Comdisco Contingent Distributi CDCOR
December 31, 2008 - 4:59pm EST by
broncos727
2008 2009
Price: 0.09 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 14 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

I am recommending a purchase of the Comdisco Contingent Distribution Rights, symbol CDCOR. This is a liquidation play that has done quite well for holders thus far, but there are still a few puffs left on this cigar butt as it trades for less than 60% of a possibly understated book value and may pay off anywhere from 6 months to 2 years. 

CDCOR represents the rights granted to the former equity holders of Comdisco Inc which filed bankruptcy in 2001. At this point, holders of CDCOR are due 37% of every incremental dollar accruing to stakeholders. The CDCOR payments are a liability of Comdisco Holdings (CDCO) and are carried on CDCO's balance sheet at 22.5mm. This amount is approximately 37% of CDCO's equity before the CDCOR liability. There are 148mm CDCOR shares outstanding giving a 13mm market cap at 8.5 cents.

There are several minor uncertainties in calculating CDCOR book value (such as increased SG&A expenses, bad debt recoveries, and equity sales prices in excess of carrying costs for CDCO), but the major uncertainty revolves around what's known as the Litigation Trust (LT). The LT was established to try to recover around 80mm in bad debts from SIP participants (67 former senior managers of Comdisco Inc who used borrowed money to purchase stock that went to zero). The key point is the LT exists for the benefit of creditors and will make payments directly to creditors. To the extent that the LT makes any payments to creditors, CDCO will have to make the corresponding payments to CDCOR holders. So for every dollar paid out by the LT, CDCOR is due 59 cents (37/63=59). And importantly, CDCO must retain enough cash on hand to satisfy any liability arising from LT payouts. A hypothetical 80mm LT payment to creditors would result in a 47mm liability to CDCOR holders.

So the fate of the LT will impact the return on owning CDCOR in 2 important ways. More money and less time. The LT reports quarterly in case number 01-24795 in bankruptcy court for the Northern District of Illinois.   The last report was 8/21/2008.

Money: 5 parties have settled with the LT for undisclosed amounts. There was a prior global settlement offer of between 70% and 80% relief with other SIP participants in 2002. 26 accepted, 69 did not. I would guess that settlement terms would be in this ballpark.

Time: LT commenced lawsuits in 2005. A significant milestone was reached in September when summary judgments were entered in Federal Court against 27 SIP participants. In October summary judgments against most of the rest were entered in State Court. The judgments have been appealed. With the entry of judgments, the LT can now commence collection actions which should be a catalyst for settlements. As settlements occur, CDCO may dividend some cash to stakeholders.

Best guess: 1 year, 10mm net LT payment to creditors, corresponding 6mm liability to CDCOR holders, total payment to CDCOR holders 26mm or 18 cents. So a double in a year.

Catalyst

Litigation Trust winds up lawsuits.
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    Description

    I am recommending a purchase of the Comdisco Contingent Distribution Rights, symbol CDCOR. This is a liquidation play that has done quite well for holders thus far, but there are still a few puffs left on this cigar butt as it trades for less than 60% of a possibly understated book value and may pay off anywhere from 6 months to 2 years. 

    CDCOR represents the rights granted to the former equity holders of Comdisco Inc which filed bankruptcy in 2001. At this point, holders of CDCOR are due 37% of every incremental dollar accruing to stakeholders. The CDCOR payments are a liability of Comdisco Holdings (CDCO) and are carried on CDCO's balance sheet at 22.5mm. This amount is approximately 37% of CDCO's equity before the CDCOR liability. There are 148mm CDCOR shares outstanding giving a 13mm market cap at 8.5 cents.

