Wednesday, February 14, 2007

ECR Analysis

ECR is a public company that is in the subprime lending business. It has faced some tough times of late with losses in 2005 and 2006. Currently, the company's book value is more than the per share value. The company is trading for .93/share where as the book value as of Sept 30th 2006 was $2.07/share.

The company is getting out of the mortgage origination business. It has securitized and is selling its subprime mortgages. The company was expected to pay out $80 million to shareholders one month after the close of its deal to sell the mortgage origination business to Bear Stearns. The company was also expected to pay out another 56 cents a share in dividends. The total comes to 1.36 per share about 40% premium to the current valuation.

The press release put out by the company gave the following outlook for dividends.

1. First it says a payment may not be made before March 30th( I think this is the 80 cents/share that was supposed to have beenpaid within 30 days of bear stearns deal closing )which wont be forthcoming now.

2. The second amount is 56 cents/share - it seems this paymentwill be made in two parts at worst ( by June 29 ) or in one lump sumby March 30th. Most likely, the 80 cent payout is likely be replacedby this payment.

3. Additional payments may be made outside of these two payments in the future. ( dates unknown )

4. Even then, the company re-affirmed the payment of $1.34 - timing isthe question mark. Future payments are now dependent on "cash flowsfrom ECC Capital's residual interests in securitizations and thecompletion of transactions related to the financing of its residuals."

What does this mean? Is the company not able to meet its obligations while the balance sheet is deteriorating? Here is one take on this after studying the last 10-Q in detail.

1. The company had plans to give away $80 million in dividends right after the close of Bear Stearns deal. The company also expected the payment of 33 million to happen over a period of time as opposed to happening immediately. The deal closed about a month and a half later and 33.6 million payment happened immediately. Not all issues regarding the deal are closed and may take some more time for it to close.

2. The company seems to have the subprime default rate under control with adequate provisions for losses. At least it said so in the 10-Q.

3. The CEO bought 500K shares from the co-CEO.

4. My guess is that the immediate payment of 33 million to Bear Stearns ( as opposed to over a period of time ) as well as the 10 million payment to the unit of GMAC caused the cash reserves to dip below the comfortable level for management to give away 8o cents/share dividend immediately.

The company planned to be in existence through 2007 as per the previous 10-Q. It remains to be seen if the company will be liquidated and if so, how soon.

While my estimate is based on the currently available public docuementation, the reality may differ from the estimate. This will become clearer as more information becomes available in due course. In addition, it should be disclosed that I own shares in this company.

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