DDM - DDM Group

[NewbieD]

Doubling their balance sheet aquiring 28 MEUR in Croatia and 50 MEUR in Greece in secured and unsecured NPLs. The greece purchase in supposedly one of the bigger NPLs transactions in Greece so far. The notional value of the Greece portfolio is 1.3 BEUR.

As a newbie in this sector, what factors are important in judging how cheap this might be and what the cash-flow over time might look like? Reading suggestions welcome.

As there are some investors in greece banks here: what's your view on the availability of NPLs going forward from Greece?
Any insight on if the greek seeming mentality of not caring about the tax collector transfer to not caring about clean credit? A bit scared that they've overpaid based on their profitability experience from slightly different cultures.

[NewbieD]

Realised there is one development I've totally missed here - swiss franc mortgage holders in eastern europe.
Apparently this was sold agressively from about 2000 to 2006 in many countries where DDM is involved - Slovenia, Croatia, Romania, Poland. Many of these are now heavily underwater due to the local FX weakening against the franc. For instance in Poland the zloty has gone from about 2 in 2008 to 4 needed to get one franc.

I have no idea how big of a share of DDMs portfolio this is - only that its not zero since they were involved in a dispute in Slovenia.

There are processes in at least Slovenia, Poland, Romania aiming to nullify these loan contracts - or force conversion into local fx using fx rates at the time of signing. The basis is the banks didnt inform about the risks but rather sold them as being superior due to being tied to a strong currency (hah).

Question is - should I be worried about legal risks as an NPL investor? How big share of the secured portfolios is this likely to be and to what extent has it already been priced into purchases in the last two years? Thankful for any insights.

Apart from this one risk I think the investment looks good. Economy turning around in many invested countries with project GDP growth rates 2018 from 2% (Greece) to 3-4% (Slovenia, Czech, Croatia) and 6% (Romania). Lots of portfolios seem to be coming up for sale.

[NewbieD]

Been selling this for the last month, decreased from 20% at most to 6% now.

- information vacuum what's going on. I knew this was likely on the financial front, i.e. you don't really know for a long time how much will be collected eventually, but coupled with below I'm just not confident any more.
- previous CEO Gustav Hultgren who I liked quit after going from CEO to 'Head of Greece' (last big transaction) for < 2 months. And promptly sold all his shares.
- new CEO which is one of the main owners quit due to family reasons. Founder Kent Hansson is back as interim CEO.
- they did not meet their revised investment goal for 2017. Could mean the price of portfolios is going up, which would be a postiive. Could also mean they are too busy handling what they already bought and the personnel changes above.
- other debt collectors e.g. IJ and Hoist have disappointed results wise.

[compounding]

Buyout offer for SEK 40/share from the largest shareholder Demeter today.

http://news.cision.com/se/demeter-finance-s-a-r-l-/r/demeter-finance-offentliggor-ett-kontant-offentligt-uppkopserbjudande-till-aktieagarna-i-ddm-holding,c2701807

Erik Fällström, who represents Demeter on DDM's board is an interesting figure in the debt collection business. They bought their current position in DDM for 42.5/share in April 2017 (small premium at that time), from the two founders Kent Hansson and Manuel Vogel.

He also founded Hoist Finance in the 90s and attempted a controversial buyout of the company in 2003, which drew criticism from among others Per H Börjesson of the Spiltan investment company. Spiltan started a campaign to defend minority shareholders and contacted all shareholders with more than 500 shares urging them do decline the bid and demand a higher price. Spiltan, and others, at this time criticised management for withholding information and that Fällström & co used the following uncertainty to launch a bid at a basement price. There seems to be some truth to this. Apparently positive news was in short supply at this time, and one of the few positive press releases was issued on Christmas Eve in 2003, comically enough. They eventually managed to get Fällström and his partner to increase their bid from 18/share to 24/share. Fällström later became a billionaire (in SEK) when Hoist re-IPO'd in 2015.

