#$ocn

[hammerstone]

Equity markets ended mixed...

...giving up early gains (after initial weakness), as markets were on the fence of what economic data meant for Fed/economy. U.S. labor costs rose at the slowest pace in at least three decades in the spring, a sign of continued sluggish wage growth, which some speculated could weigh on the Federal Reserve's decision to raise short-term interest rates.

HammerstoneReport Closing ReCap - 7/31/15

[thedealnewsroom]

Fortress exploited a Cayman Islands loophole and may get sued

A major institutional shareholder in Home Loan Servicing Solutions is contemplating a lawsuit over an acquisition by New Residential that exploited a loophole in Cayman Islands laws.

by Dan Freed

Companies linked to mortgage debt collector Ocwen Financial Corp. (OCN) and asset management giant Fortress Investment Group (FIG) may face a lawsuit over a $1.4 billion acquisition that exploited a loophole in Cayman Islands laws to bypass a shareholder vote.

The potential legal threat comes as several market watchers are expecting litigation over a stock sale by Nationstar Mortgage Holdings Inc. (NSM), another Fortress-controlled mortgage company.

At issue in this case is the sale of substantially all the assets of Home Loan Servicing Solutions Ltd., a Caymans Islands-based company that had just 14 employees before the deal, to New Residential Investment Corp. (NRZ), a REIT managed by Fortress.

HLSS and New Residential had initially agreed to an outright sale on Feb. 22, but on April 6 they changed the structure of the deal to a sale of substantially all the assets of HLSS. The change was designed to get past large investors who were opposed to the deal, according to a major HLSS institutional shareholder who said he is considering bringing a lawsuit accusing HLSS and its management of breach of fiduciary duty.

The original transaction would have required that a super-majority of HLSS shareholders approve the deal, according to a regulatory filing. However, the way the deal was restructured no longer requires a shareholder vote for the asset sale.

The asset sale valued HLSS at slightly more than $17 per share, roughly where it traded the day before the deal was announced and below the $18.25 price originally agreed upon between the two companies. HLSS had spent much of 2013 and 2014 above $22 while paying a dividend that yielded in the high single digits. Shares of New Residential are up nearly 12% since the deal was announced compared to a gain of roughly 2% for the S&P 500.

The institutional shareholder considering litigation said the asset sale significantly undervalued HLSS, and the company's management and board should either have let the company remain independent or given more serious consideration to other bidders described in a May 1 proxy. Ocwen is the only bidder identified out of the five described in the proxy, but according to four people familiar with the deal three of them were Credit Suisse (CS), Apollo Global Management LLC (APO) and Fidelity National Financial Inc. (FNF).

Spokesmen for Credit Suisse and Apollo declined to comment. Fidelity National Financial did not respond to a call or an email message. A spokesman for Citigroup, which advised HLSS, declined to comment. An Ocwen spokesman declined to comment. Calls and email messages to executives at Fortress were not returned.

Had HLSS been incorporated in the state of Delaware, as most U.S. companies are, it would have required a shareholder vote. However, because HLSS was based in the Cayman Islands, shareholder approvals weren't necessary.

In an interview, John Van Vlack, CEO of HLSS, acknowledged U.S. companies have different rules. Still, he said, "our analysis was we were a company based in Cayman and we were looking at options given how we were domiciled."

Van Vlack pointed to disclosures in HLSS's 2011 registration statement prior to its public listing which notes, among other things, that "the rights of shareholders under Cayman Islands law may differ from the rights of shareholders of companies incorporated in other jurisdictions."

Nonetheless, Van Vlack disputed the assertion that the deal was switched to an asset sale to avoid a shareholder vote.

"We were told by our auditors we would not receive a clean audit opinion based on the merger. Filing our financial statements as needed for the merger with a qualified audit opinion would have resulted in defaults in our financing facilities," he said.

A spokesman for HLSS's auditor, Deloitte and Touche, declined to comment on the grounds that "profession standards prohibit us from discussing client business."

