Value Investing News - DFC - Comments

Yes marine Iagree.Thats why

billytickets — Thu, 13 Dec 2007 08:05:07 -0500

Yes marine Iagree.Thats why I disagreed with his investment in Delta Financial this summer BEFORE IT DECLARED BANKRUPTCY. The subprime mess was "real" when he invested but instead of staying clear of it he seems to like UNCERTAINTITY which a value investor like Buffett would never do.

I think Pabrai make some

galin — Thu, 13 Dec 2007 07:08:46 -0500

I think Pabrai make some very insightful points: return of capital is more important than return on capital, low risk and high uncertainty approach, looking for Value, day-to-day fluctuations are mostly noise and more.

did you get out?If so when?

billytickets — Tue, 11 Dec 2007 00:40:24 -0500

did you get out?If so when? why did you buy this pabrai and others influence you? I never buy anything i don't understand for this reason.what do you think will happen in bankruptcy?

Yup, I bought in twice.

Nick — Tue, 11 Dec 2007 00:20:52 -0500

Yup, I bought in twice.

anyone get"trapped in this

billytickets — Tue, 11 Dec 2007 00:16:06 -0500

anyone get"trapped in this pig?

Fixed it

George — Thu, 06 Dec 2007 11:49:43 -0500

Ops, I fixed it and forgot to post a comment here that I changed the link. Thanks for checking again Nick.

Try it again George it still

Nick — Thu, 06 Dec 2007 11:39:21 -0500

Try it again George it still works for me.

DFC link

George — Thu, 06 Dec 2007 10:55:20 -0500

This link is broken, but the headline is still important. Does anyone have another link to this story? Post it below and I'll revise the original submission.

DCF

amo3 — Tue, 13 Nov 2007 13:00:47 -0500

amo3 - I made a couple of comments on DFC and would appreciate it if you could take a look at them. I, being a old fashioned lender, am a bit leary of this company's survivability. As you are a lender as well and familiar with the industry, could you give me a brief summary of what was so interesting about this company in the first place. What was the investment thesis and what was the preceived downside protection.

Delta Financial 3Q results - response

amo3 — Mon, 12 Nov 2007 17:00:54 -0500

amo3 - Thanks for your comments and insight. I have browsed their 10Q, which does a pretty good job of explaining their business. I have 2 areas of comment: first, securtizations and second, opertions and liquidity.
Securitizations are very complex financial structures. Yes the majority of the debt is not recouse to the seller/borrower; however, they are not 100% non-recourse. A lender gets comfort to make the largely non-recourse loans by advancing only a portion of the value of the loans in a pool, say for example 90%. The seller/borrower has to come up with the rest of the capital. As long as the underlying mortgages are paying within predetermined delinquncy rates and the securtization does not fall below certain interest coverage thresholds, the excess cash flow from the mortgages flows through the waterfall back down to the seller/borrower each month. But, if the underlying mortgage portfolio breaks through the interest coverage and delinqueny thrsholds, then an early amortization event is triggered. Then all the cash flows that would go to the seller/borrower go to the lender to accelerate principal repayment. Therefore, while the seller/borrower is not liable to repay the loan, they have NO CASH FLOW from the securitization. As I pointed out earlier, 9.1% of the whole $7.6B is delinquent 90 days or more. You will also notice that they have warehouse lines to accumulate mortgages into large enough batches to securitize. If the lenders feel that the underlying value of the mortgages in the warehouse line have fallen, then they can require addtional collateral or cash, a margin call. There have received "substantial margin calls during the 3erd quarter".

The company is losing money on its oerpations on a cash basis. They do not have enough cash to cover expenses. They have minimal cash in the bank and minimal equity. To turn around the operations, they have to originate mortages and reduce overhead. You will notice that actual SGA went up in the 3Q. It is far from certain that they will return to profitability even if they do not have an early am event on their securitzations, more maring calls on their warehouse lines or other call on their cash. So your point that the remaining question is how are they going to sell future securtizations for a minimal loss is a little short of the mark. The real question is whether they will be able to sell any securitizations at a profit. They need the upfront cash.

So, in conclusion, the company is unprofitable operationally, the credit of its securitizations are declining which may tirgger a loss of cash flow from them and their volume is going down. Why invest in a company with so many things that can go wrong that will kill the business. I know Mr. Parbrai is a very smart guy. I am sure he sees a path to a positve outcome but I'll be damned if I see it. I am no great statistician but I know for certain that when a lot of things can go wroing at least one will. And this case almost anything can kill this company. If your goal is to buy low in bad environment, there have to be better places than DCF. I would be trying to find the best companies in the space that will survive the downdraft and come out stronger after the weak companies fail. For me, DCF is too weak to place a bet on. I try to find companies where it does not take a lot for things to go right.

