COVENTREE INC COF CN
June 25, 2009 - 2:37am EST by
sunny118
2009 2010
Price: 3.55 EPS N/A N/A
Shares Out. (in M): 15 P/E N/A N/A
Market Cap (in M): 54 P/FCF N/A N/A
Net Debt (in M): -90 EBIT 0 0
TEV: -36 TEV/EBIT N/A N/A

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Thesis:
Coventree Inc (COF CN or COF.TO; figures in CAD) is a low-risk liquidation as 88.5% of assets are in cash and liabilities are minimal.  COF closed at $3.55 vs. estimated mid-point liquidation proceeds of $5.64, a return of 58.7%. It is likely proceeds will be distributed within 12 months and it is possible for a faster partial or full distribution. 

Unless you're managing a relatively small fund, this is an idea for your personal account although COF did trade 262k shares today so there are days of reasonable volume.  If you have excess cash in your personal account or want a bit of diversification out of USD, COF appears superior to earning T-Bill rates. 

Estimated Liquidation Proceeds from 3/31/09 Balance Sheet:

ASSETS
Cash and cash equivalents                     90.0
Restricted cash                                       0.9
Accounts receivable                                 1.7
Investment in transactions                       0.3
Promissory notes                                    2.9 << 9/30/08 Annual report, Footnote 7 & 10, page 36
Other investments                                  2.7 << 2.66mm shares of XMC.TO, current market value of $2.9mm
Capital assets, net                                  0.0
Other assets                                          1.0
Future income taxes                               2.2
Total assets:                                      101.6

LIABILITIES
Accounts payable and accrued liabilities     7.8
Limited recourse debentures                    2.9 << Offsetting asset in Promissory notes
Income taxes payable                             0.1
Future income taxes                                0.1
Total Liabilities:                                    10.9

Net Asset Value                                     90.7

LOW-END ADJUSTMENTS
Adjustment to assets                             (2.9) << 50% reduction to Other Investments, Other Assets, and Future Income Taxes
Additional severance                              (0.8) << Severance for execs let go on 5/21/09 that was not in prior reserves
OSC penalty/fees                                  (2.5) << A fine seems very unlikely; this is 50% of largest fine ever imposed by OSC
Interest income                                      0.8 << Will earn interest income on cash balance
Ongoing losses                                     (1.0) << Only 4 employees remain
Cost to liquidate                                    (2.5) << This is not included in restructuring expenses taken to date
Transitional Services                                1.0 << COF will generate profit from Transitional Services Agreement
Est Net Asset Value: Low-end                  82.7
S/O                                                     15.2
Per Share Value: Low-end                     $5.46

HIGH-END ADJUSTMENTS
Adjustment to assets                             (1.5) << 25% reduction to Other Investments, Other Assets, and Future Income Taxes
Additional severance                              (0.8) << Severance for execs let go on 5/21/09 that was not in prior reserves
OSC penalty/fees                                  (1.0) << A fine seems very unlikely; quite possible this is zero
Interest income                                      0.8 << Will earn interest income on cash balance
Ongoing losses                                     (1.0) << Only 4 employees remain
Cost to liquidate                                    (0.5) << This is not included in restructuring expenses taken to date
Transitional Services                                1.5 << Assume 50% higher than low-end
Est Net Asset Value: High-end                 88.1
S/O                                                     15.2
Per Share Value: High-end                    $5.82

Per Share Value: Mid-point                    $5.64
Current Price                                        $3.55
Upside                                                 58.7%  

Investment Merits:
#1: Low-risk liquidation as $90mm of cash (88.5% of assets)
While there are some assets, such as public stock in Xceed Mortgage of $2.7mm, that may not be worth carrying value, they are fairly modest relative to the $90.0mm of cash and I have haircut their values by 25%-50%.  The second largest asset is a $2.9mm promissory note, but this is offset by an associated $2.9mm of limited recourse debentures on the liability side of the balance sheet as both items relate to the same shareholder loan (see page 36 of annual report which also highlights that 1.0mm COF shares are pledged as security for the promissory notes).  Take the low-end estimate of $5.46, wipe out all non-cash assets other than the promissory note (because associated liability would also be wiped out) and you get $5.07/sh.   

#2: Significant insider ownership and track record of protecting shareholders
Founders Dean Tai and Geoffrey Cornish hold 7.5mm shares (49.6% of S/O) and management has ownership (not reported in Canadian proxy filings so can't quantify).  The CFO has stated that she owns "a lot of stock and is working very hard to distribute cash as quickly and cost effectively as possible." 

The interests of outside shareholders and insiders are aligned.  An example of this is the 4/16/09 press release stating, "In connection with the winding down of the operations of Coventree Inc., the independent directors of Coventree have reviewed the entitlement of Dean Tai, the former CEO of Coventree, and Geoff Cornish, Coventree's current CEO, to the 736,522 common shares of Coventree issued to each of them under Coventree's 2005 Share Allocation Plan.  As a result of their review, the independent directors have determined that the shares were not validly issued and have decided to cancel the common shares."  For outside shareholders, this reduction in the S/O increased per share value by 9.7%.

#3: Short timing
As outlined below in "Steps to Liquidate" there are just 2 remaining hurdles to clear and it seems reasonable they will be accomplished in the next 12 months, and potentially faster.  CFO is unable to share a forecast, but when asked if 12 months is reasonable, she chuckled and stated she certainly hopes it occurs in the next 12 months.  There will be a cost to liquidate (included in my estimates) and while the company cannot give formal guidance (likely will include in June 30th results), when I guessed $5.0 million of costs, I was told "that would be a very expensive liquidation."  Therefore, this liquidation seems likely to occur fairly soon and the cost is likely fairly low.  Because of an indemnification agreement with 4 former directors, distributions cannot occur before September 1, 2009.