HLSS struck the deal under severe pressure from regulators, lenders, investors, and ratings agencies. A Dec. 19 settlement between Ocwen and the New York Department of Financial Services (NYDFS) had upset a delicate ecosystem of five interrelated companies including Ocwen, HLSS, Altisource Portfolio Solutions (ASPS), Altisource Residential (RESI) and Altisource Asset Management (AAMC) Bill Erbey, Chairman and de facto leader of all five companies, was forced to resign from those positions. The California Department of Business Oversight was threatening to suspend Ocwen's license in that state. That put pressure on HLSS because its business and Ocwen's were so closely interrelated.

Following the NYDFS settlement, hedge fund Mangrove Partners, one of HLSS's 10 largest shareholders, first pressured the company to terminate its relationship with Ocwen and then, meeting resistance from the Board of Directors, vowed to replace it. Another hedge fund, Blue Mountain Capital Management, argued HLSS was in default on certain debt securities and announced it was shorting shares of both Ocwen and HLSS. Ratings downgrades were making financing more expensive, perhaps prohibitively so. Calls to Mangrove were not returned. An attorney representing Blue Mountain, Erik Hass of Patterson Belknap Webb & Tyler, wrote via email, "thanks for the inquiry and opportunity to comment, but [we] are not in the position to do so at this time in view of pending matters."

After HLSS and New Residential announced the sale of HLSS Feb. 22, Kingstown Capital, owner of 5.1% of HLSS shares, stated in a filing the following day it opposed the deal, which valued HLSS at book value compared to a historical value of 1.2 to 1.3 times book value. Luxor Capital, another hedge fund, disclosed March 12 it had acquired a 9.8% stake in HLSS to become its largest shareholder. While Luxor did not publicly disclose its position on the proposed sale, Piper Jaffray analyst Mike Grondahl contended in a March 13 note he believed Luxor was concerned New Residential would transfer debt collecting contracts from Ocwen to Nationstar. That would have hurt Luxor's stake in Altisource Portfolio Solutions. Calls and email messages to executives at Luxor and Kingstown weren't returned.

Another detail disclosed in the proxy that has received scant attention is the disclosure of a Securities and Exchange Commission subpoena requesting HLSS "provide information concerning communications between HLSS and certain investment advisors and hedge funds. The SEC also requested, among other things, documents relating to HLSS's structure, certain governance documents and any investigations or complaints connected to trading in HLSS's securities," the proxy states. HLSS CEO Van Vlack declined to elaborate on the SEC inquiry and an email to the SEC press office produced no response.

Further opposition to the original proposed sale of all of HLSS came from a lawsuit filed by a retail investor, David Rattner, arguing the transaction undervalued the company. In an argument also made by the anonymous institutional shareholder who is contemplating a lawsuit, Rattner's suit argued the HLSS board rushed to get a deal done with New Residential because they feared losing their jobs in the event Mangrove succeeded in replacing them. Rattner had sought to block the proposed sale or, if it could not be stopped, recover damages from HLSS, New Residential and Van Vlack, among other defendants, for alleged violations of their fiduciary duties. A call to the law firm representing Rattner, Faruqi and Faruqi, was not returned.

Once the sale of the entire company was changed to a sale of substantially all its assets, however, Van Vlack said he heard no complaints.

"My sense was, prior to hearing from you that there was not any concern, really, about the asset sale," he said.

Compass Point analyst Jason Stewart was less surprised to hear of lingering shareholder discontent. Still, he argued HLSS had to act quickly as a major debt refinancing was imminent, and the company was under severe stress.

"I can see how shareholders are upset about how the whole thing happened, but they really had no other choice. Yeah, they had deals that were maybe for a higher price contingent on financing but they didn't have something they could act on quickly that had no contingencies, that was all cash," Stewart said.

The institutional shareholder said whether or not he brings a lawsuit will depend in large part upon whether he can make a case that HLSS is effectively a U.S. rather than a Cayman Islands company and so was required to receive shareholder approvals for the asset sale.

[jamielissettehammerstone]

U.S. equities recovered some of its prior day losses...

...as the Dow Industrials trade back above 18,000 level (touched low 17,774.89 yesterday), the S&P 500 back above 2,100 (2,077.59 low yesterday), and Nasdaq back around 5,000 (4,921.55 low yesterday). The Nasdaq snapped its 4-dau losing streak as well today, led by good gains in Semiconductors (+2.8%) and Biotech (+2.7%).

