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Fundamental Advisors (FA) recently bid $28/share for MMAC (https://www.sec.gov/ix?doc=/Archives/edgar/data/1003201/000110465921071279/tm2117204d1_8k.htm).*

Yet, in a year, MMAC potentially could distribute ~$50/share, have $22/share in tax assets and little debt.

I suggest rejecting this transaction or restructuring it as an asset sale because it would destroy MMAC’s tax assets of $22/share**, which, despite their market value, probably would not get much in an appraisal.*** 

MMAC, superficially, has two parts: it owns solar loans and tax assets. 

These two parts boil down to two bets: one on weather, worth between $20**** and $50/share, and another on MMAC monetizing its tax assets, worth up to ~$20/share.

Roughly speaking, the value of the solar loans depends on weather. Until last Jan, MMAC and FA believed these loans were worth par plus accrued, i.e. $40***** to $50/share for solar. In Feb, however, bad weather caused this value to fall to ~$28/share inexplicably******. 

The tax asset value bet depends on MMAC generating or purchasing pre-tax income. Despite evidence of their value, MMAC did not require to be compensated for its tax assets *******. In contrast, consider PIOE (https://www.p10alts.com). In the last 3 years, with a $75 million tax asset, PIOE insiders’ purchases of pre-tax income fuelled PIOE’s rise from $0.2******** to $7 (93 million shares out). Their letters explain the runway for PIOE and they have replicated similar success in other companies like CRSS (on VIC). 

Thus, the  tax assets could provide enough value to incentivize MMAC to let the value of solar play out or negotiate a contingent value right (CVR) related to weather. Put another way, $28/share is not enough for at least $20/share from solar and potentially, weather permitting, another $30/share from solar and up to $20/share from tax assets.    

Moreover, the excerpt below suggests MMAC could avoid the $3/share Termination Fee********* and $2/share annual external manager fee by assigning Hunt´s Manager role to a new Manager (ftnt10). Per Section 11 of the Management Agreement between MMAC and Hunt:

 (a)      Assignments by the Manager. This Agreement shall terminate automatically without payment of the Termination Fee in the event of its assignment, in whole or in part, by the Manager, unless such assignment is consented to in writing by the Company and with the consent of a majority of the Independent Directors. Source: https://www.sec.gov/Archives/edgar/data/1003201/000114420418001400/tv482850_ex10-4.htm

Preserving the value of these assets requires blocking or restructuring the current FA transaction to just a sale of the solar loans. 

MMAC’s proxy explains that FA originally proposed to buy the solar loans rather than MMAC:

On September 29, 2020, an affiliate of Fundamental sent a letter to the Company offering to purchase the Company’s interest in the solar portfolio jointly owned by Fundamental and the Company, excluding certain loans to the extent defaulted or underperforming, which would remain jointly owned by Fundamental and the Company (the “Initial FA Offer”).

On October 22, 2020, Fundamental [indicated it] would be willing to acquire the Company’s interest in the solar portfolio without exclusions at par

To which MMAC responded: 

On October 19, 2020,...the Company expected Fundamental to pay a premium for the proposed acquisition of the solar portfolio. (highlight added)...On October 26, 2020,...that a price of par plus accrued interest for all of the Company’s interest in the solar portfolio could be recommended to the Board

FA agreed to par plus accrued (ftnt11), implying ~$50/share value for the solar loans.

Here’s the math: 

$343 million in Solar Ventures equity value growing  by its weighted avg coupon of 12.6%, implies a value of $386 million by 3/31/22. Subtracting the $79 million in revolving facility debt growing at 6% implies solar book value would exceed $52/share by 3/31/22. Thus, a $2-$3/share impairment implies that par plus accrued required a ~$50/share bid.  

Unfortunately, bad weather last Feb caused FA to reduce its bid:

On February 15, 2021...Fundamental planned to lower its offer for the Company’s interest in the solar business given valuation impairments of certain Sponsor X projects, in the range of $2 to $3 per share, based on events that arose following the execution of the term sheet on January 22, 2021.

Also in Feb, at FA’s suggestion, MMAC began discussing with FA selling all of MMAC to FA rather than just the solar loans. 

Yet MMAC did not require a higher price than par plus accrued despite facing the loss of MMAC’s $22/share in tax assets upon a control change: 

On March 1, 2021...Houlihan Lokey indicated that based on the current situation in Texas, an updated offer for the Company’s interests in the Solar Ventures would be less than par value, instead of the previously indicated 100% of par value, and that an offer price for the entire Company, reflecting those impairments and Fundamental’s evaluation of non-solar assets, would likely be in the range of $25.00 to $28.00 per share.

