Amid the recent stock market pullback that's created a number of dislocations, three beaten-down financial stocks merit a second look, analyst BTIG analyst Mark Palmer writes in a note.
First Data (FDC -2.2%), Voya Financial (VOYA -1.3%), and Ambac Financial Group (AMBC +1.2%) represent "potential gems for opportunistic investors," Palmer writes.
For First Data, factors accounting for 75% upswing from April to September are still in place, especially its deleveraging story, as well as mid-single-digit revenue growth outlook, and potential for its Clover POS platform.
For Voya, Palmier sees a disconnect between improved earnings growth outlook and its discount valuation; he points to increased cost savings and stock buybacks for future EPS growth potential.
As for Ambac, Palmer argues that its recent downturn may be attributed to three factors that either aren't "new news" or are unlikely to have much impact.
Ambac's reduced book ex-AOCI from AMPS exchange was already expected; furthermore, a potential delay in starting the Bank of America representation and warranty trial had been disclosed in October when management said a February start date was unlikely.
Also on Ambac: President Trump's comments that he didn't want to give Puerto Rico any more federal funds for Hurricane Maria relief are unlikely to affect actual funding in that Trump doesn't have authority to change the amounts already approved by Congress and spending for additional funds are likely to be a line item in an omnibus bill.
Ambac Financial's (NASDAQ:AMBC) Ambac Assurance Corp. unit, or AAC, reports the execution of a plan support agreement for restructuring all senior and junior Cofina bonds.
"“While there is a lot of work left to be done, the execution of the COFINA Plan Support Agreement is a definitive step towards a final resolution of Puerto Rico’s debt restructuring," says Ambac President and CEO Claude LeBlanc.
The agreement involves AAC, the Financial Oversight and Management Board for Puerto Rico, the Puerto Rico Sales Tax Financing Corp. (Cofina), Puerto Rico Fiscal Agency and Financial Authority, Bonistas Del Patio, other bond insurers, and certain holders of senior and junior Cofina bond claims.
AAC insures $808.5M of the initial principal amount of senior Cofina capital appreciation bonds. AAC also ows about 58% of AAC-insured senor Cofina bonds.
The plan support agreement furthers the agreement-in-principle announced by the Oversight Board on Aug. 8, 2018.
Creditor parties agree to support filing a plan of adjustment. The contemplated distribution consideration is comprised of new Cofina bonds and cash with a face amount equal to about 93% of senior Cofina bond holders' petition date claim amounts (without taking into account AAC's insurance policy for the AAC-Insured plans) and a face amount of about 56% of junior Cofina bond holders' petition date claim amounts.
The plan of adjustment, once confirmed by the court overseeing Cofina's Title III proceeding, will also resolve all Cofina-related litigation and validate the Cofina structure.
Under the Cofina term sheet, holders of AAC-insured senior Cofina bonds would have option:
To commute their rights in respect of the AAC insurance policy associated with the existing senior Cofina bonds, which would then be cancelled, in exchange for new Cofina bonds, cash amounts to be paid by Cofina, plus additional consideration by AAC; or
To exchange their senior Cofina bonds for trust certificates issued by a custodial trust, which the trust would get distributions from Cofina under the new bonds, plus payments under the existing AAC insurance policy in respect of any shortfalls.
Q2 earnings key takeaways for financials are that many growth-oriented stocks are fairly valued or overvalued, while value-oriented stocks appear attractive, says BTIG analyst Mark Palmer.
Municipal bond insurers and private mortgage insurers are "looking particularly inexpensive relative to their inherent values and near-term prospects," Palmer wrote.
Municipal bond insurers: Q2 earnings season was a "highly consequential period for municipal bond insurers Ambac Financial Group (AMBC), Assured Guaranty (AGO +0.7%), and MBIA (MBI +0.6%).
More significant, though, are settlements and court rulings that occurred after the end of the quarter, most notably the Cofina pact reached on Aug. 8, 2018.
"If the COFINA settlement were to be consummated and a new PREPA deal is forged, the impact on the bond insurers in terms of improving their risk profiles would be dramatic," Palmer says.
