Here’s my update on the previous VIC work done on the Rescap Liquidating Trust. I’ll assume people have read the previous two write-ups by MIP and Kata and therefore I won’t rehash old material.My tabulation of all cases that have been settled as of 3/1/17 is given below. As shown in the first table, the Rescap trust has recovered a total of $398.0M in legal settlements so far. We can compute the settlement rate as a ratio of Settlement Amount to Original Principal Balance (OPB) in two ways: (1) Securitized OPB only, or (2) Total OPB which includes both Securitized and Non-Securitized (whole loans) OPB. My impression is the Securitized OPB is a more important parameter than the Total OPB, but admittedly I’m not a lawyer and most of what I know about this situation I’ve learned by reading the previous two VIC write-ups, some analysis I’ve seen on Reorg Research, and a report I’ve seen from Cowen and Company. The second table shows the currently active (unsettled) cases. Sorry about the formatting, this didn't format correctly when I uploaded the Word document.
If we assume that the active cases eventually settle at the same percentage of OPB as the already settled cases, then as shown below the total future settlements should be in the range $1.038B - $1.354B, or $10.38/sh - $13.54/sh. If we add those estimated future settlement amounts to the current Trust NAV of $3.15/share, we arrive at a future distribution range of $13.53/sh - $16.69/sh.
Now it gets a bit more interesting/speculative, and I’m hoping we have some legal experts on VIC willing to chime in here. My thinking is that the longer these cases drag on, the higher the settlement rate will become for the lenders who have not yet settled. One basic reason is that the trust’s legal costs continue to accrue. I was shocked to discover that the trust has already incurred $344M in cash legal costs over the past ~3 years, and they currently estimate another $280M will be spent going forward. Therefore, Quinn-Emanuel will end up making ~$624M from these Rescap cases in total. (Is that some sort of record?) But more generally, I think the "additional sources of value" as described below may apply to active-case defendants (those who have refused to settle up to this point) to a greater extent than they were applied to the settlements already completed.
I assume the active-case defendants are only responsible for their pro rata share of past legal expenses, where pro rata share is calculated as Unsettled Securitized OPB / (Unsettled Securitized OPB + Settled Securitized OPB), but they’re 100% responsible for future legal expenses. Note: the current Trust NAV of $3.15/sh includes $280M of liabilities for estimated future legal/trust operating expenses. So, what I’m claiming is that we should add back at least some of that liability, because I think the active defendants are on the hook for it. Then there’s the prejudgment interest that Katana brought up in his write-up. These cases have already been going on for about 3 years and it looks like we’ve got about 2 years to go. So that’s around 5 years of pre-judgement interest at 9% per year on an estimated remaining settlement of $1.354B. If we then assume a 70% “settlement factor” on these charges (similar to Katana), the total “Additional sources of value” amount to $8.09/sh.
Adding this “additional source of value” to the baseline numbers above yields the valuation range given above.
The Bear case assumes the lower settlement rate based on Total OPB and none of the “additional sources of value”. The Bull case assumes the higher settlement rate based on Securitized OPB and 100% of the “additional sources of value”. The Moderate case assumes a settlement rate based on Securitized OPB but only 25% of the “additional sources of value” since those are admittedly rather speculative.
The bottom line is, I think this is a very interesting investment opportunity. The fact that it’s a liquidating trust provides a built-in catalyst. The Bear case comes out higher than the current market price of the stock, so that certainly catches my interest, and the Moderate case implies a very attractive 75% return over ~2 years. Furthermore, for those of us concerned about US and global stock market valuations, RESCU is a great diversifier because its payoff is largely independent of global macro-economics and overall stock market valuations.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
This is a liquidating trust so there's a built-in catalyst. I estimate trust distributions will be mostly complete within 2 years.
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