|Shares Out. (in M):||23||P/E||NA||NA|
|Market Cap (in $M):||68||P/FCF||NA||NA|
|Net Debt (in $M):||129||EBIT||0||0|
|TEV (in $M):||196||TEV/EBIT||NA||NA|
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CompuCredit's core business of securitizing consumer receivables is essentially in run-off and the Company has generated cumulative losses of over $600 million over the last five quarters. Furthermore, its financials make it extremely difficult to view true operating performance. This is especially true from a credit perspective as the most significant items on the balance sheet and statement of cashflows relate to assets that CCRT doesn't own and liabilities that have no recourse to the company as a result of recent accounting changes, which forced the Company to consolidate previously off-balance sheet securitizations. In addition, the Company has not held an earnings call since FYE 2008, will not answer investor calls and has basically zero Wall Street coverage.
In spite of all this, we believe CCRT's 3 5/8% Converts putable in May 2012 represent a compelling one-year investment at price of 94 or better, which equates to a yield-to-put of greater than 10%. We also believe that CCRT stock is significantly undervalued trading at 0.7x book value (Bloomberg and Capital IQ incorrectly show 1.4x book). Our investment is supported by the fact that despite all its difficulties and GAAP losses, the Company has returned over $200 million to shareholders since December 2009 compared to a current market cap of about $68 million (these figures are not typos). In addition, CCRT has retired almost $100 million of its 3 5/8% converts over the last five quarters including $13.5 million in Q1 2011 at an average price of 92%. While it is possible that CCRT is currently insolvent and that these purchases represent "fraudulent transfers" as a large group of organized convert holders currently claim, we do not believe this to be the case.
Fundamentally, the Company's true debt burden is significantly less than the $753 million from CCRT's latest 10Q as only $301 million of this debt has recourse to the Company - the rest of the debt relies exclusively on receivables within securitizations for repayment. Of this $301mm, only the $133 million of 3 5/8 Converts putable next May presents probable near-term refinancing risk.
In terms of sources of cash, pro forma for the sale of the Company's MEM operations, CCRT will have over $170mm of unrestricted cash. In addition, the Company expects to collect about $56 million over the next 12 months from its Investments in Previous Charged-Off Receivables Division, even though the assets underlying these collections, which are accounted for using the misleading "cost recovery method", have a carrying value of just $23 million on the balance sheet. This brings total cash liquidity from just these two sources to over $228 million or 1.7x the 3 5/8 Convert balance.
Based on our analysis of financials, we think it is highly improbable that they burn through much of this cash prior to next May as "CompuCredit is expected to be significantly profitable for the year ended December 31, 2011". In addition, "the Company's interest in the new joint venture discussed herein also represents one of several significant untapped liquidity sources (i.e., an asset against which the Company could borrow) that I believe to be available to the Company if necessary or desired in the credit markets" (from CFO March 29, 2011 declaration).
An excerpt from a declaration of CEO David Hanna filed with the court on 3/27/11:
"I am confident that CompuCredit will be able to continue to meet all of its obligations to the Noteholders and other creditors. The Company is performing in accordance with (or ahead of) management's projections. As I indicated to the Board of Directors in our Board meetings in 2010 and 2011, I believe that, today, CompuCredit could borrow additional funds if necessary and should be able to access the equity markets this year and beyond. I am also confident that the overall enterprise value of the Company will increase and has increased substantially as the economy recovers. Accordingly, I believe that if the holders of the 2025 Notes decide to hold their notes and wait until May 2012 to tender them to the Company for repurchase at full face amount, CompuCredit will be able to meet any such repurchase demands." (emphasis on last sentence added)
We know there are questions, so let's dig in...
Can CompuCredit meet the 2012 put?
