Value Investor Blog

Asta Funding Update

Posted in Uncategorized by aaronstackhouse on December 17, 2009

If you haven’t read part 1 of my analysis, I strongly recommend reading that one first here.

Asta Funding reported FY 2009 and Q4 earnings after the market closed yesterday and held its quarterly conference call this morning. I participated in the call – although during the Q&A I was cut short due to technical difficulties. Fortunately I was able to speak to the CFO Bob Michel on the phone for 10 minutes later in the day – I was impressed management is so accessible!

For full disclosure, I do NOT have a position in the stock, but I am watching it closely and think it warrants further research.

After much thinking, here are my take-aways from today:

1) My first reaction to the earnings release was surprise at the size of impairments taken in the quarter. A large part of my analysis was based on the assertion that the company had previously taken aggressive write-downs on its receivable portfolios, (in particular the portion accounted for using the interest method). I based this on an estimate I made about the cumulative impairment as a % of purchase price that they had taken since 12/31/07, and compared this to similar estimates for Asta’s competitors.

Nevertheless, in the 4th quarter, Asta took impairments of $137 million, including $74 million on the interest method portfolio – which represented 46.2% of the starting carrying balance on the interest method portfolio.

So I look a quite foolish now after putting together a “conservative” balance sheet just 10 days ago showing the interest portfolio receivables impaired 25% from their 6/30/09 levels, only to see that impairment nearly doubled in the next quarter.

Because it is such an important piece of the puzzle, I will show my estimate in detail (this is a compilation of information provided in the 10-K and 10-Q filings, all numbers are in thousands).


Beginning near the top right corner, the balance of $509,580 is the actual reported carrying balance at the beginning of 2008 Q2 (Dec 31, 2007). This is the first quarter where significant impairments were taken related to the recent economic turmoil. For each quarter, the rows show the changes in the carrying balance of receivables (remember this is only those receivables that are measured using the interest method – click here for a nice explanation of this accounting treatment).

In the actual filings, the company also includes a row for impairments. To analyze the cumulative impairments at Asta, I have removed this row to calculate what the carrying value would be WITHOUT impairments, and compared this to the actual carrying value. So as you move to the left after 2008 Q2, the top row is the balance WITHOUT impairments, not the actual carrying value.

I HAVE included $30.3 million of impairments that were taken on the “Palisades Portfolio” in Q2 2008 because in Q3 2008 this portfolio was transferred at its then-current carrying value (after the $30.3 impairment) to the cost recovery method of accounting. Since the portfolio was taken out of the interest method pool, the impairments need to go with it.

At the bottom of my table I also list the actual carrying value of the assets accounted for under the interest method. By comparing this with my estimate of the non-impaired carrying value, I was able to estimate that as of Q3 2009, these assets had been impaired ~33.6%.

The Q4 2009 data hasn’t been entirely released (the detail will be in the 10-K due out shortly), but as noted above, we do know that the interest method portfolio was impaired $74 million, and I am able to estimate the ending carrying balance of the portfolio within a few million at $69,837, representing a cumulative impairment since 12/31/07 of over 65% of the purchase price.

By way of comparison, Asta has some similar, publicly traded competitors. I looked at two of its peer companies (as noted by Asta in the 10-k) – Encore Capital Group and Asset Acceptance Capital Corp. Both companies provide more detail than Asta on impairments – explicitly showing cumulative impairments as a % of purchase price by vintage year. This is very helpful because while Asta has not purchased significant new portfolios since the credit crisis began and therefore substantially all of its assets are likely candidates for impairment (purchased at older, higher prices), both Encore and Asset Acceptance have continued to make purchases. Presumably these new purchases are at lower prices and not likely to be impaired – so it is helpful to be able to focus on just the assets that were purchased pre-crisis.

Encore Capital has taken cumulative impairments of 11.8% and 11.3% of purchase price on its portfolios purchased in 2005 and 2006, respectively. Asset Acceptance has taken cumulative impairments of 23.4% and 27.5% on its portfolios purchased 2005 and2006, respectively. This would suggest Asta has been more aggressive on impairments, as my estimates are 33.6% as of 6/30/09 and 65.4% as of 9/30/09.