Stocks rallied Friday, but still ended the week lower, after a heavy dose of mostly weaker economic data (GDP highlight disappointment), a Fed meeting (which kept door open that any meeting going forward would be a “live” meeting for interest rate hike possibility, and a busy week of corporate earnings (included more misses than makes in revs/guidance).

HammerstoneReport Closing ReCap -5/1/15

[charlessizemore]

What Happens When My Stock Get Delisted?

Even Wall Street has standards.

I know that might sound hard to believe, but to benefit from the liquidity, capital-raising power and prestige that come with a listing on the New York Stock Exchange or Nasdaq, a company has to follow a few rules. 

Among other requirements, to maintain a listing on the NYSE, a company has to have an average market cap and stockholders’ equity of at least $50 million and must have an average share price of $1 or more over a 30-day period. Nasdaq continued listing requirements are slightly different, but the same concepts regarding assets, market cap and share price apply. 

For both NYSE and Nasdaq listing, companies are also required make timely financial disclosures. 

Enter Ocwen Financial Corporation (OCN), which recently made the news for failing file its annual report in a timely manner. Ocwen Financial received a deficiency letter from the NYSE. In plain English, this essentially means that Ocwen is on the naughty mat until it learns how to obey the rules. 

I should be clear that Ocwen is not at immediate risk of being delisted. The company has six months to get its house in order before the NYSE takes any further action. And if after that six-month period Ocwen still has yet to publish its annual filings, the NYSE has the option to allow another six months to pass before initiating delisting. Of course, the NYSE could also opt to delist the company now if it felt that something dodgy was going on. 

I expect Ocwen Financial to get its books in order well before a delisting happens. But this brings up a good question — one that all investors should learn the answer to:

What happens when the shares of a company you own get delisted?

A delisting is scary. And frankly, you generally have no business owning a stock facing delisting because, with few exceptions, a company that fails the continued listing requirements is on the express train to bankruptcy. 

Take RadioShack Corporation (RSHCQ) and its newly minted ticker, for example. Back in February, RadioShack’s plunge reached a low point when, after receiving two delisting warnings, the company was delisted by the New York Stock Exchange after failing to submit a business plan. RadioShack then filed for Chapter 11 bankruptcy protection days later. 

Here are some general rules you should follow with respect to companies at risk of delisting or already trading over the counter:

If the delisting is due to financial distress, stay away. Yes, the company might pull a rabbit out of a hat and recover, but chances are better that delisting is merely a stop on the road to bankruptcy.

The over-the-counter market is a playground for manipulators and fraudsters. This is Jordan Belfort “Wolf of Wall Street” territory. Take any information you get on a non-listed stock with a major grain of salt.

If the stock also trades on a well-regulated market overseas, it is fair game so long as its over-the-counter ADRs trade with sufficient trading volume. (A couple hundred thousand shares per day in volume is adequate liquidity for most investors.)

A recent high-profile example of this last point would be German industrial giant Siemens (SIEGY), which opted to be delisted from the NYSE last year due to the reporting headache of being registered in both Germany and the U.S. 

However, Siemens actually provides a few examples of what to expect during a delisting. Holders of Siemens’ NYSE-traded ADRs woke up one morning to find that the ticker symbols on their shares had been changed from “SI” to “SIEGY.” The five-letter ticker symbol is typical of stocks that trade on the Pink Sheets or Over-the-Counter Bulletin Board (“OTCBB”), which is where most delisted stocks end up. The Pink Sheets and OTCBB are essentially the Wild West of investing, as there is very little in the way of regulation or oversight here. 

Several quality stocks that I have owned over the year trade over the counter, such as Siemens, Nestle (NSRGY) and Daimler (DDAIF). But all of these stocks have one thing in common: They are blue-chip companies subject to a high standard of financial regulation in their home markets (Germany, Switzerland and Germany, respectively). For these companies, the U.S. over-the-counter listing is merely a way to allow Americans to buy the stocks at home, in dollars.

Bottom Line

As a general rule, stay away from companies at risk of delisting. Most already have a host of potholes to deal with. 