For private mortgage insurers, each of the five companies that BTIG follows--Essent Group (ESNT), MGIC Investment (MTG -0.8%), Radian Group (RDN -0.6%), NMI Holdings (NMIH -0.5%), and Genworth Financial (GNW +2.1%)--beat consensus estimates and their conference calls were upbeat.
Industry pricing has stabilized, fears of Freddie and Fannie encroachment on mortgage insurance "appears overblown," and the possibility of a government pullback from mortgage insurance seems more likely. As a result, Palmer believes private mortgage insurers' "share price rebound is likely to have legs."
MBIA (NYSE:MBI) advances 8%, Ambac Financial Group (NASDAQ:AMBC) jumps 5.5%, and Assured Guaranty (NYSE:AGO) rises 3.5% after a group of Cofina bondholders reach an agreement with Puerto Rico to restructure Cofina debt.
MBIA (NYSE:MBI) rises 4% in premarket trading after Cofina bondholders reach a debt-restructuring deal with Puerto Rico.
MBIA has about $700M of par exposure to senior Cofina bonds, says MKM analyst Harry Fong in a note, according to Bloomberg. He sees MBIA recovering about 95 cents on the dollar of its pre-petition amount and thinks the company may become more aggressive about buying back stock once the Puerto Rico situation is more certain.
Ambac's (NASDAQ:AMBC) Cofina holdings account for about $805M of its total Puerto Rico exposure of about $2.0B, Fong wrote in a separate note. He sees AMBC shifting to other directions.
BTIG analyst Mark Palmer calls the Cofina deal a "huge win" for Ambac.
Ambac FInancial Group (NASDAQ:AMBC) completes its previously announced exchange offer for Ambac Assurance's auction market preferred shares--or AMPS.
As a result of the offer, Ambac:
Repurchased 22,296 AMPS with an aggregate liquidation preference of $557.4M;
Captured a nominal discount of about $227M (a discount of about $252M on a fair market value basis);
Issued, in total $212.7M in current principal amount of AAC's 5.1% senior surplus notes due 2020 with accrued interest thereon of $96.6M; issued 824,307 warrants to buy AMBC common stock; and paid $11M in cash.
The more important news out of Ambac Financial's (AMBC +1.4%) preliminary Q2 results may be under the "other developments" regarding litigation against Bank of America (BAC), says BTIG Mark Palmer.
Ambac's representation and warranty (R&W) litigation against Bank of America is set for pre-trial motions on Sept. 27 with a trial scheduled to begin Feb. 15, 2019.
Palmer expects the companies to settle before the case goes to trial. In previous R&W cases with municipal bond insurers as plaintiffs and banks as defendants, "the serious negotiations have typically commenced following the conclusion of the summary judgment phase of the case," Palmer writes.
The summary judgment phase of AMBC's litigation against BAC/Countrywide ended on June 27.
Any settlement exceeding about $1.843B pledged to AMBC's secured notes and Tier 2 notes could be used to pay down additional secured notes, which have a coupon of LIBOR + 500, Palmer says.
Ambac Financial (NASDAQ:AMBC) expects Q2 revenue of $136-158M, may not be comparable to $98.87M cap IQ consensus and lower than $174M in 1Q18 primarily as a result of lower investment income, lower net gains on interest rate derivatives, and lower premiums earned partially offset by higher realized investment gains.
2Q18 net income / (loss) in the range of $(26)M - $44M comapred to $306M in 1Q18.
Ambac Financial (NASDAQ:AMBC) starts an offer to exchange all of Ambac Assurance's auction market preferred shares--or AMPS-- for AAC's 5.1% senior surplus notes due 2020 and from AMBC cash and warrants to buy AMBC common stock.
For each $25,000 of liquidation preference of AMPS, holders are offered: AAC senior surplus notes with a total outstanding amount equal to $13,875, plus accrued interest, and from AMBC, $500 in cash and 37.3076 warrants to buy an equivalent number of shares of AMBC common stock at an exercise price of $16.67 per share.
The company is also soliciting proxies from AMPS holders to vote in favor of a resolutions passed at a special meeting of AAC's shareholders.
