Kingsway Financial (KFS) 5 Yrs Hence, New management, turnaround complete

[Orientinvestor]

seems like this has not been discussed in the last 5 years. New Management is in, and an interesting company has emerged, with an interesting management  -- with a Buffettesque Shareholder Letter to boot.

 

2014 Letter: http://kingsway-financial.com/new/wp-content/all/03-31-14%20Shareholder%20Letter.pdf

2015 Q1 Note: http://kingsway-financial.com/new/wp-content/all/04-30-15%20Shareholder%20Letter.pdf

 

its an entirely new company now, which probably warrants a look and discussion by the members here.

 

It also listed a very interesting Warrant -- that is noncallable, with expiry in 2023 -- a full 8 year from now, which could be an interesting Greenblattish play.

I've never invested in warrant before though.

 

Could anyone please explain the legalese part of Warrant information:

 

The Series C Warrants are subject to a mandatory exchange procedure in which the Series C Warrants will be exchanged for newly issued Common Share Series B Warrants of the Company (the “Series B Warrants”), which class of warrants of the Company are currently listed on the Toronto Stock Exchange (the “TSX”) and have substantially similar terms to the Series C Warrants. Upon notice from the Company to the warrant agent that

(i) the Common Stock Series B Warrant Agreement, dated as of September 16, 2013, between the Company and Computershare has been duly amended to increase the maximum number of Series B Warrants that may be issued thereunder to allow for the issuance of a sufficient number of additional Series B Warrants to be issued in exchange for the Series C Warrants and

(ii) the TSX has accepted the conditional listing of such additional Series B Warrants, if the Series B Warrants are listed on the TSX at the time of such exchange, each Series C Warrant will be automatically exchanged for a Series B Warrant without any further act or action to be taken by the warrant holder. The exercise price and number of Common Shares issuable upon exercise of the Series C Warrants are subject to proportionate adjustment in the event of any stock splits, stock dividends, reorganizations or recapitalizations in respect of the common stock of the Company.

 

 

I understand the adjustment in case of splits/dividends, etc., but i don't fully comprehend the fact that the warrant is exchangeable for something, without the warrant doing anything...? What's its implication? in what cases would Kingsway want to exchange this (notwithstanding hte fact that it is supposed to be non-callable).

 

any help is greatly appreciated.

 

excerpt from: http://kingsway-financial.com/new/wp-content/all/02-04-14%20Form%208-K.pdf

 

[Sunrider]

It seems to me that the couldn't / didn't want to issue any further B warrants directly so they issued C warrants with "substantially the same terms as B warrants" and are forcing a conversion from B to C (issuing new Bs, cancelling the Cs in the process) once they have approval from the TSE.

 

Once it's done there will only be B warrants outstanding.

 

I'm not sure if I'm looking at the right ticker here (also not sure if the terms are in CAD or USD) but it seems the warrants are trading at $2.2 or so. With exercise at $5 and another 7 or 8 years till maturity, they'll have to deliver substantially better than a 10% annual increase in value (book and thus share price, one presumes) for this to be an attractive investment. Say they are at about $5.7/share today so 5.7 x 1.1^7 (conservatively) = $11.1, @ 15% CAGR it'd be $ 15.16. The RoI, p.a., would be 11% in the later case. Seems the warrants are bit expensive?

 

Any views? Did I make a mistake somewhere in my thinking?

 

Cheers - Sunrider

 

 

 

 

 

seems like this has not been discussed in the last 5 years. New Management is in, and an interesting company has emerged, with an interesting management  -- with a Buffettesque Shareholder Letter to boot.

 

2014 Letter: http://kingsway-financial.com/new/wp-content/all/03-31-14%20Shareholder%20Letter.pdf

2015 Q1 Note: http://kingsway-financial.com/new/wp-content/all/04-30-15%20Shareholder%20Letter.pdf

 

its an entirely new company now, which probably warrants a look and discussion by the members here.

 

It also listed a very interesting Warrant -- that is noncallable, with expiry in 2023 -- a full 8 year from now, which could be an interesting Greenblattish play.

I've never invested in warrant before though.

 

Could anyone please explain the legalese part of Warrant information:

 

The Series C Warrants are subject to a mandatory exchange procedure in which the Series C Warrants will be exchanged for newly issued Common Share Series B Warrants of the Company (the “Series B Warrants”), which class of warrants of the Company are currently listed on the Toronto Stock Exchange (the “TSX”) and have substantially similar terms to the Series C Warrants. Upon notice from the Company to the warrant agent that

(i) the Common Stock Series B Warrant Agreement, dated as of September 16, 2013, between the Company and Computershare has been duly amended to increase the maximum number of Series B Warrants that may be issued thereunder to allow for the issuance of a sufficient number of additional Series B Warrants to be issued in exchange for the Series C Warrants and

(ii) the TSX has accepted the conditional listing of such additional Series B Warrants, if the Series B Warrants are listed on the TSX at the time of such exchange, each Series C Warrant will be automatically exchanged for a Series B Warrant without any further act or action to be taken by the warrant holder. The exercise price and number of Common Shares issuable upon exercise of the Series C Warrants are subject to proportionate adjustment in the event of any stock splits, stock dividends, reorganizations or recapitalizations in respect of the common stock of the Company.

 

 

I understand the adjustment in case of splits/dividends, etc., but i don't fully comprehend the fact that the warrant is exchangeable for something, without the warrant doing anything...? What's its implication? in what cases would Kingsway want to exchange this (notwithstanding hte fact that it is supposed to be non-callable).

 

any help is greatly appreciated.

 

excerpt from: http://kingsway-financial.com/new/wp-content/all/02-04-14%20Form%208-K.pdf

[Orientinvestor]

Thanks much Sunrider.

