Description
What if I were to tell you there's a cumulative preferred out there currently yielding 11.8% that offers tremendous liquid asset support and is trading at 70% of its redemption price? Is that something you might be interested in?
Hilltop Holdings has already been written up twice on VIC in the past year but both write ups suggested investing in Hilltop's common, HTH. The appeal of HTH was largely composed of two pieces: (1) a TEV close to $0 with a large cash balance available to invest and (2) Gerald J. Ford doing the investing for you. The value of the second piece increased as Ford, through Ford Group Bank ("FGB"), obtained the first national bank charter granted to a private investment firm or public company for bidding on government-assisted bank transactions. It was anticipated that Hilltop would capitalize half of FGB and that FGB would be able to purchase a financial institution under favorable conditions (uncompetitive process due to lack of viable buyers, federal assistance/support in an acquisition, etc.). Now it looks like the general direction of the government's "solutions" won't be creating such favorable conditions. Whatever the loss of value that Hilltop has experienced from the FGB option, the new risk/return profile of the HTH common has led us to move on to Hilltop's $125 million of 8.25% Series A Cumulative Redeemable Preferreds (HTH.PA).
Hilltop Holdings Inc. 8.25% Cum. Redeem. Pfd. Series A
Even though owning a preferred in Hilltop Holdings puts you in the structurally subordinated position of the Holdco/Opco structure, the preferreds are actually covered 4.9x over by $609 million in net cash at the Holdco level. With so much net cash at the Holdco level 'backing' the HTH.PA's, the Holdco/Opco structure is currently offering a significant margin of safety to the HTH.PA holders.
| Hilltop Holdings Inc. - Asset Coverage |
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As of: |
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12/31/2008 |
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Unconsolidated |
| Balance Sheet |
$(000,000)'s |
NLASCO |
Holdings |
| Investments: |
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| Fixed income: |
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| Available for sale: |
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| Govt |
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32.8 |
- |
| MBS |
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13.4 |
- |
| Corp |
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69.1 |
- |
| Held-to-maturity: |
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| Govt |
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16.4 |
- |
| Equity securities: |
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| Available for sale |
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6.8 |
- |
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138.6 |
- |
| Cash and cash equivs |
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33.1 |
716.3 |
| Restricted cash (unrestriced as of 01/5/09) |
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18.5 |
| Accrued interest and dividends |
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- |
1.6 |
| Premiums receivable |
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20.5 |
- |
| Reinsurance receivable, net of uncollectable amounts |
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16.9 |
- |
| Prepaid reinsurance premiums |
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4.8 |
- |
| Income tax receivable |
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24.6 |
| Deferred income taxes |
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- |
15.0 |
| Total tangible assets |
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$213.9 |
$775.9 |
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| Reserve for losses and loss adjustment expenses |
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34.0 |
- |
| Unearned premiums |
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68.5 |
- |
| Reinsurance payable |
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0.8 |
- |
| Accounts payable and accrued expenses |
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9.3 |
| Income taxes payable |
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- |
- |
| Senior exchangeable notes |
(1) |
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90.9 |
| Insurance company LOC |
(2) |
0.0 |
- |
| NLIC note payable |
(3) |
10.0 |
- |
| NLIC note payable |
(4) |
10.0 |
- |
| ASIC note payable |
(5) |
7.5 |
- |
| Insurance company note payable |
(6) |
20.0 |
- |
| Dividends payable |
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1.7 |
| Other liabilities |
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4.7 |
| Lease obligations |
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0.6 |
| Total liabilities |
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$150.8 |
$107.2 |
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| Net tangible assets available for stockholders |
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$63.1 |
$668.8 |
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| 8.25% Series A Cumulative Redeemable Preferred Stock |
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125.0 |
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| Tangible asset coverage |
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5.4x |
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| Total net cash coverage |
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4.9x |
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With 4.9x net cash coverage, we believe that the potential IRRs for the preferreds are attractive on a risk-adjusted basis.