At 65.4% impairment, it seems unlikely the assets are STILL being carried above fair value. However, I would have said the same thing about last quarter’s numbers. So in light of my previous post, I feel a bit like Kramer on the episode of Seinfeld where he takes a vow of silence…. “starting NOW.”

In Summary on Impairments

- I feel more confident than before that the stated book value is conservative

- I feel far less precise on my understanding of the fair value of the assets

- The company is generating an estimated $46 million tax refund in 2010 by taking these impairments. To the extent that management is choosing real cash benefits over reporting better earnings and hence adding value, I applaud them.

- I plan to spend more time digging to see if I can get a better comfort level on the appropriate fair value

2) My second take-away from today is how well the stock performed today relative to news that book value was reduced by 25%. The stock opened down approximately 15% and then traded up most of the day. Take a look at the stock chart, which explains it better than I can here.

I would like to think a large factor in this was the seemingly large margin of safety going into yesterday. Having that margin of safety leaves room for error of analysis (in my case on the impairments), bad luck (wish I could blame this), or deteriorating conditions.

I am sure the large tax refund also played a role.

3) The company once again reporting strong cash flows from interest method portfolios that are fully amortized ($9.6 million for the quarter). This income for 2007, 2008, and 2009 has been $23.9, 45.3, and 40,7 million, respectively. As I discussed in part 1, I think this is a key component of overlooked value at the company. I asked Bob Michel (CFO) about this today and in particular if the company could offer any visibility on the extent that this might continue. He wouldn’t provide any guidance, although he did say he expected it to decrease, although not to zero.

I wonder if this is simply a by-product of a company that is aggressive with impairments. Over the next few weeks I am going to see what I can dig up as far as comparing these cash flows to similar companies, and estimating future cash flows from these fully amortized portfolios going forward.

4) I am NOT making any specific buy/sell/hold calls yet, but will definitely be watching and analyzing in the weeks to come.

5) There is a lot more to talk about – the fact that Asta has completed paid off its credit facility, freeing up cash flow and removing some restrictive covenants on share repurchases and portfolio acquisitions (although no promises on either of these going forward). Also, Asta has estimated cash flows of $80-85 million from operating and investing activities for 2010 so I’d like to play out where that will go… More to come!

BTW I love feedback, questions, and criticisms if you have them.

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20 Responses

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  1. Value Investor said, on December 17, 2009 at 8:29 am

    I’m guessing you were the first caller during the conference call is it was the only relevant question I heard. I planned on asking questions this morning but opted not to because I estimated their would be a healthy abundance of questions asked. Apperantly there wasn’t. Next time I’ll push the star button on the phone.

    We should get in contact with each other. Our style is very similar and I always enjoy a good conversation with an intelligent fellow value investor. Write me over at valueinvestortoday.com if you feel inclined.

  2. Value Investor said, on December 17, 2009 at 8:32 am

    I apologize in advance for my misspellings. They’re atrocious. Unfortunately, there is no edit button.

  3. Hot Sauce said, on December 18, 2009 at 2:43 am

    Love your style. I love that you showed up to the conference call all psyched up and yet you don’t own any shares of ASFI. How many individual investors would go so far as to show up on the conference call and not own any shares. Takes some real gusto to take it that far. I love your liquidation analysis. I didn’t realize that Asta could get that extra $30 million in liquidation, so my liquidation valuation was a bit lower than yours. You have added some great insight into this company. Look forward to hearing more of you at the conference calls and of course reading more of your posts. I too was amazed, surprised, and very glad to see the stock hold up quite nicely the day after the $5.55 loss was announced. There is hope yet that average “day traders” might actually understand something about fundamental value. My theory is that the recent massive write downs have added a lot of clarity to Asta’s balance sheet – whereas, prior to Q4 releases, most investors were left to guess at Asta’s debt portfolios’ values and therefore came up with a large range of possible quotes and were then forced to value those assets at the lowest end of that range. Now, the massive write downs have effectively reduced the “spread” of possible valuations of Asta’s assets. People will no longer have to guess as much at the assets’ true values and should now feel more confident in purchasing nearer to the basic book valuation (assuming no more massive write downs are on the horizon, as you mentioned in your briefing).