#4: COF is very easy to reach
Both the current and prior CFO are perplexed by the current share price and while I generally give little value to management's estimates of fair value, in the case of a liquidation I make an exception.  COF is in perpetual blackout so they are not allowed to buy.  The CFO is Ani Hotoyan-Joly and she can be reached at (416) 572-2086.

Investment Risks:
#1: Potential lawsuits
It is possible COF is sued and this slows the liquidation or reduces proceeds.  There are no current lawsuits against the company and management has stated they would issue a press release if sued.  As noted below, as part of the January 21, 2009 ABCP market restructuring COF received "comprehensive releases in respect of claims that might have been asserted against it in respect of its role as sponsor, administrator and financial agent for the Coventree-sponsored ABCP conduits." (see 3/31/09 MD&A, page 3).  A lawsuit does not appear feasible and the large gap between the current market cap of $53.8mm and expected liquidation proceeds of at least $82.7mm would require an extraordinarily expensive lawsuit before shareholders suffered a loss.

#2: OSC ABCP investigation and OSC IPO inquiry
Additional information is included below on both items, but simply put, the OSC is a very weak regulatory body and it is focused on the future of the ABCP market in Canada.  As COF is liquidating and will not be part of that future, it is very unlikely that COF receives punishment.  When I spoke with the OSC earlier this year, they seemed to have no interest in COF, which is further illustrated by the OSC's ABCP Draft Regulatory Proposals not once mentioning Coventree by name.  Regarding the IPO inquiry (not a formal investigation), if the OSC decided to move forward, it would make sense to go after individuals, not the company, as the OSC should not penalize shareholders for IPO transgressions. 

#3: Delay in liquidation
It is possible that unforeseen events occur delaying the liquidation.  While not ideal, the current price includes a margin of safety.  To date the company has taken steps that are consistent with creating as much shareholder value as possible.

#4: FX risk
If concerned the C$ is over-valued you may wish to hedge currency.

Company Description/Background:
On August 13, 2007 the non-bank Canadian asset-backed commercial paper (ABCP) market seized up.  Prior to August 13, 2007, COF was a non-bank that manufactured ABCP and serviced ABCP conduits.  After August 13, 2007, COF was no longer a viable business.

A comprehensive Canada-wide restructuring plan was implemented on January 21, 2009 and the assets of the COF-sponsored ABCP conduits were transferred to new special purpose vehicles that issued new notes to holders in exchange for existing securities, thus terminating the COF-sponsored ABCP conduits.  The assets in the new special purpose vehicles are now administered by third party administrators although COF provided transitional administrative services from 1/21/2009-5/21/2009.  Per a 5/21/09 press release announcing layoffs at the completion of the transitional administrative services agreement, COF has just 4 remaining employees.   It is important to note that "in accordance with the restructuring plan, Coventree received comprehensive releases in respect of claims that might have been asserted against it in respect of its role as sponsor, administrator and financial agent for the Coventree-sponsored ABCP conduits." 

Following the events of the summer of 2007, COF formed a special committee which determined on February 1, 2008 that "the Company will seek an orderly wind down of its operations and, in conjunction therewith, the distribution to shareholders of any funds remaining after setting aside appropriate amounts to cover the Company's expected future costs and liabilities, including known and other related liabilities." (see 3/31/09 MD&A, page 4)  For further detail, please see the company's quarterly or annual reports.

Steps to Liquidate:
1. OSC ABCP investigation
In early 2008, the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC) began examining the ABCP market.  As part of the investigation, the OSC inquired into Coventree's participation in the ABCP market and COF formed a special committee to oversee COF's response.  In October 2008, draft regulatory proposals were released.  Having reviewed the proposals, it seems reasonable to conclude COF will not be fined.  In fact, COF isn't specifically mentioned as the paper focuses on proactive changes and highlights the actions of the DBRS rating agency and ABCP distributors, such as RBC and CIBC.  The public comment period was closed on February 16, 2009.  In speaking with the OSC, I was told COF is not of interest and to expect a final report in the summer of 2009.  It seems the most likely outcome of the OSC ABCP investigation is the final report is released in the next couple months and there is no mention or fine of COF.  If for some reason the OSC decides to go after COF, the OSC told me $5.0mm is the largest fine they have ever imposed.  While it seems very unlikely COF receives any fine, a $5.0mm fine lowers liquidation proceeds by $0.33.  To be conservative I have included a $2.5 million penalty in my low-end estimate although I do not believe this will occur.

2. OSC IPO inquiry
Unlike the ABCP investigation, this is simply an inquiry and not a formal investigation.  I have not found the exact date the inquiry was launched, but judging from when it was included in COF press releases, it was approximately 1/1/09.  COF has said they provided everything the OSC has asked for and that there has not been a response or follow-up request from the OSC.  It is possible that the OSC launches a formal investigation of COF's IPO, but that isn't my impression from COF management.  Also, when I asked the OSC about this inquiry, they stated they had no reply as "it's not a formal investigation."  If the OSC did decide to proceed, a formal investigation of individuals associated with the IPO, rather than COF, seems most appropriate. 

The most likely outcome appears to be the OSC files its final report on the ABCP market shortly and there is no mention of COF (and no fine).  Likewise, the OSC's IPO inquiry seems a nonissue.  The indemnification is set to expire on Sept 1, 2009, which will allow COF to distribute proceeds. Nothing proceeds as smoothly as one would like, but it seems very feasible for these events to occur in less than 12 months.

