Rewind I have been emailing Neil regarding his blog and this was...

Rewind I have been emailing Neil regarding his blog and this was the update to the blog after the announcement of the sale

Saturday, September 27, 2008

A hug for AHUG (Allco Hybrid Investment Trust Alleasing Hybrids)
I wrote about the AHUG securities here in my post about general Allco securities. I indicated that they were worth about 60c on the dollar in the absence of the Allco guarantee. After Allco confirmed they would not honor the guarantee I estimated a value of closer to 50c on the dollar for AHUG based on an Alleasing sale between 120-180M and an appropriate portion of Allco's Mezzanine money to be kicked back to AHUG holders.

My weighted average purchase price across accounts was $17.88 adjusted for purchases made a few days before the previous interest payment.

AHUG was trading at $10 before it was suspended pending a sale of the Alleasing trust which took Allco about 2 weeks longer than they expected. An announcement was made on Friday outlining the terms of the sale:


Sale of Alleasing trust for total consideration of $146M

$20M of that is deferred for 18 months and subject to various conditions, warranties etc

Allco gets $49.9M total consideration

Alleasing gets $49.9M total consideration

AHUG holders get $41.97 within 2 months of completion which is estimated to occur on 30th November

AHUG holders get $8.03 after final payment of the deferred amount subject to adjustments

AHUG holders have to agree and no doubt waive all their other rights

AHUG is now trading again and traded as high as $38.1 before closing at $33, a reasonable 230% rise from the pre-suspension price!

A quick look at the numbers shows that a purchase today at $30 would provide an annualized 119% return or 40% over 4 months followed by an additional 27% after 20 months from now.

The outstanding risks are:

The sale does not proceed - Alleasing needs to continue to pay interest and Allco may still be on the hook to redeem AHUG. Allco had other bidders and would almost certainly be able to find another buyer, though at worse terms

The deferred amount is substantially less than forecast - from today's price almost all the value is in the January 09 payment anyway. The deferred payment is just a bonus

AHUG holders vote down the proposal - Allco can try to force the sale, though I'm not sure this would succeed. Allco could put the trust into receivership, in this case it seems likely that AHUG holders would eventually get more than proposed except if the trust was liquidated which doesn't seem to be in anyone's interests. I don't think a receiver could recommend liquidation if the company is so obviously worth more as a going concern. AHUG holders could still pursue the Allco guarantee.

The trust is worth book value + additional residual value + interest margin + new business margin. This is roughly -30M + 180M + 60M (over 2 years) + 45M (assuming 5% on assets as new business is written). This comes out at 255M. Therefore CHAMP Private Equity, the purchasers, are getting a good deal and ought to be motivated to see this close. Allco are motivated because they have to desperately raise cash to meet debt level agreements. AHUG holders are motivated because they may see 60% in a runoff but that would be in 2-3 years time. Given this business environment, 41% return now and 9% return in 18 months is about the same thing or slightly better.

Therefore a buy around $30 is still looking good and is much lower risk that a buy at $10 before the announcement (and much lower reward).