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Why Kyle Bass Is Betting on Post-IPO NMI Holdings

Kyle Bass‘ fund Hayman Advisors recently filed a 13D form with the Securities and Exchange Commission, declaring that it had added private mortgage insurance company NMI Holdings Inc (NASDAQ:NMIH) to its equity portfolio. The fund currently owns about 5.5 million shares of the company, equal 9.5% of the outstanding common stock, and as stated earlier, the position is activist by nature.

Kyle Bass

NMI Holdings recently went public. Its initial public offering (IPO) was closed last Thursday, and the company received net proceeds of approximately $29.5 million, before expenses. Since the IPO, which was priced at $13 per share, the stock is up about 7%.

As the company is on the development stage, it has not reported any revenue so far. This makes it the first U.S. insurer since 2009 to file an IPO without posting a profit. However, as interest in home-loan guarantors rebounds in the U.S., NMI Holdings decided to give it a shot and went public.

It’s hard to find a particular reason behind Bass’ investment in NMI Holdings. However, if I had to guess, I’d say he’s betting on the value: NMI trades at substantially lower price-to-book values than established private mortgage insurance companies. The stock price (and thus, valuation) is expected to remain quite flat for the next few months, so as to attract investors. However, long-term returns could definitely turn out to be interesting.

Hayman Advisors was founded in 2005, and returned about 300% in its first four years: 20% in 2006, 216% in 2007, 6% in 2008 and 9% in 2009. However, what made Kyle Bass (and the fund) really famous was the fact that he was one of the few hedge fund managers that anticipated the collapse of the US sub-prime mortgage market, and could largely profit from it: he made about a half a billion dollars betting against subprime CDOs.

About 1/4 of its current portfolio is comprised of consumer cyclical stocks. After these, its most relevant holdings are real estate and ETFs.

The fund’s portion of NMI Holdings is currently valued at approximately $77 million. This makes it its second most valuable holding, slightly below the recently acquired PennyMac Mortgage Investment Trust (NYSE:PMT).

In its latest 13F form, Mr. Bass´ fund declared at least 9 new positions, started during the third quarter. Some of the most relevant in terms of impact to its portfolio are (sorted by the value of the transaction): PennyMac Mortgage Investment Trust; J.C. Penney Company, Inc. (NYSE:JCP); Microsoft Corporation (NASDAQ:MSFT); and Vodafone Group Plc (ADR) (NASDAQ:VOD).

Disclosure: none

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