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« Last post by wabuffo on May 31, 2020, 07:47:29 PM »
CB - re AHHAP
Ahhh - glory days!
Compared to other subprime lenders, LEND had an interesting structure and that was what drew me to it after sub-prime blew up in early 2007. As an aside I also had an investment in ECRO after it sold its origination platform to Bear Stearns. IIRC, in 2008 - two of my top five positions at times were sub-prime mortgage lenders (ECRO, AHHAP).
AHHAP ORIGIN STORY:
OK - back to LEND/AHHAP. LEND was originally structured as a C-Corp. But by the mid-2000s, it was finding itself at a competitive disadvantage vs the new subprime mortgage originators on the scene that were organized as mortgage REITs (NFI, New Century, etc). So LEND created a Mortgage Loan REIT subsidiary that housed all of its securitization trusts. Now the rules about ownership of REITs are very specific in order to preserve its tax status. Part of those rules are a 5/50 rule which means that the top five holders of the equity cannot hold more than 50% of the total equity. But LEND owned all of the equity of its new Mortgage Loan REIT. To solve this ownership problem and qualify as a REIT, LEND created a class of publicly-traded preferred shares (AHH-A later AHHAP on the pinks). The preferreds gave the Mortgage Loan REIT broad ownership and helped meet the 5/50 rule to qualify as a REIT pass-thru structure. But here's the key to the whole investment thesis. In order to protect the preferred shareholders, LEND had to give a guarantee to the AHHAP preferred dividends.
So to summarize, LEND (holdco) is a C-Corp holding the mortgage origination platform. The REIT that issued AHHAP preferreds is a subsidiary of LEND. LEND owns 100% of the common equity of this REIT sub. The REIT sub holds onto all of the securitization trusts' residuals, which are its only source of income to pay the preferred dividends. So when the mushroom clouds start to go off in subprime in 2007, and the mortgage REIT's preferred dividends can no longer be supported by the residuals, LEND is on the hook to pay the preferred dividends because of its unconditional guarantee.
Few people understood that - that was the key that forced the preferred dividends to continue to be paid. It got even more interesting - in 2007 Lone Star buys 100% of LEND, but it can't touch the preferred shares without unwinding the REIT. So basically LEND goes dark after the buyout, and the preferreds are left to trade as stranded preferreds. Their share price craters. This was opportunity #1 because everyone thought that Lone Star would pull the plug on the preferred dividends and I bought AHHAP in mid-2007. But folks who had read the details in the prospectus for the preferreds, knew that Lone Star couldn't stop the preferreds without pulling the plug on its investment in LEND itself. The preferred dividends continued throughout 2007, 2008 until the 1st quarter of 2009. Because I had made a great return on AHHAP and more opportunities were starting to appear in late 2008, I sold out of AHHAP. This was fortunate because I missed the...
LEND CHAPTER 11:
LEND/Lone Star put the C-Corp into Chapter 11 in April, 2009. The Mortgage Loan REIT was kept outside of the bankruptcy estate but had claims against the operating company (the origination platform and opco owed the REIT due to some large receivables related to how Lone Star extracted cash out of it) and the holdco (due to its preferred dividend guarantee). AHHAP fell to around $1 but I stayed away. I did follow the court docket and that's where I saw some of the discussion about large IRS refunds from past LEND tax years. By that time the price recovered to around $6 which was where I bought back in, IIRC. The estate filed a liquidation plan and disclosure document that outlined the recovery waterfall for AHHAP based on its claims against both the holdco and the opco. IIRC, Lone Star basically abandoned its equity in the Mortgage Loan REIT and had to kick in some cash to the estate for basically trying to screw the preferreds as well as some of the Trust Preferreds.
But I was also watching the LEND securitization monthly reports. And you know what, they were still providing positive cash flows to the Mortgage Loan REIT every month. There were sixteen deals and I think the four 2004 vintage securitizations were quite solid. In the end, between the Ch 11 recoveries and the securitization cash flows, total cash distributed to AHHAP holders was $19.21 per share (there was a final distribution in Sep 2016 after the securitizations were sold off and AHHAP was extinguished). Not bad vs a $25 liquidation preference and very good vs where I got in at $6 in 2011. But even better for some investors I know who got in at $1-2 right after it went Chapter 11.
I can dig through my files if you have any specific questions about the Chapter 11 case.
wabuffo
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