Are Liquidations Profitable? Capital Crossing Preferred vs. HealthShares
I’m chartering into inexperienced waters with this topic, so I hope people will provide comments if they have experience with investing in actual liquidations. In this post, I’ll be discussing 2 liquidations: Capital Crossing Preferred Corporation (CCPCN) and HealthShares Exchange-Traded Funds.
Quick Definition
For those unfamiliar, a liquidation is a process where a company is brought to an end. It converts all of its assets into cash. That is, they sell all positions in their portfolios, sell their real estate, inventory, desks, chairs and anything else that may have cash value. Remember how the value of a company is the sum of its future cash flows as well as its shareholders' equity? In a liquidation, since there is no more future cash flow, a piece of the shareholders' equity is what we are entitled to received.
Capital Crossing Preferred Corporation Liquidation
(Capital Crossing Preferred Corporation is an entity of Capital Crossing.)
I stumbled upon Capital Crossing Preferred Corporation on the news that CCPCN (the preferred stock) is being called for a liquidation price of $25 cash on Dec 1, 2008. Its closing price Friday was $23.75.
There is still a 5% spread remaining but I am not sure whether the shares will be tradeable on the actual call date. If they are, a guaranteed 5% with zero risk in 1 day would definitely be fantastic. The annualized gain would be astronomical even after fees.
From the 8-K filing on Oct 31, 2008:
On October 27, 2008, the Board of Directors of Capital Crossing Preferred Corporation unanimously approved, subject to obtaining the approval of the Office of Thrift Supervision to the extent required by law or regulation or policy of the OTS, the voluntary complete liquidation and dissolution of the Corporation as being advisable and in the best interests of the Corporation’s stockholders and adopted a Plan of Complete Liquidation and Dissolution of the Corporation.
….
On or before December 1, 2008, the Corporation intends to declare one or more liquidating distributions in cash to the holders of shares of Series D Preferred Stock representing the full liquidation preference on the Series D Preferred Stock of $25.00 per share, plus any accrued but unpaid dividends thereon from the beginning of the dividend period in which the liquidation occurs to the date of liquidation.
CCPCN Liquidation Probability
I assume that even liquidations should be approached like merger arbitrage, except that the probabilities are much higher.
Mergers get canceled for all sorts of reasons, but I’ve never heard of shareholders or external factors preventing a liquidation if the board has already approved it.
Here is an excerpt from the 10-Q filing on Nov 14,2008.
Since Capital Crossing Preferred is a subsidiary of Lehman Bank, federal bank regulatory authorities will have the right to examine it and its activities and under certain circumstances, to impose restrictions on Lehman Bank or Capital Crossing Preferred which could impact Capital Crossing Preferred’s ability to conduct its business according to its business objectives. For instance, if Lehman Bank’s regulators determine that Lehman Bank’s relationship to Capital Crossing Preferred results in an unsafe and unsound banking practice, the regulators could restrict Capital Crossing Preferred’s ability to transfer assets, to make distributions to its stockholders or even require Lehman Bank to sever its relationship with or divest its ownership interest in Capital Crossing Preferred.
In the end, it seems like the company has acknowledged it would be better off liquidating. So the chances of this going through are very high.
It’s a shame I’m potentially missing out on a nice gain with virtually no risk, but I’ll use this as a learning tool for future special situations.
You can read a news article on CCPCN here. Moving onto HealthShares.
HealthShares Exchange-Traded Funds Liquidation
It seems like ETF liquidations are less profitable as they are usually priced very close to their Net Asset Value (NAV). The only potential reward is if the ETF market price is below the fund's NAV.
(Net Asset Value is the Net Assets of the Fund divided by shares outstanding)
Here’s a snippet of the news:
The Board of Directors of HealthShares, Inc. a registered investment company, today announced that it has determined to liquidate the Company’s four underlying investment portfolios effective December 31, 2008 and subsequently dissolve the Company.
….
The Board also carefully considered current market conditions, the inability of the Funds to attract significant market interest since their inception, their future viability as well as their prospects for growth in the Funds’ assets in the foreseeable future, and thereafter determined that it was advisable and in the best interests of the Funds and their shareholders to liquidate the Funds.
ETFs to be Liquidated
The funds that will be liquidated are as follows:
- HealthShares Cancer Exchange-Traded Fund (HHK)
- HealthShares European Drugs Exchange-Traded Fund (HRJ)
- HealthShares Diagnostics Exchange-Traded Fund (HHD)
- HealthShares Drug Discovery Tools Exchange-Traded Fund (HHV)
December 23, 2008 is the last day of trading for the shares and all trading will halt on December 24, 2008.
Return Percentage
Comparing the market price and NAV for each of the ETFs:
HHK
| Market Price (11/26/2008) | 23.99 |
| NAV (11/26/2008) | 24.36 |
HRI
| Market Price (11/26/2008) | 15.26 |
| NAV (11/26/2008) | 14.79 |
HHD
| Market Price (11/26/2008) | 20.31 |
| NAV (11/26/2008) | 20.53 |
HHV
| Market Price (11/26/2008) | 21.44 |
| NAV (11/26/2008) | 22.38 |
As you can see, HHV seems to be the only candidate with a 4.38% spread but who knows how that will change over the next 3 weeks.
Risks
An ETF liquidation is tricky because it acts much like a stock, except it holds other disadvantages.
- When the managers liquidate the portfolios, expenses go up
- Capital gains taxes need to be paid
- Unlike regular risk arbitrage, I can’t think of a way to hedge
Conclusion
Company liquidations can be very profitable if you are aware of the news.
ETF liquidations are barely worth the effort unless there is a difference between market price and NAV close to the end of the trading deadline.
Disclosure: No positions in any stocks mentioned at time of writing.
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This article has 7 comments:
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jmorace
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Nov 30 03:02 PMwaddaya tink u tradn' here...... MO??? 'bout 2000 shares traded friday.
good luck chum!
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