If anyone knows what the original thesis for investing in this business is I would appreicate seeing it. I could have missed something.

dfc

sorud — Mon, 12 Nov 2007 08:31:14 -0500

If I understand the situation correctly the fact is that the 7.6billion loan portfolio, is not their risk.

DFC securitizes loans using portfolio accounting (where both the mortgage loans [assets] and the non-recourse securitization bonds [liabilities] are kept on the balance sheet.

The majority of the the real risk of these loans is on the shoulders of the past buyers of DFC securitization bonds.

If that is correct then the remaining question is how to sell future securitizations for a minimum loss.
If they can figure out this they are safe.

Delta Financial 3Q results

amo3 — Sun, 11 Nov 2007 11:52:44 -0500

amo3 - I don't get this one. This company has a $7.6billion loan portfolio left on its balance sheet that it probably cannot sell, even at a loss. They did manage to get off a securitization for $900 million but they took a loss on the sale. This had to be the last batch of higher quality loans they have, otherwise they would have sold more. Therefore they are left with a portfolio of loans of the poorest quality they orignated and now have to run them off. The credit performance of this portfolio is a disaster. They have only a 1% reserve against 9% of non-performing loans and they took a $12.5M charge off in the quarter, which is 17% of their reserves. If they keep going at that rate they will wipe out their equity of $115M in 9 quarters. But the bad news is that the loan loss provision is just an estimate of future losses. We have just begun to see the collapse of sub prime and other mortgages. From my personal experiance I can tell you that when a loan portfolio starts to fall apart, you have no idea where it will end and it generally ends up a lot worse that you originally prediceted. But they did raise $70M. However, that will likely go to fund actual operating losses they have until they can fire enough people. I suspect that those investors significantly diluted existing share holders.
In conclusion
- you have a company that is leveraged 63/1 and has $4M in cash, so there is no equity or working capital cushion here.
- the credit quality is undefinable at this point. We are just at the beginning of the collapse of sub prime and this portfolio is experiancing huge problems. 9% of the portfolio or $684M has not paid for 90 days or longer, which is a HUGE problem. We don't know where it will end and neither does management.
- furthermore, the company is experiancing operating losses and needs cash at any price to have a chance at keeping going. The company's continued existance is far from certain. You can bet the new investors took whatever remaining security the company had so the common shareholders will be toast.
I though value investing as about buying safe and cheap companies. This is sure cheap. Safe it is NOT!
Please explain to me what I am missing.

I bought CRYP on my own last

Nick — Sat, 10 Nov 2007 01:16:39 -0500

I bought CRYP on my own last October before even knowing about Pabrai after finding it on the Magic Formula Investing screen and after doing my own due diligence. I'm still happy about this purchase. I also bought HNR because I had missed it on the Magic Formula Investing screen and because Pabrai owned it. This one was a no brainer when I picked it up in May of 2007. I actually feel more comfortable buying companies with warts. This way I know why they are cheap. I hate companies that seem to be perpetually cheap.

I went to the Value Investing Congress last spring and was first exposed to DFC. I work for a major bank and I thought I understood their business. I purchased stock when I could buy it below Pabrai's cost basis and after reading their annual report. They really seemed like the cream of the crop in the non-prime industry. I knew that that the thesis would take 3-5 years to play out but I didn't mind. Lately I don't feel confident in the balance sheets of any of the banks and I feel the credit derivatives are impossible to price. In retrospect the margin of safety that seemed obvious was actually unknowable. Just ask Citi's ex-CEO.

Buying now will either make you a zero or a hero. More research is warranted.

How about you why did you buy. All of my worst investment have been riding on coattail my best investments have always been original, yet unpopular ideas.

You are down 56% following Pabrai

CarstenP — Fri, 09 Nov 2007 15:43:34 -0500

I bought some of his stocks as well. Up on HNR and down on CRYP. So you are not alone. Did you do analysis on the stocks before you bought them or did you just buy them because Pabrai had bought them?

Which stocks do you own?

delta financial dfc

ghjj — Fri, 09 Nov 2007 12:47:40 -0500

Just bought for childs roth ira at $2.28 . Great stock buy if you arent hasty .