I am happy to further elaborate on my diligence in Q&A, but wanted to avoid a long write-up.

 

Catalyst

1. Resolution of OSC ABCP investigation

2. Partial or full distribution of liquidation proceeds.

    sort by   Expand   New

    Description

    Thesis:
    Coventree Inc (COF CN or COF.TO; figures in CAD) is a low-risk liquidation as 88.5% of assets are in cash and liabilities are minimal.  COF closed at $3.55 vs. estimated mid-point liquidation proceeds of $5.64, a return of 58.7%. It is likely proceeds will be distributed within 12 months and it is possible for a faster partial or full distribution. 

    Unless you're managing a relatively small fund, this is an idea for your personal account although COF did trade 262k shares today so there are days of reasonable volume.  If you have excess cash in your personal account or want a bit of diversification out of USD, COF appears superior to earning T-Bill rates. 

    Estimated Liquidation Proceeds from 3/31/09 Balance Sheet:

    ASSETS
    Cash and cash equivalents                     90.0
    Restricted cash                                       0.9
    Accounts receivable                                 1.7
    Investment in transactions                       0.3
    Promissory notes                                    2.9 << 9/30/08 Annual report, Footnote 7 & 10, page 36
    Other investments                                  2.7 << 2.66mm shares of XMC.TO, current market value of $2.9mm
    Capital assets, net                                  0.0
    Other assets                                          1.0
    Future income taxes                               2.2
    Total assets:                                      101.6

    LIABILITIES
    Accounts payable and accrued liabilities     7.8
    Limited recourse debentures                    2.9 << Offsetting asset in Promissory notes
    Income taxes payable                             0.1
    Future income taxes                                0.1
    Total Liabilities:                                    10.9

    Net Asset Value                                     90.7

    LOW-END ADJUSTMENTS
    Adjustment to assets                             (2.9) << 50% reduction to Other Investments, Other Assets, and Future Income Taxes
    Additional severance                              (0.8) << Severance for execs let go on 5/21/09 that was not in prior reserves
    OSC penalty/fees                                  (2.5) << A fine seems very unlikely; this is 50% of largest fine ever imposed by OSC
    Interest income                                      0.8 << Will earn interest income on cash balance
    Ongoing losses                                     (1.0) << Only 4 employees remain
    Cost to liquidate                                    (2.5) << This is not included in restructuring expenses taken to date
    Transitional Services                                1.0 << COF will generate profit from Transitional Services Agreement
    Est Net Asset Value: Low-end                  82.7
    S/O                                                     15.2
    Per Share Value: Low-end                     $5.46

    HIGH-END ADJUSTMENTS
    Adjustment to assets                             (1.5) << 25% reduction to Other Investments, Other Assets, and Future Income Taxes
    Additional severance                              (0.8) << Severance for execs let go on 5/21/09 that was not in prior reserves
    OSC penalty/fees                                  (1.0) << A fine seems very unlikely; quite possible this is zero
    Interest income                                      0.8 << Will earn interest income on cash balance
    Ongoing losses                                     (1.0) << Only 4 employees remain
    Cost to liquidate                                    (0.5) << This is not included in restructuring expenses taken to date
    Transitional Services                                1.5 << Assume 50% higher than low-end
    Est Net Asset Value: High-end                 88.1
    S/O                                                     15.2
    Per Share Value: High-end                    $5.82

    Per Share Value: Mid-point                    $5.64
    Current Price                                        $3.55
    Upside                                                 58.7%  

    Investment Merits:
    #1: Low-risk liquidation as $90mm of cash (88.5% of assets)
    While there are some assets, such as public stock in Xceed Mortgage of $2.7mm, that may not be worth carrying value, they are fairly modest relative to the $90.0mm of cash and I have haircut their values by 25%-50%.  The second largest asset is a $2.9mm promissory note, but this is offset by an associated $2.9mm of limited recourse debentures on the liability side of the balance sheet as both items relate to the same shareholder loan (see page 36 of annual report which also highlights that 1.0mm COF shares are pledged as security for the promissory notes).  Take the low-end estimate of $5.46, wipe out all non-cash assets other than the promissory note (because associated liability would also be wiped out) and you get $5.07/sh.   

    #2: Significant insider ownership and track record of protecting shareholders
    Founders Dean Tai and Geoffrey Cornish hold 7.5mm shares (49.6% of S/O) and management has ownership (not reported in Canadian proxy filings so can't quantify).  The CFO has stated that she owns "a lot of stock and is working very hard to distribute cash as quickly and cost effectively as possible." 

    The interests of outside shareholders and insiders are aligned.  An example of this is the 4/16/09 press release stating, "In connection with the winding down of the operations of Coventree Inc., the independent directors of Coventree have reviewed the entitlement of Dean Tai, the former CEO of Coventree, and Geoff Cornish, Coventree's current CEO, to the 736,522 common shares of Coventree issued to each of them under Coventree's 2005 Share Allocation Plan.  As a result of their review, the independent directors have determined that the shares were not validly issued and have decided to cancel the common shares."  For outside shareholders, this reduction in the S/O increased per share value by 9.7%.

    #3: Short timing
    As outlined below in "Steps to Liquidate" there are just 2 remaining hurdles to clear and it seems reasonable they will be accomplished in the next 12 months, and potentially faster.  CFO is unable to share a forecast, but when asked if 12 months is reasonable, she chuckled and stated she certainly hopes it occurs in the next 12 months.  There will be a cost to liquidate (included in my estimates) and while the company cannot give formal guidance (likely will include in June 30th results), when I guessed $5.0 million of costs, I was told "that would be a very expensive liquidation."  Therefore, this liquidation seems likely to occur fairly soon and the cost is likely fairly low.  Because of an indemnification agreement with 4 former directors, distributions cannot occur before September 1, 2009.