Holders that tender after 5PM NY time on July 17, 2018 will not receive the cash consideration or the warrants.
The exchange offer and proxy solicitation are scheduled to expire at 5PM NY time on Aug. 1, 2018.
MGIC Investment (MTG +1.3%), First Data (FDC +1.5%), and Ambac (AMBC +0.5%) all gain in morning trading after BTIG analyst Mark Palmer finds the three financial stocks particularly attractive at 2018's midpoint.
Ambac's agreement with holders of a majority of its auction market preferred shares--AMPS-- bodes well for the company's shares, as does a recent ruling on its representation and warranty litigation against Bank of America.
Potential catalysts for AMBC: Emerging clarity on the treatment of COFINA senior sales tax bonds in Puerto Rico's debt restructuring--which represents about 40% of AMBC's net insured exposure to the island's debt; Settling the BAC R&w litigation could provide AMBC with the cash it could use to deleverage. A settlement could come sooner, rather than later, Palmer writes.
For First Data, Palmer sees free cash flow allowing FDC to reduce net leverage ratio to 5.0x at YE2018 from 5.8x at March 31.
FDC shares, which trade at 10.7x consensus FY19E EV/EBITDA, should benefit from multiple expansion as net leverage decreases, increasing the value of its equity, and it demonstrates ability to sustain revenue growth in the mid-single digits, Palmer writes.
Concerns about MGIC Investment should wane as changes in leadership in agencies overseeing the U.S. housing market should give investors more confidence that the government will cede more of the mortgage insurance space to the private insurers, he writes.
And Palmer sees premium rates stabilizing. "We have heard nothing to support the notion that the PMIs are looking to implement premium rate cuts beyond those already announced," he writes.
Ambac Financial Group (AMBC +0.1%) support pact with most of the holders of its Auction Market Preferred Shares--or AMPS--represents an important step to simplifying Ambac's capital structure and unlocking value, writes BTIG analyst Mark Palmer in a note.
BTIG sees benefits in terms of economics and additional financial and strategic flexibility outweighing the reduction in adjusted book value by about $1.59 to $29.98.
AMPS have been a complicating factor in analysis and decision-making with regard to the company's balance sheet.
The timing may save the company money down the road. BTIG sees a settlement of AMBC's representation and warranty litigation with Bank of America likely later this year--a development that probably would drive the price of the AMPS higher.
Palmer rates AMBC a buy with price target of $26.00.
Conditions that must be satisfied for deal to close: approval by AMBC's Wisconsin regulator; receipt of certain tax opinions; participation of holders of at least 80% of outstanding liquidation preference of the AMPS; a vote in favor by at least two-thirds of aggregate liquidation preference of the AMPs at a special meeting of Ambac Assurance Corp.’s shareholders.
Ambac Financial Group (NASDAQ:AMBC) enters preferred stock repurchase and support agreement with holders with holders of Ambac Assurance Corp.'s--AAC-- outstanding Auction Market Preferred Shares--or AMPS.
The transactions reflect significant deleveraging and will simplify Ambac's capital structure, the company says.
Ambac will buy AMPS from holders in exchange for AAC senior surplus notes and cash and warrants from Amac Financial Group.
Holders of about 89% of the aggregate liquidation preference of outstanding AMPS have agreed to support and vote in favor of the transactions and have committed to tender 80% of the $660.2M aggregate liquidation preference of outstanding AMPS.
At minimum participation in the tender of at least 80%, Ambac will capture a discount of $217M on $528.2M of AMPS, deleveraging Ambac's capital structure. AAC will deliver $293.2M in principal and interest outstanding of 5.1% surplus notes due 2020, and AFG will pay $10.6M of cash and deliver 788,265 in warrants held in treasury to buy an equivalent number of shares of common stock of AFG at a strike price of $16.67.
Based on an 80% participation level, the transactions are expected to reduce total Ambac Financial Group stockholders' equity (“book value”) and adjusted book value by about $71.9M or $1.59 per share. The AMPS are carried on Ambac’s consolidated balance sheet under noncontrolling interest at $264.1M.