It seems like Fällström is following a similar playbook for value creation this time around, attempting to buy out a company he knows well, that has had a lousy recent performance for the equity. The bid seems pretty low as far as I can tell. In terms of ERC the multiple to EV is 0.59, and it's something like 7.67x EV/EBIT. Will be interesting to see what the reaction to this bid will be. If they get the company for SEK 40, I expect it to be a very successful investment for the buying company.

I have a small position.

[NewbieD]

Agree with your post, compounding.

Long acceptance period seems like a good thing for the buyer too. Still trading at 2,5%+ discount and high likelihood of deal concluding in my opinion it could be a decent yield trade if you, like me, have a lack of good other ideas.

I wasn't around the previous instance with Hoist but I don't see any candidates to putting up a fight against the bid this time?

[compounding]

Agree with your post, compounding.

Long acceptance period seems like a good thing for the buyer too. Still trading at 2,5%+ discount and high likelihood of deal concluding in my opinion it could be a decent yield trade if you, like me, have a lack of good other ideas.

I wasn't around the previous instance with Hoist but I don't see any candidates to putting up a fight against the bid this time?

Hansson is still on the board and owns 4.3% of the shares. I guess he isn't a good bet for activism since he sold shares for 42.5 the last time around, even if I would argue that the company has improved since then. There are a few others that perhaps could put up some resistance, but I wouldn't say it looks promising. Perhaps the best bet is some other company taking an interest, like what happened with Hoist, where Aktiv Kapital made a counter offer for 21/share.

There are some risks to holding as well. The offer is conditioned on Demeter receiving 90%, and they have announced that they are aiming to delist the company even if they go through with the offer without getting 90%. Seems like Fällström is not intent on doing minority shareholders any favors this time around either.

[NewbieD]

The market is definitely pricing in a pretty big chance of the deal not going through. I think the 90% is not the major reason, to me that seems very likely to be reached. However, condition 3 in the press release may not be as straightforward:

"the obtaining of consent from (A) the required majority of the bondholders of bonds
issued by DDM Debt AB (publ)3 with ISIN: SE0009548332 (EUR 85 million currently
outstanding bonds due 30 January 2020) (the “Bonds”) for the following waiver of and
amendments to the terms and conditions of the Bonds: (i) waive the change of control
event that will occur with respect to the transaction contemplated by the Offer; (ii)
extend the final maturity to a date on or later than 30 January 2022; (iii) new interest
rate of 7.00 – 8.50 percent p.a.; and (iv) include permission to pay certain
management fees, the use of certain SPV structures for investments and an Equity
Cure provision, in all material respect similar to corresponding provisions included in
the terms and conditions for bonds issued by DDM Debt AB (publ) with ISIN
SE0010636746 (EUR 50 million currently outstanding bonds due 11 December 2020)
(the “Amendments”); or (B) Bondholders representing at least 60 percent of the
Adjusted Nominal Amount (as defined in the terms and conditions of the Bonds)
irrevocably accept to exchange their Bonds for new bonds on terms and conditions in
all material respect similar to the Bonds but including the above Amendments."

The stock is trading down driven mostly by what looks like one big seller. If the deal completes now in slightly less than 3 months you get 17% return, 87% annualized.
About 22% to stock price when offer was announced. Good case for the seller would be some clueless individual or redemption driven fund. Bad case would be someone with better info..

Questions I'm wrestling with:
- How should the company become private affect required return by bondholders?
- Is it reasonable to demand a lower financing cost because of implicit backing by the new owner? Or because of market changes? (the bond to be replaced currently 9.5% int)
- Who is selling?

[compounding]

Some interesting developments here which reduced the spread somewhat. The Swedish Securities Council required Demeter to waive the condition regarding the changed interest on the bond, and that they remove the delisting threat from the offer. Demeter responded by doing just that, and the spread contracted quite a bit, even though it's still very wide.

NewbieD, I'm guessing this further raises your conviction level that 90% will be reached? I'm not there yet as far as conviction, but haven't done anything with my shares.