Plus, while in theory, nothing will change with respect to your equity in the company, in practice you might find your shares a lot harder to sell. Over-the-counter stocks tend to have low volume and low liquidity because they are shunned by institutional investors. And because of the lax reporting requirements, they are a lot harder to research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: audio-luci-store.it

[jamielissettehammerstone]

Major averages dropped into the close...

...as the S&P 500 and Dow Industrials gave up earlier gains, while the Nasdaq Composite snapped its 5-day winning streak, ending narrowly lower as Biotech stocks dropped. Transports were among top losers on the day, as rails declined on weaker forecast from KSU, while airlines suffered as oil prices jumped (DJ transports drop more than 1.5%); Defensive Telecom (low yields helping) & Staples (helped by weaker dollar). Markets overseas were mixed with more gains in Asia, but Europe was mixed. The main driver remains Central Banks, as they continue to provide all out QE to stimulate their economy/weaken their currencies (or at least in the U.S., don’t raise rates despite at record lows of 6-years despite an economic improvement), which has lifted global stock markets.

HammerstoneReport Closing ReCap -3/23/15

[jamielissettehammerstone]

U.S. stocks tried to end the month (a stellar month) on an up note...

...but faded into the close after weaker than expected economic data, which included a manufacturing data point falling to the lowest level since 2009. The Q4 GDP report was revised down to 2.2% (from 2.6% prior), while the Chicago PMI Index contracted for the first time since April 2013, and sentiment declined.

It was a narrow trading range for the S&P 500, less than 1% for the 5th consecutive session according to Bloomberg, with defensive sectors leading today (Staples and Telecom), while Technology, Healthcare, Energy and Financials lagged. The S&P 500 posted more than a 5% jump in February (best monthly gain since 2011), while the NASDAQ posted a 7% gain for the month (as close as 12 points from 5,000). European shares rose, extending their run of weekly gains to four. The volatility index (VIX) dropped 34% in February.

HammerstoneReport Closing ReCap 2/27/15

[alphaattribution]

Hedge Fund Stress, Support & Risk

The S&P 500 had a great week and reversed much of what the markets had inflicted on it,  year to date. Though the Symmetric Top Position (STP) Index of popular, high-conviction hedge fund positions underperformed the SPY, the Symmetric Top Positions (STP) sector indices each outperformed their benchmark and all except one outperformed the SPY.

The Symmetric Top Positions (STP) Index tracks the top fifty most popular, high-conviction long-positions across the Symmetric hedge fund universe. Drawn from the Symmetric universe of hedge fund holders, the STP index provides a lens on hedge-fund stress and support from the perspective of their most popular, high-conviction positions. While the SPY had traded up 3% this week, over the same period, the STP Index underperformed by 60 basis points and traded up 2.5%.

The STP Energy and STP Financials Indices outperformed their benchmarks (XLE & XLF) by 190 and 130 basis points this week (Jan 30 close - Feb 6), respectively. Unlike last week, when it declined 140 basis points more than its benchmark (XLK), Tech was not a source of stress this week. The STP Consumer Discretionary and STP Healthcare indices only modestly outperformed their benchmarks (XLY & XLV).

The STP Index was dragged down by twenty-seven positions that underperformed the SPY benchmark. The top five positions that had a negative impact on the STP Index were Gilead Sciences Inc (GILD), Abbvie Inc (ABBV), HCA Holdings Inc (HCA), Ali Baba (BABA), and Delta (DAL). Each of these underperformed the SPY by more than six hundred basis points and, in the case of GILD, 1000 basis points.

The STP Energy index outstripped its benchmark (XLE) by 190 basis points on the strength of key stock-picks by managers. The exploration and production companies in the Symmetric Top Energy index continued to recover and stabilize. Sandridge Energy Inc (SD) and Golar LNG (GLNG), rose 55% and 12% this week, respectively. While GLNG’s popularity has been increasing, SD’s popularity had been declining among hedge funds over the past few quarters, so fewer than fifty hedge funds had a position in SD of which six had it on as a high conviction bet. Hedge funds that benefited from owning this stock include Akanthos Capital Management and Kamunting Street Capital Management. Akanthos has held SD for just over one year, and it makes up 8.5% of their book. Top 25% stock picker Jeffrey Bersh and his Venor Capital Management holds more than 13% of its publicly disclosed portfolio in GLNG.