As mentioned previously, CCRT's balance sheet vastly overstates its liabilities. The Company's only likely obligations in the next 12 months relate to its 3.625% Converts. While its "CAR revolver" might represent an additional $28 million liquidity call, the Company is "optimistic [it] can renew or replace this facility under acceptable terms." Importantly, this facility is backed by $43 million of cash and auto finance receivables. Otherwise, all of CCRT's $453 million of notes payable associated with structured finance have no recourse to CompuCredit.
|3.625% Convertible Senior Notes Due 2025||132.5|
|5.875% Convertible Senior Notes Due 2035||140.5|
|Total Fully Recourse Debt||273.0|
|Revolving line of credit of CAR Auto Finance segment receivables||27.7||Represents maximum liquidity call|
|Maximum Recourse Debt - 3/31/11||300.7||Backed by auto finance A/R w value of $43mm|
|Likely to be extended but if not Co. is on hook|
|Non-recourse Debt - Securitizations|
|Notes Payable Amortizing Debt Facility against JRAS Auto Finance||7.8|
|Notes Payable Amortizing Debt Facility of ACC Auto Finance||44.3|
|Notes Payable Amortizing Structured Financing Facility Issued||282.1|
|Notes Payable Amortizing Term Structured Financing Facility||97.8|
|Notes Payable Amortizing Term Structured Financing Facility||13.6|
|Notes Payable Financing of JRAS Auto Finance Segment Inventory||-|
|Notes Payable Financing of JRAS Auto Finance Segment Receivables||-|
|Notes Payable Investment in Previously Charged Off Receivables||1.1|
|Notes Payable Multi-Year Variable Funding Structured Financing Facility||1.1|
|Notes Payable Ten-Year Amortizing Term Structured Financing Facility Issued||4.7|
|Notes Payable Vendor-Financed Software and Equipment Acquisitions||-|
|Total non-recource debt||452.5|
|TOTAL Debt on B/S||753.2|
In terms of sources of cash, PF for the sale of its MEM operations, the Company currently has $172.2 million of cash. We have also shown below CCRT's estimated collections from receivables over the next year, which we believe to be a fairly reliable source of cash.
|Sources of Cash|
|Unrestricted cash 3/31/11||106.5|
|Sale of MEM operations||170.7|
|Less: Repurchases of stock with proceeds||(105.0)|
|Net cash from sale of MEM||65.7|
|Pro Forma Unrestricted Cash 3/31/11||172.2|
|As % of 3.625% Convertible Senior Notes Due 2025||130%|
|Investments in Previous Charged-Off Receivables Division|
|Asset Value on Balance Sheet - Cost Recovery method||22.9|
|Estimated Collections per 10Q 3/31/11||127.5|
|% in next 12 months||43.5%|
|Estimated Collections next 12 months||55.5|
|TOTAL Cash Sources including collections in next 12 months||227.7|
|As % of 3.625% Convertible Senior Notes Due 2025||172%|
Should the Company require additional liquidity, we believe the following are potential sources:
What are current earnings/cashflow - is CCRT burning cash?
Prior to the crisis, CCRT earnings were driven almost exclusively by its credit card operations. CCRT originated or purchased consumer receivables and then packaged them into securitizations retaining an equity/residual stake. The Company then earned servicing and other fees in addition to the potential equity upside from their residuals. CCRT's smaller Auto Finance segment performed a similar function with respect to auto loans.
With the shutdown of the securitization market, CCRT's focus turned to liquidity over profitability. As outlined by Company management, CCRT's current strategy is to right-size its credit card business, maximize the value of residual interests, and opportunistically invest in other businesses lines. This focus on liquidity has allowed the company to generate cash despite significant GAAP losses during the downturn.
While GAAP financials make it difficult to get a sense for true operating performance, we believe that there is sufficient disclosure in SEC filings and court documents from the ongoing litigation with convert holders to get a decent picture of current operations. Overall, we believe that CCRT has now stabilized its business such that liquidity is no longer a major concern.
Credit Card Business under control
As can be seen below, CompuCredit's Credit Card segment has contributed to the vast majority of GAAP losses over the last three years.
|Net Profit Before Tax|
|Investments in Previously Charged-off Receivables||5.2||17.4||92.0||25.7||33.2||12.4||(1.2)||6.5|
|Total Net Profit Before Tax||188.7||157.0||304.6||167.9||(73.8)||(210.6)||(744.8)||(116.2)|
Despite these losses, we believe this business line represents minimal risk of cash drain going forward.
|Avg. Managed A/R (L Axis)||2,049,503||1,751,037||1,523,105||1,259,687||1,052,977||913,707||774,875||697,032|
|Operating Ratio (R Axis)||10.20%||11.40%||16.80%||11.20%||12.00%||9.20%||9.80%||10.40%|
CCRT "expects a low double-digit operating ratio for the next several quarters, even with the effects that net liquidations of our credit card receivables will have on the operating ratio given our fixed cost base.