    #4: COF is very easy to reach
    Both the current and prior CFO are perplexed by the current share price and while I generally give little value to management's estimates of fair value, in the case of a liquidation I make an exception.  COF is in perpetual blackout so they are not allowed to buy.  The CFO is Ani Hotoyan-Joly and she can be reached at (416) 572-2086.

    Investment Risks:
    #1: Potential lawsuits
    It is possible COF is sued and this slows the liquidation or reduces proceeds.  There are no current lawsuits against the company and management has stated they would issue a press release if sued.  As noted below, as part of the January 21, 2009 ABCP market restructuring COF received "comprehensive releases in respect of claims that might have been asserted against it in respect of its role as sponsor, administrator and financial agent for the Coventree-sponsored ABCP conduits." (see 3/31/09 MD&A, page 3).  A lawsuit does not appear feasible and the large gap between the current market cap of $53.8mm and expected liquidation proceeds of at least $82.7mm would require an extraordinarily expensive lawsuit before shareholders suffered a loss.

    #2: OSC ABCP investigation and OSC IPO inquiry
    Additional information is included below on both items, but simply put, the OSC is a very weak regulatory body and it is focused on the future of the ABCP market in Canada.  As COF is liquidating and will not be part of that future, it is very unlikely that COF receives punishment.  When I spoke with the OSC earlier this year, they seemed to have no interest in COF, which is further illustrated by the OSC's ABCP Draft Regulatory Proposals not once mentioning Coventree by name.  Regarding the IPO inquiry (not a formal investigation), if the OSC decided to move forward, it would make sense to go after individuals, not the company, as the OSC should not penalize shareholders for IPO transgressions. 

    #3: Delay in liquidation
    It is possible that unforeseen events occur delaying the liquidation.  While not ideal, the current price includes a margin of safety.  To date the company has taken steps that are consistent with creating as much shareholder value as possible.

    #4: FX risk
    If concerned the C$ is over-valued you may wish to hedge currency.

    Company Description/Background:
    On August 13, 2007 the non-bank Canadian asset-backed commercial paper (ABCP) market seized up.  Prior to August 13, 2007, COF was a non-bank that manufactured ABCP and serviced ABCP conduits.  After August 13, 2007, COF was no longer a viable business.

    A comprehensive Canada-wide restructuring plan was implemented on January 21, 2009 and the assets of the COF-sponsored ABCP conduits were transferred to new special purpose vehicles that issued new notes to holders in exchange for existing securities, thus terminating the COF-sponsored ABCP conduits.  The assets in the new special purpose vehicles are now administered by third party administrators although COF provided transitional administrative services from 1/21/2009-5/21/2009.  Per a 5/21/09 press release announcing layoffs at the completion of the transitional administrative services agreement, COF has just 4 remaining employees.   It is important to note that "in accordance with the restructuring plan, Coventree received comprehensive releases in respect of claims that might have been asserted against it in respect of its role as sponsor, administrator and financial agent for the Coventree-sponsored ABCP conduits." 

    Following the events of the summer of 2007, COF formed a special committee which determined on February 1, 2008 that "the Company will seek an orderly wind down of its operations and, in conjunction therewith, the distribution to shareholders of any funds remaining after setting aside appropriate amounts to cover the Company's expected future costs and liabilities, including known and other related liabilities." (see 3/31/09 MD&A, page 4)  For further detail, please see the company's quarterly or annual reports.

    Steps to Liquidate:
    1. OSC ABCP investigation
    In early 2008, the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC) began examining the ABCP market.  As part of the investigation, the OSC inquired into Coventree's participation in the ABCP market and COF formed a special committee to oversee COF's response.  In October 2008, draft regulatory proposals were released.  Having reviewed the proposals, it seems reasonable to conclude COF will not be fined.  In fact, COF isn't specifically mentioned as the paper focuses on proactive changes and highlights the actions of the DBRS rating agency and ABCP distributors, such as RBC and CIBC.  The public comment period was closed on February 16, 2009.  In speaking with the OSC, I was told COF is not of interest and to expect a final report in the summer of 2009.  It seems the most likely outcome of the OSC ABCP investigation is the final report is released in the next couple months and there is no mention or fine of COF.  If for some reason the OSC decides to go after COF, the OSC told me $5.0mm is the largest fine they have ever imposed.  While it seems very unlikely COF receives any fine, a $5.0mm fine lowers liquidation proceeds by $0.33.  To be conservative I have included a $2.5 million penalty in my low-end estimate although I do not believe this will occur.

    2. OSC IPO inquiry
    Unlike the ABCP investigation, this is simply an inquiry and not a formal investigation.  I have not found the exact date the inquiry was launched, but judging from when it was included in COF press releases, it was approximately 1/1/09.  COF has said they provided everything the OSC has asked for and that there has not been a response or follow-up request from the OSC.  It is possible that the OSC launches a formal investigation of COF's IPO, but that isn't my impression from COF management.  Also, when I asked the OSC about this inquiry, they stated they had no reply as "it's not a formal investigation."  If the OSC did decide to proceed, a formal investigation of individuals associated with the IPO, rather than COF, seems most appropriate. 