    There are several minor uncertainties in calculating CDCOR book value (such as increased SG&A expenses, bad debt recoveries, and equity sales prices in excess of carrying costs for CDCO), but the major uncertainty revolves around what's known as the Litigation Trust (LT). The LT was established to try to recover around 80mm in bad debts from SIP participants (67 former senior managers of Comdisco Inc who used borrowed money to purchase stock that went to zero). The key point is the LT exists for the benefit of creditors and will make payments directly to creditors. To the extent that the LT makes any payments to creditors, CDCO will have to make the corresponding payments to CDCOR holders. So for every dollar paid out by the LT, CDCOR is due 59 cents (37/63=59). And importantly, CDCO must retain enough cash on hand to satisfy any liability arising from LT payouts. A hypothetical 80mm LT payment to creditors would result in a 47mm liability to CDCOR holders.

    So the fate of the LT will impact the return on owning CDCOR in 2 important ways. More money and less time. The LT reports quarterly in case number 01-24795 in bankruptcy court for the Northern District of Illinois.   The last report was 8/21/2008.

    Money: 5 parties have settled with the LT for undisclosed amounts. There was a prior global settlement offer of between 70% and 80% relief with other SIP participants in 2002. 26 accepted, 69 did not. I would guess that settlement terms would be in this ballpark.

    Time: LT commenced lawsuits in 2005. A significant milestone was reached in September when summary judgments were entered in Federal Court against 27 SIP participants. In October summary judgments against most of the rest were entered in State Court. The judgments have been appealed. With the entry of judgments, the LT can now commence collection actions which should be a catalyst for settlements. As settlements occur, CDCO may dividend some cash to stakeholders.

    Best guess: 1 year, 10mm net LT payment to creditors, corresponding 6mm liability to CDCOR holders, total payment to CDCOR holders 26mm or 18 cents. So a double in a year.

    Catalyst

    Litigation Trust winds up lawsuits.

    Messages


    SubjectCDCO
    Entry12/31/2008 06:01 PM
    Memberlindsay790
    Interesting idea...any thoughts on CDCO itself at this point? We used to own.

    SubjectRE: CDCO
    Entry12/31/2008 06:54 PM
    Memberbroncos727
    CDCO has about 40mm net book value or $10 per share.
    So it has been trading at between a 20% and 30% discount to book. CDCOR will get more and CDCO will get less if the LT makes a payment to creditors, so CDCOR is the better buy at a 40% discount to book, but CDCO is probably not a sale. A 20mm LT payment (25% net recovery - probably too high to expect) would reduce the amount for CDCO to something close to the $7.80 closing price for CDCO.

    Sorry for the typos in the header. CDCOR closed at $0.085 for a 13mm market cap. And I should have had a disclaimer for the gnat cap nature of the idea.

    SubjectRE: any update on this?
    Entry01/25/2011 08:49 PM
    Memberbroncos727
    Now trading .12, so $18 million market cap. The CDR liability booked at $21 million on Comdisco's 10k so the discount has closed considerably.
    The remaining variable is still the outcome of the Litigation Trust. In rereading the original post, I am struck by how optimistic I was in the timing of the outcome. Today, I still think it may take 1 or 2 years to complete the legal process against those that haven't settled (about half have settled). The LT has consistently won the legal arguments, but the appeals process takes seemingly forever.
    Although I still own it, I wouldn't recomend it to VIC at these prices. I keep hoping the parent company announces a dividend (after all the ultimate liability is reduced as more and more cases settle with the LT), but I may sell some if we go another quarter without a dividend.
    I guestimate the LT settled half the cases for at least 20 cents on the dollar or about $8 million, leaving at least $1 million or so in the kitty after the $7 million in legal fees. They would be seeking to recover about $35 million from the rest. They may eventually recover about $10 million as stated in the original write-up, but it may take 1-2 more years.
    Hope that helps. I will be out of the office for 2 weeks, so unable to answer any follow-ups 'till then.

    Subjectfinal liquidation payment 8/5/2016
    Entry08/08/2016 12:50 PM
    Memberbroncos727

    Well Comdisco finally liquidated more than 7.5 years after the idea was posted, paying a total of 16.4 cents for a satisfactory return. However there turned out to be no upside from the litigation trust - which would have dramatically improved IRR.

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