Evermore Global Advisors is bullish on Emergent Capital Inc (OTCMKTS:EMGC), a $64-million market alternative finance company that invests in life settlements. In its Q3 investor letter (you can download a copy here), Evermore discussed its investment thesis on Emergent Capital. Let’s take a look at the fund’s comments:
Emergent Capital was the largest contributor to performance during the quarter. Our new position in this special situation includes stock, senior notes, and warrants to purchase additional common stock in the future. Emergent showcases Evermore’s flexibility around idea sourcing and deal structure.
Prior to Evermore’s involvement, Emergent faced a fairly dire liquidity crisis stemming from: (1) an avalanche ($100+ million) of one-off legal and professional fees for matters we believed to be squarely behind the company; (2) an interest cost on debt burden inappropriate for a company with such inherently unpredictable underlying cash flows; (3) looming debt maturities; and (4) a generally unfavorable 2016 in terms of their portfolio performance. The stock market had certainly taken notice of these issues, driving shares down approximately 90% in the year preceding our initial investment
Far from a traditional “brokered” deal, we first learned of Emergent’s contemplated recapitalization from a business associate in our network that traffics in a variety of stressed value situations. After completing a significant amount of due diligence on the company’s assets and operations over a number of months, we came to believe Emergent’s primary problem was one of liquidity, not solvency. As a result, we agreed to purchase a significant stake in the company’s newly-issued equity at $0.20 per share, as well as participate in the refinancing of the company’s Senior Notes. Notably, even with news of the massive share issuance at $0.20 fully disseminated to the market, the stock still regularly traded above $0.30 per share prior to the recapitalization. For taking a lead role in the debt and equity recapitalization, Evermore received warrants to purchase additional shares at $0.20, as well as a Board seat. We believe Emergent exemplifies one of Evermore’s core competencies, the ability to evaluate and participate in highly complex and negotiated transactions. Evermore helped the lead investor drive the recap to closure and fully supported their efforts to dramatically revamp the company’s operating structure to maximize profitability.
Looking at the business itself, Emergent’s pool of life settlements resides within a bankruptcy-remote vehicle, White Eagle Asset Portfolio, L.P., which benefits from an external funding source to finance life insurance premium payments. The amount of cash Emergent can extract from White Eagle will be a function of the vehicle’s loan to value ratios, which are driven by underlying portfolio performance. We believe that were White Eagle to be put into “runoff mode,” Emergent would be able to extract significantly more than $0.20/share in value. However, we saw an opportunity for the company to grow intrinsic value per share by making cuts to what had become a bloated cost structure, while simultaneously exploring thoughtful capital deployment within life settlements and other alternative finance asset classes. With a purchase price at a steep discount to book value and with significant operational optionality, we believe the Fund will reap rewards from its investment in Emergent for years to come.
Please note that, due to Evermore’s representation on Emergent’s Board of Directors, our discussion of this investment will be of a limited nature going forward.
Florida-based Emergent Capital Inc (OTCMKTS:EMGC) focuses on life settlements. It purchases individual policies and portfolios of life insurance policies and manages them based on actuarial and market data. The company owns a portfolio of about 630 life insurance policies. On September 30, the estimated fair value of the company’s life insurance policies was $555.2 million, up compared to $498.4 million at December 31, 2016.
For the three months ended September 30, Emergent Capital reported total income from continuing operations of $24.5 million, compared to $4.8 million for the same period in 2016. The company had net income from continuing operations of $4.2 million, or $0.03 per share, compared to a loss of $8.5 million, or $0.31 loss per share, for the same period last year.