  4. Qleap said, on December 19, 2009 at 6:33 am

    Aaron,

    The quality of your analysis is excellent – thanks for sharing this. Looking forward to your further findings.

    regards,
    Qleap

  5. aaronstackhouse said, on December 23, 2009 at 2:47 am

    VI – sadly I was not the first question on the call, I was the guy babbling about the tax rebate. In my defense I got cut off by the operator before I could follow up and really get at my question. Thanks for the support and I can’t wait to dig into your blog – looks like you have some great content on there!

    Hot Sauce – thanks for the compliments! I don’t know what to say, I just love the challenge. I’ll probably own shares at some point but even if I didn’t, I’d still be following and writing just for sport. I agree with you – while it’s hard to know what their assets are worth, the more writedowns they take the more comfortable you have to feel… They are also projecting 80-85million in cash flow in 2010 excluding the Palisades aka Great Seneca Portfolio. We should know more when the 10-K comes out but I’m pretty sure this also excludes cash flow from the fully-amortized receivable pools – which as I mentioned above has been consistent and material. So we could be looking at 120 million or so in “cash from operating and investing activities.” All that cash is going to have to go somewhere! Portfolio acquisitions, dividends, share buybacks – I think any could be a catalyst for this stock.

    Q- thanks, and thanks for reading

  6. Value Investor said, on December 23, 2009 at 3:05 am

    Aaron, Ok. You’re correct, you were just leading into your question and they cut you off. In any event, I’m curious about something. If you aren’t invested in Asta yet you see significant value and a limited downside risk, what are you currently invested in that is so much better? Just curious. It looks like we have a conversational relationship with some of the same people. I look forward to visiting with you in the future. All the best.

  7. Hot Sauce said, on December 23, 2009 at 3:52 am

    Yeah, well I hope they don’t add onto their dividends. They should take the money and hoard it right now. Pay down as much debt as possible. They have really made a lot of progress in that regard already though. Also, I think the $80-85M quoted by Gary would have already included income from fully amortized portfolios, that’s just my guess. $120M seems like an awful lot and I don’t think they could generate those kind of cash flows from investing activies and collections. Correct me if I’m wrong here, please! Btw, how did you learn what you know about corporate loan terms and such?

  8. Hot Sauce said, on December 23, 2009 at 4:03 am

    Oh yeah, and I believe the $35-40M he mentioned was free cash flow expected from collections alone, and I would assume this number included both fully amortized portfolios and ones that still show up under their receivables assets. Again, please correct me if I’m wrong, anyone?

  9. Value Investor said, on December 23, 2009 at 1:28 pm

    Bill Desellum:
    OK, great. So let’s start with understanding the — a couple of cash flow numbers that you put in the — in the commentary in the release.

    The — you mentioned 80 to 85 million in the second paragraph but then in the fourth paragraph there’s a reference to the 35 to 40 million, but that says that excludes the Great Seneca portfolio. So are we to read into that that the difference is the Great Seneca portfolio or could you provide some clarity to help us understand that please.

    Gary Stern:
    Sure Bill. We anticipate a $46 million federal tax refund and we anticipate the next — for fiscal year 2002 we’ll have $35 to $40 million in positive cash flow. Therefore, the total cash available to Asta in the course of 2010 for portfolio purchases will be somewhere in the $80 to $85 million range.

    Bill Desellum:
    So basically taking the $35 to $40 million we add on top of that the federal tax refund. And any cash flow that you collect from the Great Seneca portfolio that goes to the bank of Montreal.

    Gary Stern:
    That’s correct. So the number’s we’re talking about, 80 to 85 million, are just on Asta Funding excluding Great Seneca. And we also had a small credit facility of $6 million which, if needed, we would attempt to increase that as portfolio purchases increased, but as far, as we could see now, we believe the company would be self funded this year.

    Bill Desellum:
    Great. Thank you.