 

If they convert the warrants without any change on any of the feature, that's OK. so cosmetic changes to ensure that they track just one set of warrants...

 

Yes, the warrant looks like a bit expensive (or fully priced at best) at this price, though Black-Scholes would give out a value of >3, largely due to the long maturity. and of course, the most important thing is how KFS would fare in that 7 to 8 years.

 

 

It seems to me that the couldn't / didn't want to issue any further B warrants directly so they issued C warrants with "substantially the same terms as B warrants" and are forcing a conversion from B to C (issuing new Bs, cancelling the Cs in the process) once they have approval from the TSE.

 

Once it's done there will only be B warrants outstanding.

 

I'm not sure if I'm looking at the right ticker here (also not sure if the terms are in CAD or USD) but it seems the warrants are trading at $2.2 or so. With exercise at $5 and another 7 or 8 years till maturity, they'll have to deliver substantially better than a 10% annual increase in value (book and thus share price, one presumes) for this to be an attractive investment. Say they are at about $5.7/share today so 5.7 x 1.1^7 (conservatively) = $11.1, @ 15% CAGR it'd be $ 15.16. The RoI, p.a., would be 11% in the later case. Seems the warrants are bit expensive?

 

Any views? Did I make a mistake somewhere in my thinking?

 

Cheers - Sunrider

 

 

 

[muscleman]

I am puzzled by the bull thesis.

Book value is only $42 million. Even if they  could earn 20% return on the book, it is still impossible the realize that $849 million NOL.

They tried to issue preferred stocks and bulls say that the capital from preferred stocks can be used to realize that NOL, but they only issued $6.6 million so far, and it is convertible preferred.

 

[StubbleJumper]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

[muscleman]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

 

Read their 10-k about the NOL. I think they mentioned some IRS rules about ownership change that can lose the NOL. That's why they approved unlimited preferred stocks, in order to raise money and realize this NOL without either diluting existing shareholders or losing this NOL.

 

However, they have only been able to issue $6.6 million preferred so far, and it is convertible preferred.

[kab60]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

 

Read their 10-k about the NOL. I think they mentioned some IRS rules about ownership change that can lose the NOL. That's why they approved unlimited preferred stocks, in order to raise money and realize this NOL without either diluting existing shareholders or losing this NOL.

 

However, they have only been able to issue $6.6 million preferred so far, and it is convertible preferred.

Exactly. A takeover ruin the NOLSs. Anyone interested in Kingsway should read T11's letters. He expects a big transformative acquisition. I think it's interesting but find it difficult to value. Insiders keep buying stock though.

[muscleman]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

 

Read their 10-k about the NOL. I think they mentioned some IRS rules about ownership change that can lose the NOL. That's why they approved unlimited preferred stocks, in order to raise money and realize this NOL without either diluting existing shareholders or losing this NOL.

 

However, they have only been able to issue $6.6 million preferred so far, and it is convertible preferred.

Exactly. A takeover ruin the NOLSs. Anyone interested in Kingsway should read T11's letters. He expects a big transformative acquisition. I think it's interesting but find it difficult to value. Insiders keep buying stock though.

 

I didn't see any form 4s in the past 12 months showing insider buys. Where did you get that?

 

I am also looking into PIH, which KFS IPO'ed in 2014. I think if KFS decided to sell the major stake in PIH and retain the other insurance business, that maybe a potential bearish sign that either:

1. They think PIH is not as good as the other insurance line.

2. They need money badly and PIH is the only quality asset that they can sell for a good price.

 

Which one of the two is true?  ::)

[kab60]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

 

Read their 10-k about the NOL. I think they mentioned some IRS rules about ownership change that can lose the NOL. That's why they approved unlimited preferred stocks, in order to raise money and realize this NOL without either diluting existing shareholders or losing this NOL.

 

However, they have only been able to issue $6.6 million preferred so far, and it is convertible preferred.

Exactly. A takeover ruin the NOLSs. Anyone interested in Kingsway should read T11's letters. He expects a big transformative acquisition. I think it's interesting but find it difficult to value. Insiders keep buying stock though.

 

I didn't see any form 4s in the past 12 months showing insider buys. Where did you get that?

 

I am also looking into PIH, which KFS IPO'ed in 2014. I think if KFS decided to sell the major stake in PIH and retain the other insurance business, that maybe a potential bearish sign that either:

1. They think PIH is not as good as the other insurance line.

2. They need money badly and PIH is the only quality asset that they can sell for a good price.

 

Which one of the two is true?  ::)

Canadian Insider: https://www.canadianinsider.com/company?menu_tickersearch=Kingsway%20Financial%20Services%20Inc.%20%7C%20KFS

 

I saw you asking a question along the same lines in the PIH thread, but I don't have the answer. I'm intrigued by PIH but not enough to pull the trigger. PIH is easier for me since it's trading below BV, whereas KFS - as you said - trades a lot above.

[StubbleJumper]

I must confess that I haven't spent 5 minutes thinking about Kingsway since Bill Starr ran it into the ground.  What a shameful performance that was.

 

But the $849m NOLs is interesting.  If they can convince people that their problems are over and that there are no skeletons in the closet, then is it possible some profitable insurer might be interested in buying Kingsway simply to obtain the NOLs?  If BV=$42m, a multiple of BV (say 2x or 3x) could be paid and the purchaser would get all of that back in tax savings within a few short years?

 

Interesting.

 

SJ

 

Read their 10-k about the NOL. I think they mentioned some IRS rules about ownership change that can lose the NOL. That's why they approved unlimited preferred stocks, in order to raise money and realize this NOL without either diluting existing shareholders or losing this NOL.

 

However, they have only been able to issue $6.6 million preferred so far, and it is convertible preferred.

 

 

Okay, so no takeover...unless a reverse-takeover would work?