The STP Financials index rebounded on the strength of broad-based improvements among its components. It didn’t hurt to see Ocwen Financial’s (OCN) regulatory controversies start to subside and yield more than a 38% increase in the stock for the week, net of its benchmark. OCN was owned by fifty hedge funds within the Symmetric Universe of which fifteen of them owned it as a high conviction bet. Hedge funds that gained from the bet include Kingstown Capital, a $1.2b equity L/S hedge fund, which had 17% of its publicly disclosed portfolio in the stock as of the last public disclosure. Altisource Asset Management, Corp (AAMC) also rebounded this week, following weakness in prior weeks, and increased 19% net of its corresponding benchmark.

The STP Tech index also exceeded its benchmark (XLK) and the broader SPY. Twitter, Inc (TWTR), Linkedin Corporation (LNKD), and SunEdison, Inc (SUNE) led the STP Tech index, with advances of 24.9%, 14.1%, and 7.6%, respectively, net of the benchmark.

The stock picks of some individual managers, however, far outstripped the week’s market-moves. Hovde Capital Advisors realized 12.1% of stock-picking skill, and Kingstown Capital Management realized 10.8% of stock-picking skill. Altai Capital Management remained among the biggest winners for the second week in a row, realizing 3.5% of stock-picking skill. The table below shows the biggest winners in terms of stock picking skill for the past week.

To see a full attribution of what drove the funds and indices returns, as well as the index components, please consult the Symmetric Premium Product and Hedge Fund Screener

Biggest Winners, by name and change in skill

HOVDE CAPITAL ADVISORS -- 12.1%

KINGSTOWN CAPITAL MANAGEMENT -- 10.8%

ALTAI CAPITAL MANAGEMENT LP -- 3.5%

KERRISDALE ADVISERS -- 2.4%

[alphaattribution]

Hedge Fund Stress, Support & Risk

The S&P 500 has had a good week, but it’s been even better for popular, high-conviction hedge fund positions. While the SPY had traded up 1.7% this week, over the same period, the Symmetric Top Positions (STP) Index traded up 2.2%.

The Symmetric Top Positions Index (STP) tracks the top fifty most popular, high-conviction long-positions across the Symmetric hedge fund universe. Drawn from the Symmetric universe of hedge fund holders, the STP index provides a lens on hedge-fund stress and support from the perspective of their most popular, high-conviction positions.

The energy component of the STP Index only slightly underperformed its benchmark (XLE), but the financial component saw greater stress this week (Jan 15 close - Jan 23 close), declining while the benchmark increased. Tech and consumer discretionary picks provided strong support over their benchmarks (XLK & XLY)

The financials sector impacted the STP index particularly hard, compared to the benchmark (XLF). Ocwen Financial Corp (OCN), a company that specializes in the servicing and origination of mortgage loans, continued last week’s decline, dropping nearly 17% today, alone. OCN was owned by fifty hedge funds within the Symmetric Universe of which fifteen of them owned it as a high conviction bet. Hedge funds that suffered from the bet include Kingstown Capital, a $1.2b equity L/S hedge fund, which had 17% of its publicly disclosed portfolio in the stock as of the last public disclosure. Altisource Asset Management, Corp (AAMC) also impaired the STP Financial Index, declining 3.26% for the period.

Tech and Consumer Discretionary picks supported the STP index. Index-member, Linkedin (LNKD), rose 8.4% this week. More than seventy hedge funds had a position in this stock of which 16 of funds had it on as a high conviction bet. Hedge funds that benefited from owning this stock include Coatue Management and Meru Capital Group. Coatue has held LNKD for over three years, and it makes up 7.4% of their book.

The STP index exceeded its benchmark by nearly 600 basis points and easily outpaced the the stock picking skill of the Symmetric long-short equity manager universe. The average equity long-short manager generated negligible stock picking skill over the past week, so the average fund’s stock picks roughly corresponded to their sectors on a beta adjusted basis. Nonetheless, there were some winners at the tail. The table below shows the biggest winners in terms of stock picking skill for the past week. To see a full attribution of what drove the funds and indices returns, please consult the Symmetric Premium Product

Biggest Winners

Apex Capital

Crosslink Capital

Jericho Capital

Whalerock Capital     Top 25%