    The most likely outcome appears to be the OSC files its final report on the ABCP market shortly and there is no mention of COF (and no fine).  Likewise, the OSC's IPO inquiry seems a nonissue.  The indemnification is set to expire on Sept 1, 2009, which will allow COF to distribute proceeds. Nothing proceeds as smoothly as one would like, but it seems very feasible for these events to occur in less than 12 months.

    I am happy to further elaborate on my diligence in Q&A, but wanted to avoid a long write-up.

     

    Catalyst

    1. Resolution of OSC ABCP investigation

    2. Partial or full distribution of liquidation proceeds.

    Messages


    Subjectrecourse question
    Entry06/25/2009 07:25 PM
    Membersurf1680

    I owned stock in a company that had some Coventree branded structured money market type product.  It got frozen.  I believe they wrote it off, took a haircut, whatever the terminology is.    Are you saying that Coventree shareholders could get some cash and, yet, the company that holds their money market type product won't get made whole on this "cash-like" investment?  

     

     


    SubjectRE: recourse question
    Entry06/26/2009 11:36 AM
    Membersunny118

    Per page 3 of the 3/31/09 MD&A:

    "In accordance with the Restructuring Plan, Coventree received comprehensive releases in respect of claims that might have been asserted against it in respect of its role as sponsor, administrator and financial agent for the Coventree-sponsored ABCP conduits.  Coventree was also required to provide similar releases to other participants in the Restructuring Plan."

     

    For COF's legal counsel and the OSC to allow the use of the word "comprehensive" makes this pretty air tight.

     

    I understand this is not an easy pill to swallow, but I came to the situation post the Jan 21, 2009 ABCP Restructuring Plan.


    SubjectRE: Questions
    Entry06/26/2009 06:11 PM
    Membersunny118

     

    <!-- /* Font Definitions */ @font-face {font-family:Wingdings; panose-1:5 0 0 0 0 0 0 0 0 0; mso-font-charset:2; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:0 268435456 0 0 -2147483648 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} p {mso-style-noshow:yes; mso-style-priority:99; mso-margin-top-alt:auto; margin-right:0in; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman","serif"; mso-fareast-font-family:"Times New Roman";} span.EmailStyle15 {mso-style-type:personal; mso-style-noshow:yes; mso-style-unhide:no; mso-ansi-font-size:11.0pt; mso-bidi-font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; color:windowtext;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} -->

    1. Indemnification: The 4/8/08 press release, states, “We recognized that, as the Company continues to downsize and wind-down its business, it is appropriate to have a smaller, more focused board with experience and expertise in the issues now facing the Company.”  One of the two board members appointed on 4/8/08 is Wes Voorheis, who has an excellent reputation (I know nothing of Peter Dey's reputation).  While I have no reason to expect funny business, Voorheis' involvement allows me to sleep well at night.  

    Below is from page 18 of the 9/30/08 Annual Report and it appears pretty self explanatory:
    On April 8, 2008, the Company entered into an agreement (the “Indemnification Support Agreement”) with

    the four persons who resigned as directors of the Company on that date to support the Company’s indemnification

    obligations in respect of those persons. In the Indemnification Support Agreement, the Company agreed (a) not to

    pay any distributions to shareholders if, as a result of that distribution, the Company’s book value, determined in

    accordance with GAAP, would be less than the sum of (i) $3 million less all amounts paid by way of

    indemnification to present and future directors of the Company and (ii) the present value of the Company’s expected

    costs through to winding down, net of any income expected to be received in that same time frame, and (b) to

    deposit $500,000 in a trust account that may be applied by the four resigning directors to the payment of liabilities

    covered by the Company’s indemnification obligations to such persons if the Company does not pay such liabilities

    upon request. The Company’s obligations in the Indemnification Support Agreement terminate on the earlier of: (a)

    agreement of the four resigning directors to release the Company from its obligations under such Agreement; (b) if

    on or after September 1, 2009 there are no actions or proceedings outstanding or threatened against those four

    persons; (c) the applicable limitation periods for bringing an action against those four persons have expired; and (d)

    all actions brought against such persons have been finally determined. To date, there have been no actions or claims

    brought against the Company that have resulted in, or which could result in, any amounts owing under the

    Indemnification Support Agreement. There cannot be any assurance, however that such a claim will not be made in

    the future.

     

    2. Partial Distribution:
    First off, regarding distribution of total proceeds, it is difficult to accurately estimate timing of proceeds in a liquidation.  I feel pretty comfortable that a full distribution will happen within the next 12 months.  COF is clearly not trying to enter a new business line as noted in the 5/7/09 FYQ209 press release stating, “Consistent with its previous announcements, now that the restructuring of the market-disrupted Canadian third party ABCP has closed, the Company has been implementing, and expects that it will continue to implement, an orderly wind down of its operations.”  In the 5/21/09 press release for the workforce reduction, COF  “announced further planned workforce reductions as part of the continuing orderly wind down of its operations.”  So I have no reason to believe that COF is looking to draw this out as they’re down to just 4 employees.  The employees drawing big salaries are gone.  So the big inside shareholders want the same thing that I do -> money back as quick as possible.

    Second, regarding a partial distribution, I have expressed my desire to both the former and current CFO for an immediate distribution of a significant portion of COF’s cash balance.  While perhaps a blowoff, I was told that shareholder input is always communicated to the board.  To date I believe that the company has taken steps that are consistent with creating as much shareholder value as possible and I feel no need to go direct to the board.  On the other hand, my patience will decrease after September 1st.

    I have no hard data, but the company has little need for cash at the current time.    While I’m simply speculating, an early distribution of $75.0mm ($4.95/sh) seems reasonable although it’s always possible the company will want a larger cushion.  They can’t provide guidance, but their ownership, body language and tone indicate they want to get cash back to shareholders as fast as possible.

