Last week, I wrote an article: AmTrust Financial (AmTrust) Predatory Action: High risk opportunity. The article provides a detail introduction to the investment case. In this article, I would like to focus on the latest development.
4/2/2019, Keefe, Bruyette & Woods, Inc. (KBW), an underwriter for AmTrust preferred securities and debt notes, filed a litigation AmTrust yesterday, alleging reputational harm in connection with AmTrust’s delisting announcement and has moved to preliminarily enjoin AmTrust from moving forward with the delisting. The litigation can be found here. Document number 2.
One day later, AmTrust filed a notice of removal - they are arguing that the case should be heard at a different court to delay court ruling.
The core of the filing can be summarized from the initial paragraphs:
2. KBW has acted as an underwriter with respect to Series A-F of AmTrust's preferred shares (the "Preferred Shares") and two issues (7.25% and 7.5%) of AmTrust's subordinated debt notes (the "Subordinated Debt Notes"), which represents a total initial investment in the Preferred Shares and Subordinated Debt Notes of AmTrust totaling nearly $1.2 billion. AmTrust intends to delist all of these securities on February 7, 2019.
4. One of the selling features for the Depositary Shares was the fact that they were to be listed on the NYSE. A listing on a national securities exchange, such as the NYSE, triggers a company's reporting requirements under the Securities Exchange Act of 1934. The reporting requirements provide securities holders with continuous information material to their investment in the company including quarterly reports, annual reports, proxy solicitations and notice of unscheduled material events or corporate changes. Listing on the NYSE also provides securities holders with a liquid trading market.
5. In the Underwriting Agreement for the Series F Depositary Shares dated September 20, 2016 (the "Underwriting Agreement"), AmTrust explicitly covenanted that it would keep the Depositary Shares listed on the NYSE. AmTrust gave the exact same covenant in the Underwriting Agreements for all of the Preferred Shares (series A-F) and the two issues of Subordinated Debt Notes.
6. However, on January 18, 2019, AmTrust issued a press release announcing that it intends to delist the Depositary Shares (in fact, all of the Preferred Shares (series A-F) and the Subordinated Debt Notes) which will become effective on February 7, 2019. This planned delisting of nearly $1.2 billion of investments will materially impair KBW's and its affiliate's relationships with their investor customers who purchased the Depositary Shares, will damage KBW's reputation as an underwriter and will negatively impact KBW's goodwill. By way of example, there are over 1300 beneficial owners of Depositary Shares (Series F) who invested through KBW's allocation of 1.1 million Depositary Shares. Given that AmTrust's Series F included 10 million Depositary Shares, it is obvious that tens of thousands of retail investors have already been negatively impacted by AmTrust's public announcement of its intent to delist its Preferred Shares and Subordinated Debt Notes.
7. Accordingly, KBW seeks judicial intervention to stop AmTrust's delisting the Depositary Shares (and the rest of the Preferred Shares and Subordinated Debt Notes) and to require AmTrust to honor its contractual obligation to keep the Depositary Shares listed on the NYSE.
In the later part of the filing KBW lists the breaches by AmTrust:
20. AmTrust publicly filed a proxy statement in or about May 2018 to encourage the shareholders to vote for the 2018 Merger (the "Proxy"). In connection with convincing the shareholders to vote "FOR," the Proxy represented that the Depositary Shares would not be delisted
21. Specifically, the Proxy stated:
Q. What effects will the merger have on AmTrust Financial?
A. . . . As a result of the merger, all of the shares of common stock of the Company will cease to be publicly traded and will be owned by Parent . . . . However, each outstanding share of preferred stock of the Company will remain outstanding and will continue to be listed on the New York Stock Exchange following the merger and the reporting obligations with respect to such shares under the Exchange Act will therefore continue.
22. Upon information and belief, AmTrust made a similar representation to state insurance commissions in connection with seeking approval of the 2018 Merger stating:
"AmTrust will continue to remain subject to certain SEC reporting requirements and requirements governing the independence of its audit committee given that its preferred stock will remain outstanding and listed on the New York Stock Exchange postmerger."
23. Throughout 2018, AmTrust and its founding shareholders repeatedly and consistently represented to the public and its regulators that it intended to keep the Depositary Shares listed on the NYSE.
24. AmTrust's repeated and consistent representations in 2018 with respect to keeping the Depositary Shares listed on the NYSE demonstrate that AmTrust believes that continued listing is commercially reasonable to the extent that principle is relevant to AmTrust's obligation to maintain the listing on the NYSE.
25. AmTrust represented its intention to continue listing the Depositary Shares to convince its shareholders and regulators to approve the 2018 Merger which closed in or about November 2018. However, shortly thereafter, AmTrust announced that it would not maintain the listing.
The above is quite important. The underwriter is litigating and writing to the SEC to stop AmTrust to cause damage to its investors. The question is, what the major underwriters would do. Most of the issues were lead managed by Morgan Stanley and UBS. I believe Morgan Stanley and UBS clients who bought AmTrust preferreds from them should be calling them to ask when are they filing their litigations against AmTrust. If they would, the risk profile of the investment would further improve.
I do not understand why Stone Point Capital got involved in this. Why are they risking their reputation. The company is headed by ex Goldman chairman Stephen Friedman, who should be sensitive to reputational hazard. Or perhaps times have changed and a reputation has a lower priority.
The litigation is a good sign for investors. If the other underwriters sue AmTrust too, the investor standing should improve. If you are their client, it is time to pick up the phone.
Disclosure: I am/we are long AFSI.PC, AFSI.PE, AFSI.PF, AFSI.PD, AFSI.PA, AFSI.PB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.