| Hilltop Holdings Inc. - IRRs on the 8.25% Series A Cumulative Redeemable Preferred Stock |
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| Assumptions |
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| Last Price |
($17.50) |
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| Redemption Price ("RP") |
$25.00 |
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| Current % of FV |
70.0% |
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| Rate |
8.25% |
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| Entry date |
4/15/2009 |
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| IRRs |
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| Exit Price |
$13.00 |
$15.00 |
$17.50 |
$19.00 |
$21.50 |
$23.00 |
$25.00 |
| Implied exit date |
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| 04/15/2010 |
-13.9% |
-2.5% |
11.8% |
20.4% |
34.6% |
43.2% |
54.6% |
| 04/15/2011 |
-1.1% |
4.8% |
11.8% |
15.8% |
22.1% |
25.7% |
30.4% |
| 04/14/2012 |
3.5% |
7.4% |
11.8% |
14.3% |
18.2% |
20.4% |
23.2% |
| 04/14/2013 |
5.9% |
8.6% |
11.8% |
13.5% |
16.3% |
17.8% |
19.8% |
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| Exit as a % of Entry |
74.3% |
85.7% |
100.0% |
108.6% |
122.9% |
131.4% |
142.9% |
| Exit as a % of RP: |
52.0% |
60.0% |
70.0% |
76.0% |
86.0% |
92.0% |
100.0% |
The attractiveness of the preferreds haven't gone unnoticed by insiders. Although most of these purchases weren't as recent as we'd like (and were made at lower prices than currently available), they were all within the last 6 months. After Ford bought out Farallon's 10% position for $54 million, he bought into Hilltop for another $6 million-but in HTH.PA. This $6 million was bought while HTH was trading below the $9.75 price of Ford's purchase from Farallon ($8.93 on 11/10/09 and $8.86 11/13/09).
| Insider Transactions - Open Market |
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| Insider |
Date |
Type |
Position |
Stock |
Price |
Number |
Total |
| Brinkerhoff |
3/31/2009 |
Purchase |
Director |
Preferred |
$18.90 |
1,000 |
$18,900 |
| Ford |
11/13/2008 |
Purchase |
Director |
Preferred |
$15.95 |
357,500 |
$5,702,125 |
| Vanek |
11/13/2008 |
Purchase |
President of NLASCO |
Preferred |
$15.97 |
5,000 |
$79,850 |
| Willard |
11/12/2008 |
Purchase |
President & CEO |
Preferred |
$16.00 |
35,000 |
$560,000 |
| Rhodes |
10/10/2008 |
Purchase |
Director |
Preferred |
$13.75 |
20,000 |
$275,000 |
| Ford |
10/10/2008 |
Purchase |
Director |
Preferred |
$13.75 |
172,500 |
$2,371,875 |
| Ford |
9/25/2008 |
Purchase (private) |
Director |
Common |
$9.75 |
5,626,460 |
$54,857,985 |
Since the end of September, the preferreds have moved from a low of $13.25 on October 10th to a high of $19.50 on February 10th.
Risks
Asset leakage to the commons
Although the preferreds have protections against buybacks and dividends or distributions of cash or property to commons, these protections only apply if Hilltop's current own the preferred dividend. It's not clear that a special dividend of the net cash is restricted if Hilltop is current on the preferreds, but given the FGB shelf charter, we don't see Hilltop shipping the cash out anytime soon.
M&A use of cash
The net cash support will erode if Hilltop actually uses the FGB shelf charter. If Hilltop makes an acquisition, the preferreds and commons will be similarly situated. Assuming an acquisition, we believe the risk/return profile is better in the preferreds and above Gerald J. Ford. In the event of a merger, the HTH.PA holders are protected against any material adverse action to the rights of the preferreds.
Lack of voting rights
The HTH.PA's don't have any current voting rights, but if six or more quarterly dividends are in arrears, then the HTH.PA holders get to elect two additional directors to Hilltop's board.
Catalyst
- Ford Group Bank makes a government-subsidized acquisition
- An unexciting $600 million in net cash becomes incrementally more attractive and results in 16% to 35% IRRs in the next two years