     

    3. Taxes: I am not aware of any taxes that COF needs to pay.  Regarding individual taxes, please talk to your tax counsel, but my understanding is that the portion of the distribution that is classified as a dividend will be taxable.  If you are a US shareholder, the portion classified as a dividend will be subject to Canadian withholding (15%), which is a credit towards taxes on dividends for a US tax filing.  The portion of the distribution that is classified as a return of capital will lower your basis in the stock.  However, the portion that is classified as a dividend will not lower your basis and therefore you may have a loss that can be used to offset capital gains on other investments. 

     

    Sorry it took me a couple days to get back to you.


    SubjectOSC Enforcement Notice
    Entry07/24/2009 01:45 PM
    Membervalue_31

    Sunny, what do you make of today's announcement about the OSC enforcement notices? 


    SubjectRE: OSC Enforcement Notice
    Entry07/28/2009 02:12 PM
    Membersunny118

    Value_31,

    Coventree was waiting to hear from the OSC.  The OSC was deciding whether to drop or to move forward with an enforcement.  Unfortunately, they chose the latter.  I don't find this surprising - the ABCP market disruption was a pretty major event in Canadian finance and the OSC needs to show that it's doing its job.

    Before going into analysis of possible fines a few points to:

    1. On a positive note, the OSC's investigation is progressing.  As this investigation started about 18 mths ago and government regulators can be very slow, I'm happy to see that the investigation is moving along.  If the OSC wraps up its work in 3-6 mths and fines Coventree $2.5mm (50% of the largest fine ever) this will be a good outcome (particularly from the current stock price of $3.91).  While a bit odd, the best outcome is for the OSC to impose a fine in the very near future.  I'd rather have Coventree pay a fine in 3-6 mths than pay no fine in 12-18 mths.  And if it does take 12-18mths, the cash burn of Coventree is pretty low.

    2. One of the individuals that the OSC is considering an enforcement against is David Allan.  He was just hired by the Ottawa govt (Globe & Mail article 4/30/09) - if this guy was truly toxic, seems unlikely he would have been hired by the govt.

    3. The focus of the enforcement action is disclosure.  I'm not a govt regulator, but in my opinion disclosure issues do not rank as high as something like fraud.  Moreover, Coventree has been fully cooperating with the OSC, unlike other companies in the past so I don't believe that the OSC is personally motivated to make Coventree pay an absurd fine.

    4. Other news articles of the past few days give the impression that the OSC is focused on whether dealers acted without fiduciary duty following the summer 2007 warning from Coventree.  So seems that the focus is on dealers selling their own inventory rather than COF specifically.  Of course, these reporters are not inside the OSC so this is a bit of speculation on their parts.

     

    Potential range of fines:

    1. Huge fine on the order of $25mm (5x largest past OSC fine).  Anything is possible, but this seems very unlikely.  For example Atlas Cold Storage was accounting fraud and there was no fine.  Biovall received the largest fine ever ($5mm) for "improper accounting, misleading the public and making false statements to the Ontario Securities Commission."  But for the purpose of looking at a truly draconian scenario, on my low end estimate, a $25mm fine results in a distribution of $3.97/sh, which is slightly above the current price of $3.91/sh.  It's always possible that something terrible happens to an investment.  But if one modeled the worst possible scenario for every security, it seems unlikely that anything is a buy.

    2. Fine of $5-10mm (1x-2x largest past OSC fine).  Fining Coventree the same or greater than Biovall seems unreasonable, but anything is possible.  The low-end estimate moves down to $4.96-5.29/sh if this occurs.

    3. Fine of ~$2.5mm (prior low-end estimate).  The OSC is moving forward and it seems likely that they'll a fine on Coventree.  A fine half the size of the largest ever past fine seems to be reasonable.  As $2.5mm was the prior estimate, no change to low-end estimate of $5.46/sh.

     

    In summary, it seems highly unlikely that Coventree gets slapped with a huge fine.  The $2.5mm included in my low scenario still seems reasonable.

     

    If other VIC members have different thoughts, I would appreciate hearing them.

    Apologies for the delay in responding - took a few days for holiday.


    SubjectRE: RE: OSC Enforcement Notice
    Entry07/29/2009 07:51 AM
    Memberjohn771

    A few thoughts.

     

    I think $5mm is the maximum fine allowed under Ontario law, however multiple fines could be assessed if the OSC determined that multiple infractions occured.

    The maximum penalty ever assessed by the OSC was $77mm recently paid by executives of Research in Motion related to options backdating.  The entire payment was made by executives rather than the company.  The payment includes fines under $5mm, reimbursement of investigation expenses incurred by the company and the OSC, and repayment of gains.  The entire amount of the penalty was settled through forfeiture of in-the-money options.  Additional detail:

    TERMS OF THE OSC SETTLEMENT

    • $0 Research In Motion Ltd. receives no monetary penalty, but agreed to hired a consultant to review corporate governance practices.
    • $38.3-million Amount co-CEOs James Balsillie and Mike Lazaridis and chief operating officer Dennis Kavelman will jointly pay to RIM to cover benefits arising to employees from backdated options.
    • $29.8-million Amount the three executives will pay RIM to cover its investigation costs.
    • $5-million Penalty Jim Balsillie will pay to the OSC, plus $700,000 to cover costs of the OSC investigation. Will step down as a director for one year.
    • $1.5-million Penalty Mike Lazaridis will pay to the OSC, plus $150,000 to cover costs of the OSC investigation.
    • $1.5-million Penalty Dennis Kavelman will pay to the OSC, plus $150,000 to cover costs of the OSC investigation. Banned from being a director or officer of a public company for five years.
    • $50,000 Amount Angelo Loberto, vice-president of corporate operations, will pay to cover the costs of the OSC investigation. Cannot be a director or officer of a public company until he completes a director training course.
    • $0 Kendall Cork, director emeritus, Douglas Wright, director emeritus, James Estill, director, and Douglas Fregin, co-founder, former executive and former director, received no fine, but must complete a director training course.