  10. Hot Sauce said, on December 24, 2009 at 3:25 am

    Well overall, like in terms of sharpe ratio and everything aspect of investing taken into account, he might actually beat you Jim. You’re not very diversified and he is very diversified. I’m sure my parents would trust him more with their money than they would you. You’re mostly invested in just 2 stocks. If one of those companies go bankrupt, you lose half your money. Tim would have an easier time convincing some retired folks to invest their Roth IRAs with him. That being said, I do appreciate your deep value strategy more than his short-side penny stock strategy. But that’s just me. You gotta work on your sharpe ratio more too, keep trying hard. Bottom line is you’re both great investors. You both are among the hardest hardest working guys on Covestor (next to Perry and other management of Covestor, of course)

  11. Value Investor said, on December 24, 2009 at 9:04 am

    First, we’re not in competition. Second, I’m sure he gives about the same amount of significance to the sharpe ratio as I do which is none. Third, diversification means different things to different people. For me, I’m confident that I know what I’m doing so I have no need for diversification and I’m willing to take the risk if I’m wrong. Fourth, your folks can choose whomever they like to invest with. Currently, I’m completely booked and have no room for additional clients. Merry Christmas. When you start eliminating useless terms such as the Sharpe Ratio from your vocabulary, I may give you a present in terms of knowledge. For now, it would serve no purpose.

  12. Hot Sauce said, on December 31, 2009 at 2:08 am

    What’s up Aaron? Did you get anything out of the 10K yet? Are you more worried or less worried about Asta now? Do you consider it a buy at this point? Let me know if you see any oddities in the 10K that might be of interest to me. Thanks!

  13. Qleap said, on January 2, 2010 at 7:36 am

    I guess the key Q here is what is the MoS ? All rough figures below.

    They owe 104 million on the Palisades Portfolio (carrying value of 121 million) at 320 bps above LIBOR. The worst that could happen is if there is inflation, the rates could go up to 15-17% vs 5% now. AND in addition to the monthly interest, the min repayments due are 12 and 7 million in 2010 and 2011.

    The balance amount will not be 25 million by Apr 2011 according to the 10-K. So BMO will help them in extending the facility to 2011, probably at higher rates in addition to the 8 million recourse – is my understanding correct ?

    The worst as you point out is that they are not able to reach an agreement (highly unlikely) and the assets shrink to 208 million (including 46 million in tax refund) while liabilities shrink to 20 million leaving about 12.96 dollars per share of equity.

    What am I missing here ?

  14. Hapsburger said, on January 3, 2010 at 7:00 pm

    Just located your blog – great information, thanks.

    You mentioned you used the Yahoo Finance stock screener – are there othes that you use as well? Does Edgar provide this also?

    thanks again

  15. Hot Sauce said, on January 4, 2010 at 7:56 am

    It’s funny to me how much thought has been put into figuring out Asta’s liquidation value when they are making money and collecting debts like crazy (given the recession and joblessness) and are clearly still a highly functional company! But as a beginner investor, I can learn a whole lot about corporate finance from you guys as you talk about liquidation value. I didn’t even know it was a variable rate loan (the one used to buy the Palisades portfolio). ^_-

    Appreciate all the work you guys did, happy new year and hope that Asta redeems itself in Q1 or Q2. (hope that Asta doesn’t have any further major write offs)

  16. Value Investor said, on January 4, 2010 at 7:10 pm

    Hapsburger,

    Thanks for your comment. I also use the MSN deluxe screener. It’s free as well. Edgar doesn’t provide a screener to my knowledge but I do use it to search for specific filings. In my experience, the yahoo screener has suited my criteria the best out of the ‘free’ screeners. Stop by anytime.

  17. Value Investor said, on January 4, 2010 at 7:12 pm

    Hapsburger,

    LOL, I’ve got to appologize, I thought you were posting a message on my blog. LOL. Didn’t realize to just now that this isn’t my blog hahaha. Sorry. Apperantly the owner of this blog uses the exact same screener as I do :)

  18. Hot Sauce said, on January 6, 2010 at 8:36 pm

    Why are you being so territorial, Jim? Do you personally know Stacks?

  19. […] debt is non-recourse. Aaron Stackhouse discusses the company’s situation in further detail here, for those interested in further analyzing this company. Looking at a company’s balance […]

  20. […] Part 2 […]


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