important to shareholders. In other words they put a lot of effort into trying to bury them. Meanwhile the mention of ordinary losses did not get a wiff. Zelin made no mention of them either in his report.

    The conversations I recall regarding the ordinary losses were upwards of 10B once the stock abandonment NOLs were added in. Besides the 6.5B of NOLs there was talk about having the payments to creditors and interest be considered "ordinary losses" as well as the professional and reorg fees. However you need to balance that opinion against another conversation concerning how the WMB stock abandonment was being disallowed by the IRS in its entirety, but they were going to allow the payments to creditors to be allowed instead as a compromise, and that the $6.5B NOLs included all allowable losses from the list above and that opposing counsel failed to differentiate.

    With all of that in mind that is why I called the NOLs "ambiguous". They and their value for shareholders really are a huge unknown at this time. And for good reason too; more "colorable" stuff can happen.

    Consequently, in the effort to being as properly perspective as possible I stuck with the most supportable numbers regarding WMIH. I write with the intent to inform and to help others increase their ROI. However your and others comments do help shed light on the outside possibilities which is good.

    Also there are complaints out there about how this is all "old information". It is. With an efficient market, everything is old information in seconds, minutes, in rare cases maybe an hour. If I had "new information" A) you would have it to OR B) it would be illegal OR C) I would be an insider and bound by non-disclosures.

    The best I can do for readers is 1) research like crazy, 2) explain things in a common sense manner, 3) add personal reflections of historical but less discoverable events, 4) wrap it all up with a bow at 1,500 words or less. Most people out there that still follow WMIH are as knowledgeable as I am because they are reading the same filings I am.

    Anyone left still standing after 46 months of this is a big fish in a small pond.
    Jul 25, 2012. 01:07 PM | 1 Like Like |Link to Comment
  • The Wait Continues For WaMu Shareholders [View article]
    You found the P&L for WMMRC. It is a subsidiary to WMIH but it is effectively "tapped out". What equity it has remaining ($158M) has been pledged to pay off senior creditors from bankruptcy so shareholders won't see any value there.

    All that shareholders have remaining is the $75M in cash and the NOLs. Since the stock is trading above cash the only value remaining are what will become of the NOLs which no one has any certainty of, consequently it hit just $.02 over its cash value last quarter. Shares perked up a with the Blackstone announcement but info has been hard to come by otherwise. WMIH is going to need to see a shareholders meeting, quarterlies, and several acquisitions to move any higher.

    There are 200M issued common shares in WMI.
    Jul 24, 2012. 07:37 PM | 1 Like Like |Link to Comment
  • The Wait Continues For WaMu Shareholders [View article]
    You made the right decision. Common shares effectively received $.013/share, so you could have lost another 87% of your money. My shares are from preferred holdings as I closed my common shares position much earlier. Both preferred and common shareholders in WaMu received just new common shares so its impossible to tell those individuals apart now.

    WaMu was a Malox type ride. Preferred shares went from a low of $1.50 to over $100 during bankruptcy, ended up getting about $19.80 as a settlement, now they trade around $9.90 worth. One day in March the stock moved from above $100 to below $9 and finished the day in the mid-$50s. An iron stomach is still going to be required on this one.

    Bottom line: They don't call it "distressed" securities trading for nothing.
    Jul 24, 2012. 07:28 PM | 1 Like Like |Link to Comment
  • The Wait Continues For WaMu Shareholders [View article]
    Reader's Digest Version: "WMIH is worth between $.375 and $5.875."

    If you are not interested in doing proper due diligence, stick with ETFs (exchange traded funds). Sufficient reading comprehension is required for those desiring of trading individual securities.
    Jul 24, 2012. 07:20 PM | 1 Like Like |Link to Comment
  • Washington Mutual Reorganization Part 2: Fund Insider Trading Charges Prompt Mediation Order [View article]

    Thank you for your readership.

    For the most part, many companies in bankruptcy end with their stock being cancelled and after emergence they fail yet again. This is why most investors and analysts do not bother with these "broken" companies. However there are some situations where companies emerge from bankruptcy and go on to become successful once again.

    For example in K-Mart, the company had a massive real estate portfolio that was gifted to the debtholders at the expense of the equity by using artificially low evaluations. K-Mart later emerged with a new common stock which skyrocketed. Sears then purchased out K-Mart, resulting in a 250% ROI over two years.

    On the other end of the spectrum is General Growth Properties (GGP) where the debtor actually helped equity with all parties working together. Shares in GGP returned over 1300% after it emerged.

    For WaMu there still are currently a lot of unknowns to evaluating it. The company has up to $17 billion in NOLs it can use to offset future taxes. It also has a number of assets set to go to a liquidation trust with an unknown value. There is probably some value that should remain to shareholders however the debtholders are doing their best to hide that value so they can have it later for themselves just like in K-Mart.

    Moving forward the reinsurance business is booming right now. The new owners of WaMu could inject new capital into the company and make a profit for years tax free in the reinsurance business. WaMu could also purchase other companies, pull them under the WMI shell, and expand its business. I suspect this is what will ultimately happen. WaMu will preform a buy out or merger and assume the target's name since the WaMu name is forever tarnished.

    It's hard to say where the money in this case is going to land. It is a shame you can't own stock in the professionals like Weil, Gotshal & Manges LLP because they are the ones who have profited the most so far. WMI bonds are also going to profit immensely if contract rate is ultimately enforced.

    Here is how I would split a theoretical investment of $10,000 in WaMu if I were just jumping in now.

    WAMU.JG (bond) $8,000
    DIMEQ (warrant) $700
    WAHUQ (bond) $600
    WAMKQ (preferred) $700

    WAMU.JG is your hedge which will pay 106 or 123 cents on the dollar. It trades for around 100 cents on the dollar right now. DIMEQ will either pay 0 cents or 300 cents. If .JG and DIMEQ are paid at 123 and 300 respectively WAHUQ will receive 0 cents. If DIMEQ receives 0 cents then WAHUQ will receive 34 cents on the dollar. If DIMEQ receives 0 cents and .JG receives 106 cents then WAHUQ will receive 99 cents on the dollar. WAMKQ will receive whatever equity can carve out in a settlement. If KQ can receive all the NOLs and use them all at a 35% tax bracket over the next twenty years it could ultimately return 79 cents on the dollar.

    Disclosure: Long WAHUQ and WAMKQ.

    Note: WAMPQ is also WMI preferred stock that is less expensive than WAMKQ. However WAMPQ has a Dec 2012 conversion feature which may be utilized to reduce overall preferred stock liabilities. WAMPQ would be turned into WMI common shares (WAMUQ) at that point. If WAMPQ were converted to common shares WAMKQ may ultimately recover 100 cents on the dollar over the next twenty years. Under that scenario $1.45B in value would remain to WAMPQ and WAMUQ holders.
    Oct 24, 2011. 12:33 PM | 1 Like Like |Link to Comment