Description

I am recommending a purchase of the Comdisco Contingent Distribution Rights, symbol CDCOR. This is a liquidation play that has done quite well for holders thus far, but there are still a few puffs left on this cigar butt as it trades for less than 60% of a possibly understated book value and may pay off anywhere from 6 months to 2 years. 

CDCOR represents the rights granted to the former equity holders of Comdisco Inc which filed bankruptcy in 2001. At this point, holders of CDCOR are due 37% of every incremental dollar accruing to stakeholders. The CDCOR payments are a liability of Comdisco Holdings (CDCO) and are carried on CDCO's balance sheet at 22.5mm. This amount is approximately 37% of CDCO's equity before the CDCOR liability. There are 148mm CDCOR shares outstanding giving a 13mm market cap at 8.5 cents.

There are several minor uncertainties in calculating CDCOR book value (such as increased SG&A expenses, bad debt recoveries, and equity sales prices in excess of carrying costs for CDCO), but the major uncertainty revolves around what's known as the Litigation Trust (LT). The LT was established to try to recover around 80mm in bad debts from SIP participants (67 former senior managers of Comdisco Inc who used borrowed money to purchase stock that went to zero). The key point is the LT exists for the benefit of creditors and will make payments directly to creditors. To the extent that the LT makes any payments to creditors, CDCO will have to make the corresponding payments to CDCOR holders. So for every dollar paid out by the LT, CDCOR is due 59 cents (37/63=59). And importantly, CDCO must retain enough cash on hand to satisfy any liability arising from LT payouts. A hypothetical 80mm LT payment to creditors would result in a 47mm liability to CDCOR holders.

So the fate of the LT will impact the return on owning CDCOR in 2 important ways. More money and less time. The LT reports quarterly in case number 01-24795 in bankruptcy court for the Northern District of Illinois.   The last report was 8/21/2008.

Money: 5 parties have settled with the LT for undisclosed amounts. There was a prior global settlement offer of between 70% and 80% relief with other SIP participants in 2002. 26 accepted, 69 did not. I would guess that settlement terms would be in this ballpark.

Time: LT commenced lawsuits in 2005. A significant milestone was reached in September when summary judgments were entered in Federal Court against 27 SIP participants. In October summary judgments against most of the rest were entered in State Court. The judgments have been appealed. With the entry of judgments, the LT can now commence collection actions which should be a catalyst for settlements. As settlements occur, CDCO may dividend some cash to stakeholders.

Best guess: 1 year, 10mm net LT payment to creditors, corresponding 6mm liability to CDCOR holders, total payment to CDCOR holders 26mm or 18 cents. So a double in a year.

Catalyst