5. Credit Cards segment is remote. "It is also worth mentioning that our Credit Cards segment operations are separate and distinct from our other segment operations. As such, if we were ever to conclude that the ongoing costs of these operations exceeded their benefits (i.e., cash flows to us and residual asset values), we could liquidate our Credit Card operations (either by continuing to allow them to decline in size or through more aggressive action) with minimal impact on future financial performance of our other operating segments" (CCRT 10Q 3/31/11). Worst case, CCRT can scrap this business line.
Similar to the Credit Cards segment, operating costs seem to be under control within the Auto Finance segment and losses have significantly moderated.
|Avg. Managed A/R (L Axis)||318,961||296,247||272,664||248,315||220,416||192,480||165,286||140,132|
|Operating Ratio (R Axis)||18.30%||16.20%||21.00%||16.60%||16.10%||17.60%||20.70%||18.70%|
|Net Profit Before Tax||($6.2)||($1.5)||($20.7)||($14.5)||($6.8)||($3.3)||($6.6)||($3.6)|
While profitability is not expected for a few quarters, we believe costs are likely contained within this segment.
Other Business Lines
CompuCredit's other business lines are performing and profitable. Investments in Previously Charged-off Receivables has been profitable for the last seven quarters and we expect significant profit and cashflow out of this segment going forward as a result of collections. In addition, the micro-loans segment is roughly breakeven on a GAAP basis and there is significant upside from potential monetization of this business line (as outlined in recovery analysis later).
What are management's expectations?
While we have never spoken to management, court documents provide good insight into their expectations for the business going forward. Below are some relevant excerpts.
Company is expected to be both profitable and cashflow positive over next 12 months
J. Paul Whitehead (CFO) - 3/29/11 Declaration:
"CompuCredit is expected to be significantly profitable for the year ended December 31, 2011; and CompuCredit's May 2012 consolidated unrestricted cash balance is expected to exceed the current $132.5 million principal balance of the 2025 Notes even without any additional proceeds from incremental debt or equity issuances or asset or business sales."
Charles A. Riepenhoff, Jr. (Managing Director KPMG) - 3/29/11 Declaration:
"According to the Company's cash flow forecast, as of month end April 2012, CompuCredit will have in excess of $180.0 million in unrestricted cash and liquid investments, excluding cash of approximately $25.0 million to $35.0 million held at the subsidiary level."
"The Company forecasts unrestricted cash of at least $180 million as of April 2012 month-end , which is more than sufficient to repay the 3.65% Convertible Senior Notes. The Company's Cash Forecast further projects cash balances to be more than $47.9 million after the repurchase of the 3.65% Convertible Senior Notes."
Company is tracking ahead of budget
"Although the Company's actual cash balances at the beginning of March 2011 were approximately $40.3 million lower than projected in the April 2010 Cash Forecast, it was because of discretionary uses of cash, as opposed to operating shortfalls...the Company elected to repurchase additional convertible senior notes (approximately $36.4 million) and invest in certain market opportunities that management expects will yield attractive shareholder returns. Had the Company not made these discretionary investments, the Company's actual cash balances as of the beginning of March 2011 would have exceeded the cash balances projected in the April 2010 Cash Forecast by more than $9.2 million."
A Case for the Common Stock- Recovery Analysis
Insiders own over 50% of the common stock of the Company, and management has repeatedly taken measures to return capital to shareholders over the past several years. While this presents a risk to our convert position (thus, the ongoing lawsuit against the Company by convert holders), we believe the short duration of the trade significantly mitigates this risk.
Given how shareholder friendly management has been, it is difficult to analyze CCRT without also checking out the stock. While Bloomberg shows CCRT trading at 1.4x book value, pro forma for recent transactions, CCRT trades significantly below a book value.
|Less: MEM Assets||(71.3)|
|Plus: MEM Liabilities||8.7|
|Plus: Cash Proceeds from MEM Sale||170.7|
|Shareholders' Equity - PF for MEM Sale||199.1|
|Less: Share Repurchases||(105.0)|
|PF Shareholders' Equity / Book Value||94.1|
|Current Market Capitalization||67.9|
|% Book Value||72%|
While CCRT's book value is very liquid, we believe it understates true value. Based on our analysis below, we believe that CCRT's orderly liquidationvalue is significantly in excess of its current market capitalization without assigning any value to the ongoing operations and infrastructure of the Credit Card, Auto and Investments in Previously Charged Off Receivables segments.