    OSC prefers to assess penalties against executives instead of companies because the commission states that its purpose is to protect investors.  I believe that Coventree's former CEOs Dean Tai and Geoffrey COrnish still own 7.5mm shares of Coventree that could be used to satisfy substantial penalties.

    The company disclosed that the OSC has asked questions about Coventree's IPO.  If you read the prospectus on SEDAR it's remarkable how much detail was provided in the Risk Disclosures.  Everything that eventually did go wrong was identified in advance as a risk.  Articles in the Canadian press have expressed suspicion about the relationship between Coventree and Quebec's Caisse de depot which was a major shareholder of Coventree and eventually lost several billion dollars on ABCP managed by Coventree so my guess is that the OSC is investigating this relationship.

    I think the worst case penalty could be more significant than was stated in the write-up, but I think the risk to shareholders is quite low because a penalty is highly likely to be paid by executives.  So I think this was an excellent idea and rated it accordingly.

     


    SubjectRE: my take on this
    Entry08/05/2009 10:50 PM
    Memberedward965

     

    I haven't followed this closely, but this message got me thinking.

    One comment you made is that the OSC is protecting the little guy here, but the one of those "little guys" had a $170 million investment (the largest investment in the $388 million).  Is that really little?   So, the OSC will take money from some true little guys whom own Coventree shares and pay out someone with a $170 million investment?

     

    Also, what illegal act was done by Coventree - selling subprime wasn't illegal.  However, dealers selling subprime to individuals and lying to those individuals about what they were buying seems worthy of restitution.   Therefore, making those investors whole using dealer funds seems appropriate, but Coventree?  Dealers were smart money and are deep pockets, and Coventree shareholders are neither.

     

    On the flip side, my problem with this investment was the idea that a $5 million fine was the cap, while in reality I suppose that in theory anything can happen.  That said, an upside of upwards of $1.5/share from here in ~ under 1 year, or ~$1 upside to NPV using a 10% r, implies a roughly $15-$20 million dollar fine is expected by the market.  Too hard to do a good probability weighting, but my gut is that this stock is underpriced compared to the true risk.  And that may be why this stock is priced like it is.

     

    Thanks to everyone for this thread.

     


    Subjectany updates?
    Entry10/22/2009 12:23 PM
    Memberjamal
    Stock still hasn't moved much...

    SubjectNews out looks bad
    Entry12/08/2009 03:08 PM
    Membernha855

    Any thoughts out from someone following the situation on the news that the OSC is going to prosecute these offenses? Any thoughts on the final outcome and timing. Much appreciated


    SubjectRE: News out looks bad
    Entry12/08/2009 04:41 PM
    Memberjohn771

    Details of the OSC claim are here:

     

    http://www.osc.gov.on.ca/documents/en/Proceedings-SOA/soa_20091207_rev_coventree.pdf

     

     


    SubjectRE: RE: News out looks bad
    Entry12/09/2009 07:33 PM
    Memberjohn771

    Also see this Notice of Hearing:

    http://www.osc.gov.on.ca/documents/en/Proceedings-NOH/noh_20091207_coventree.pdf

     

    A few of my thoughts about the news:

    1) The allegations cover only failures to disclose information to Coventree shareholders.  The OSC has not reopened the much bigger issue of losses incurred by ABCP investors (covered by the global settlement that closed in January 2009).

    2) The OSC statement lists 4 allegations and the notice of hearing proposes a fine "not more than $1 million" for each violation.  So it appears that the maximum fine is 4 times $1 million.  But there's some ambiguity because each of the OSC allegations could be deemed to comprise multiple violations.  But the allegations are pretty narrow so it sounds to me like $4mm is at risk.

    3) Coventree's execs (Tai and Cornish) are charged alongside Coventree, but Coventree has indemnified them.  Coventree has some D&O insurance that would cover indemnity payments.  From this year's proxy:

    "Directors’ and Officers’ Liability Insurance
    The Company maintains an insurance policy for its directors and officers that expires on April 17,
    2010. The aggregate limit of liability applicable to all insured directors and officers under the policy is
    currently $10,000,000. Under the policy, the Company pays a $250,000 deductible for any claim other
    than securities law claims, which have a $500,000 deductible for each claim. The policy also includes
    $5,000,000 of aggregate coverage for past acts claims relating to acts occurring prior to October 17, 2007,
    and an additional coverage limit of $5,000,000 for acts occurring after October 17, 2007. The by-laws of
    the Company also provide for the indemnification of the Company’s directors and officers from and
    against liabilities and costs in respect of any action or suit against them in connection with the execution
    of their duties of office, subject to the limitations contained in the OBCA. In addition, the Company has
    entered into indemnity agreements with each of the directors and officers which provide for the
    indemnification of the Company’s directors and officers from and against liabilities and costs in respect of
    any action or suit against them in connection with the execution of their duties of office pursuant to the
    OBCA."

    4) The vaguest part of the Notice is:

    "requiring Coventree, Cornish and Tai to each disgorge to the Commission any amounts
    obtained as a result of the non-compliance pursuant to paragraph 10 of section 127(1) of
    the Act"

    I don't know how they propose to identify amounts obtained by non-compliance.  It's possible that the OSC could claim that the IPO proceeds were tainted by the one disclosure failure therein.  But if that disclousre had been properly made, in the heady days of 2006 I don't think it would have made any difference to buyers.

