Description

SYNCORA HOLDINGS LTD [SYCRF]

Thesis

Syncora Holdings is a late stage liquidation trading with over 30% upside to a conservative valuation of its remaining assets. Shares trade at around $0.30/share despite an estimated liquidation value of $0.40/share.  We believe the investment has minimal fundamental downside because the biggest part of the asset base is $0.26/share in cash which accounts for over 85% of the current market cap. The company has slimmed down its cost structure dramatically, with current operating costs running at less than $200k/month based on our estimates. We expect the major distributions from the liquidation to be complete within a year and a realized IRR in excess of 30%.

Please note that as the major distribution resulting from the Syncora Guarantee sale proceeds occurred early this year, Syncora is now a microcap stock that trades with limited liquidity and there is a 5% ownership limit of the common shares.

Background

Once a large monoline insurer, in August 2019, Syncora Holdings Ltd announced the sale of its operating company, Syncora Guarantee to GoldenTree Asset Management LLC for $429 mm. The transaction was completed in December 2019 and the associated distribution of $4.7669 per share was declared and paid in January 2020. The remaining company is composed of 3 assets and cash from the sale of Syncora Guarantee.

For further background on the events leading up to the decision to liquidate the company, please see the previous write-up from timp9990 on 8/17/18.

Valuation

In addition to $22.45 mm in cash, Syncora also holds 3 additional assets: Swap Financial Group, a Detroit real estate option, and an investment in Crown Holdings.

Swap Financial Group

Syncora Holdings holds an 80% ownership in Swap Financial Group (“SFG”). SFG is an independent rate swap/derivative advisory business.

SFG is currently in litigation with vendor Principia Partners who has claimed inaccurate payments to them by Swap Financial. Although litigation continues in the New York State court, this case was already dismissed by Federal Courts in September 2019.

We value the business at a multiple of 3x cash dividends, less $1mm of litigation/settlement contingencies, which equates to roughly $3.8mm ($0.04 per share).

Detroit Real Estate Option

Syncora Holdings owns a real estate development option for an 8.9 acres plot in Detroit, granted out of the Detroit bankruptcy proceedings. The plot is located in the Rivertown Warehouse District not far from downtown Detroit. It is also noteworthy that large local investor Dan Gilbert has previously purchased other development rights from Syncora.

A comparable transaction nearby sold for $1.8mm/acre pre-pandemic. Estimating $1mm/acre and $1mm in associated costs, one can arrive at a liquidation value of $7.9mm (about $0.09/share).

Crown Holdings Investment

In 2015, Syncora acquired a 13% interest in Crown Global, an insurance and financial advisor. From Syncora’s most recent filing: “In connection with the sale of Syncora Guarantee Inc. to Star Insurance Holdings LLC on December 30, 2019, the Company adjusted its cost basis in Crown Global to $3.0 million, which is its current carrying value, excluding any estimated selling costs.” At book value of $3.0mm, the equates to $0.03 per share.

Wind Down Costs

Accrued estimated income and liquidation costs are listed at $1.36mm. Using a wind down cost estimate of $2.5mm, one arrives at a negative impact to liquidation value of -$0.03/share.

Liquidation:

Risks

Risks to an investment in Syncora Holdings (SYCRF) include:

• Swap Financial Group’s litigation proceedings with Principia could persist and could create unwanted uncertainty for potential buyers.
• Broader economic uncertainty could extend the timeline in the sale of the Detroit development option or could force further development spending to extend the life of the option.  

Disclaimer

This document is for informational purposes only. All content in this report represents the author's opinion. The author obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind — whether express or implied. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any information contained herein. As of the publication date of this report, the author and/or their affiliates have a long position in the stock of Syncora Holdings Ltd. Following publication of the report, we may transact in the securities of Syncora Holdings Ltd without notice. This report is not a recommendation to purchase the shares of any company, including Syncora Holdings Ltd. The information included in this document reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity. Any or all forward-looking statements, assumptions, expectations, projections, intentions or beliefs about future events included in this document may turn out to be wrong. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment prior to making any investment decision.

Catalyst

Sale of remaining assets and distribution of net proceeds and existing cash as the company liquidates.