Other proxy questions or omissions: 

Though the proxy explains that FA ultimately agreed to the high end of this $25-$28/share range, it does not explain how FA’s estimate of valuation impairments of $2-3/share are consistent with a $28/share bid for MMAC? In other words, how is a $28/share bid consistent with $2-3/share impairment of the ~$50/share par plus accrued bid? Moreover, why proceed with the sale of MMAC to FA vs the sale of the loans to FA given the loss of MMAC’s tax asset in the former but not in the latter?

The proxy also states, as reason for the merger, “the ability to realize value we otherwise would not have obtained for our below market subordinated debt.” As the subordinated debt’s market value is $6/share lower than its nominal value, the Board is stating that the merger captures this $6, yet this $6 increases NAV above $50/share by next year. 

TD, as far as I saw, did not calculate NAV without the external manager or Termination fees despite their being avoidable via assignment to a new manager. 

Lastly, the proxy notes that “Hunt informed TD Securities that at a price in excess of $26 per share, it would more likely be a seller than a buyer.” This statement implies that above $26/share, Hunt would forego the Termination Fee and could be replaced as Manager.  

Summary of MMAC value excluding assignment of Hunt to another manager: 

MMAC in a year potentially could distribute ~$50/share, have $22/share in tax assets and little debt.

Roughly speaking, MMAC has two parts: solar loans and tax assets. 

1. In a liquidation, assuming no loan impairment (the key question is how much impairment is reasonable), the solar business would be worth ~$50/share by 6/30/22:

1. Solar loans book value was $46 per share on 3/31/21 (last ftnt)

1. As the weighted average coupon and maturity on this $46 is 12.6% and 15 months, respectively, by mid next year, this $46 would grow to ~$53 for an acquirer not paying MMAC´s SG&A. (p.6 of https://mmacapitalholdings.com/wp-content/uploads/docs/MMAC-Shareholder-Presentation.pdf)

2. MMAC has not explained why the $28/share is attractive for $50/share of solar value given “Through March 31, 2021, $2.3 billion of commitments across 164 project-based loans made by the Solar Ventures had been repaid with no loss of principal, resulting in a weighted-average IRR (“WAIRR”) to the Solar Ventures of 19.6% that was on average higher than originally underwritten loan IRRs.”

2. The rest of MMAC, roughly speaking, is deferred tax assets of $22/share ($124 million). 

*J.P. Grant, Chair of the Transaction Committee, commented: “Together, MMA and Fundamental have enjoyed considerable success providing development and construction financing for solar energy generating facilities.   In order to grow to its full potential, the business needs more capital than we have been able to provide.  Following a diligent review of our options, the Board has determined that Fundamental, which has been a great partner in our efforts to date, has the capital access the business needs and we are extremely pleased that they are making the decision to acquire and grow the business, while at the same time enabling us to meet the goal of maximizing value for our stockholders by obtaining a significant premium to our recent trading price. "

**due to a change of control

***As even the market inconsistently values tax assets

****Though the $28/share bid, which assumes payment of $3/share to Hunt as a Termination Fee, implies FA’s belief that solar will generate at least $31/share, the $20/share value is my worst case estimate. This estimate is based on FA’s required IRR, which is at least 15%. FA would not invest in solar for a potential 70% return (to $50/share) if it believed that 30% downside (to $20/share) was a significant probability.

******The proxy does not explain how $28/share equals par plus accrued minus the $2-$3 per share impairment due to Feb weather (“Fundamental planned to lower its offer for the Company’s interest in the solar business given valuation impairments of certain Sponsor X projects, in the range of $2 to $3 per share, based on events that arose following the execution of the term sheet on January 22, 2021.” p.35 of proxy).

*****The Board’s initial MMAC sale price was $34.50/share, which accounted for the ~$5/share Termination Fee (p.33 of proxy).

*******As explained below, last Feb, at FA’s suggestion, MMAC began discussing with FA selling all of MMAC to FA rather than just the solar loans. Yet MMAC did not require a higher price than par plus accrued despite facing the loss of MMAC’s $22/share in tax assets upon a control change.

********Per Item 5(c) on SEC Filing | P10 (p10alts.com)

********“The Manager has agreed to terminate the Management Agreement upon payment of the termination fee in order to allow the Merger to proceed, which termination fee is comprised of a cash payment of $16.5 million and the transfer by MMA to the Manager of MMA’s South African assets, which had a carrying value of $3.9 million at March 31, 2021.” Inline XBRL Viewer (sec.gov)

ftnt10: In the proxy, TD does not consider MMAC’s NAV excluding these fees.

ftnt11: “On January 22, 2021, the Fundamental non-binding letter of intent to acquire the Company’s interests in the Solar Ventures was executed with a price of par plus accrued interest for the entire solar portfolio.” id

last ftnt: $343 million of equity in solar (note 3 of last 10-q, p.39) minus $79 million credit facility debt (note 5). See “Collateral and Restricted Assets” in Note 8, p.54 of last 10q (Inline XBRL Viewer (sec.gov))

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