    5) It seems unfair and contrary to the OSC's mission and the history of OSC missions that Coventry could pay penalties and also be responsible for paying the penalties of its executives via indemnification agreements.  I believe that forfeiture of some or all Coventree shares held by Tai and Cornish is a likely result of the hearing.  It would satisfy the requirement to disgorge profits and serve the public interest by setting an example of the consequences of violating the law.

    6) My understanding is that the first hearing in January will probably establish a time frame for consideration of the case.  The facts seem to be pretty well established so hopefulyl a resolution wont take too many months.

     

     

     

     


    SubjectRE: RE: RE: News out looks bad
    Entry12/09/2009 10:49 PM
    Membernha855

    I am concerned that the IPO is part of the covered period and therefore the IPO proceeds could be at risk. If this is the case, the common will be wiped out. This reminds me of several other investments, such as Sun Times, where the equity appeared to be valued below the cash on the balance sheet but contingent liabilities came to roost. What's the difference here?


    SubjectArticle says $12mm
    Entry12/12/2009 10:44 AM
    Memberjohn771

    Source of the info not identified so this is unofficial, but plausible.

    -----------------------------------------------------------------------------------------------------------------------------------

    Investors hope ABCP settlement will cover their losses but won't erase hardship

     

    MONTREAL - Some Canadian investors hope a multimillion-dollar bank settlement with regulators over asset-backed commercial paper finally spells the end of their two-year nightmare.

    Published reports say several banks and financial institutions have agreed to pay $149 million. The National Bank of Canada (TSX:NA) would pay the largest amount, representing about half of the total fine.

    The bank declined to comment until a settlement agreement is finalized.

    "We hope to have it behind us before the holidays," bank spokeswoman Joan Beauchamp said.

    In addition to $75 million to be paid by the Quebec-based bank, reports say Scotiabank (TSX:BNS) would be on tap for $30 million, CIBC (TSX:CM) $22 million, and HSBC $10 million. Laurentian Bank (TSX:LB), Canaccord (TSX:CCI) and Credential Securities would pay a total of $12 million.

    Toronto-based Coventree, which was responsible for half of the commercial paper sold in Canada, and Deutsche Bank have refused the $12-million settlement. They have been called to a hearing by regulators in January.

    Banks involved in the settlement would avoid this and the damage from having to publicly disclose more about their roles in this crisis, observers say.

    Montreal businessman Hy Bloom was pleased a resolution appears near, but is angry that is has taken so long to conclude.

    "The stress and aggravation and the sickness that lots of people have felt can't be repaid by the money alone but I'm sure that it will make a lot of people feel better," he said in an interview from London.

    Bloom is suing the National Bank for the $12 million he invested in the short-term investment, some just days after the bank allegedly became aware that its value was impaired.

    He said any fines or payments should first be distributed to retail investors like himself who were not covered by a previous agreement that fully repaid those who invested up to $1 million.

    Companies such as Jean Coutu (TSX:PJC) are not expected to be eligible for relief, but the fate of institutions such as the City of Hamilton is unclear.

    Lawyer Brian Iler was one of the lucky ones.

    He recovered his $229,000 investment, but he said the settlement doesn't come close to paying the damage these institutions inflicted on so many Canadians.

    "I thought the penalties in light of the fact that $35 billion were at stake are extremely light," he said.

    He called the crisis a wake-up call for the securities industry, which he said was asleep or intentionally avoiding reality by selling these risky investments.

    Iler said serious reform is required and the whole episode has soured him on using securities brokers.

    "The level of trust you need when you're placing your life savings into the hands of someone else has been destroyed by this process and I don't see enough steps being taken to rebuild that trust."

    Ontario and Quebec securities regulators declined to confirm the settlement or disclose who would have access to the money.

    "The investigation is ongoing and, as such, we have no further comment," Theresa Ebden of the Ontario Securities Commission said in a email.

    The Ontario regulator, Quebec's Autorite des marches financiers and the Investment Industry Regulatory Organization of Canada have conducted a joint investigation.

    Diane Urquhart, an independent financial analyst who previously advised many retail investors, said justice won't be served unless the fines are used to resolve virtually all of the outstanding claims by small investors.

    "It's improper in my opinion that the victims would go unpaid while the government and IIROC would put money into their treasury," she said.

    "All of the investment dealers should move forward expeditiously to resolve the matter and get the final victims paid."

    A settlement is unlikely to completely satisfy investors. Many want criminal charges to be filed and time behind bars served by those who decided to unload the paper even after they knew it was impaired.

    This could include the head capital markets and risk management executives at the banks.

    "Most people like to get their money back, that's a relief, but there's also a continuing ABCP retail owners community that is seeking justice criminally," she added.

    Although unlikely, an apology is plausible here because the Canadian court system has been closed to all those seeking damages, Urquhart said.

    A similar effort is slated to take place Dec. 23 in Bankruptcy Court in New York to shut down opportunities to seek damages in the United States.


    SubjectAnyone still following?
    Entry01/19/2010 01:57 PM
    Membernha855

    I'd like to know if anyone is still following this company and, if so, what your current expectations are for liquidation proceeds and timing. Thanks


    SubjectOSC Proceedings
    Entry05/27/2010 01:25 PM
    Membernha855
    Is anyone following the OSC proceedings and either attending in person or reading transcripts so far? Any opinions you can share?
      Back to top