|Cash and Equivalents||3/31/2011||Notes||3/31/2011||Notes|
|Unrestricted cash||106.5||3.625% Convertible Senior Notes Due 2025||132.5|
|Sale of MEM operations||170.7||5.875% Convertible Senior Notes Due 2035||140.5|
|Less: Repurchases of stock with proceeds||(105.0)||TOTAL DEBT||273.0|
|Net cash from sale of MEM||65.7||Accounts payable and accrued expenses||46.4|
|SUBTOTAL||172.2||Income tax liability||60.8|
|Unencumbered Assets - Excluding Micro Loans||TOTAL LIABILITIES||380.2|
|Loans and fees receivable, net - Credit Card||14.7|
|Loans and fees receivable, at fair value - Credit Card||9.0||Equity Value||190.3|
|Investments in securities||9.5||Shares Outstanding||22.7||PF for tender|
|SUBTOTAL||33.2||Book Value per Share||$8.38|
|Credit Card Securitizations||Stock Price||$2.99|
|Loans and fees receivable pledged as collateral||415.1|
|Notes payable associated with structured financings, at fair value||(399.3)||% RETURN
|Loans and fees receivable pledged as collateral||99.0|
|Notes payable associated with structured financings, at face value||(80.9)|
|Investments in Previously Charged off Receivables|
|Asset Value on Balance Sheet - Cost Recovery method||22.9|
|Discount 2 yrs @ 12.0%||(25.9)|
|SUBTOTAL - "Liquid" investments||341.0|
|US Micro Loans Business - Valuation|
|MEM UK Sale Price||170.0|
|Book Value 3/31/11||62.5|
|Price / Book||2.7x|
|Estimated Book Value US Micro Loans 9/30/10||68.9||From Purpose Financials spin-off doc.|
|Price / Book||2.0x||Assumes 25% discount to MEM Business multiple|
|Equity Method Investees|
|Book Value||56.3||Largely JV created to invest in UK portfolio (98mm assets|
|Price / Book||1.0x||and no debt)|
|Restricted Cash @ 75.0% of book value||30.2|
|PP&E @ 25.0% of book value||2.6|
|TOTAL ASSET VALUE||570.5|
Quote from CEO testimony in court (5/7/10) "I also believe that GAAP likely understates the true enterprise value of the Company. Looking primarily at the operating business units and the "servicing platform" (which I believe is valuable intellectual property), my analysis is that the current net enterprise value of CompuCredit (i.e., fair value of assets minus liabilities) is greater than $250,000,000 and that by the end of 2011, the net enterprise value will be substantially higher."
We believe CCRT stock represents a compelling investment with a potential catalyst given our expectation for a profitable 2011.
Poor Disclosure / Lack of Transparency
Unable to restructure business - losses > revenue
Fraudulent Transfers / Company siphons cash to shareholders
Regulatory / Litigation
CompuCredit is a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market. The Company's business is organized and managed as five segments:
a. Credit Cards: Historically, CompuCredit has engaged in marketing and origination of credit card accounts and other credit products and servicing of those consumer accounts (i.e., managing collections and related activities), as well as portfolios of consumer accounts purchased from other lenders (e.g., banks). CompuCredit also markets and sells other products to its cardholder customers, including credit and identity theft monitoring, health discount programs, shopping discount programs, debt waivers and life insurance.
b. Retail Micro-Loans: CompuCredit makes small-balance, short-term cash advance loans, to which CompuCredit refers as "micro-loans," which are marketed in part through retail branch locations within the Retail Micro-Loans segment.
c. Auto Finance: CompuCredit purchases and services auto loans for a pre-qualified network of "buy-here, pay-here" used car dealers, and also services auto loans that it has purchased or originated in connection with its company-owned "buy-here, pay-here" businesses.
d. Investments in Previously Charged-Off Receivables: Through licensed debt collection subsidiary, the Company purchases and collects previously charged-off receivables from the trusts that the Company services and third parties.
e. Other: CompuCredit markets micro-loans over the Internet, predominantly in the U.K., but also on a limited test basis in the U.S.
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