The curious case of the BINDQ liquidation trust

If you are looking for an actionable idea you can quit right away, because the BIND Therapeutics stock has been cancelled months ago so there is nothing that can be bought or sold anymore. But if you like reading something about a bizarre situation you are at the right address here.

History

For those who don’t know anything about the story, a little bit of background information. BIND Therapeutics filed for chapter 11 bankruptcy protection in early 2016. It managed to sell its assets to Pfizer for enough money to pay back all creditors with some money left over for equity holders. So far all pretty straightforward, but the liquidation plan came with an interesting twist. The company picked a sort of random date (August 30, 2016) as the record date of which shareholders would be eligible to receive all future liquidation distributions. As a result the stock became basically worthless after that date, but since the stock continued to be traded for some time it offered shareholders a nice way to profit twice. I sold my position for something like $0.30/share which was a substantial windfall since I estimated liquidation distributions to be roughly $1.20/share while I bought the stock around $1.00/share.

Part of the reason that the stock continued trading at an elevated level was probably the involvement of a fund that apparently bought approximately one million shares after the record date. They have been, and still are involved in litigation, against the trustee (and FINRA as well I believe) trying to change the liquidation plan/the record date for future liquidation payments. So far they have been unsuccessful, but they haven’t given up yet. Their latest move is an attempt to convert the liquidation from chapter 11 to chapter 7, presumably to make it possible to work around the the record date confirmed in the chapter 11 plan.

Equity distribution form

While this is already weird, it got even weirder this year. After paying an initial liquidation distribution last year the trustee sent a letter to shareholders that they would be required to fill out an equity distribution form and a form W8/W9 in 180 days in order to be eligible for future distributions. This piece of paperwork proved a bit tricky to complete. You needed to provide the signed tax form to your broker, and your broker needed to sign-off on the number of shares you owned on the record date. A process like this has a lot of points where things can go wrong. Your broker might not notify you of the requirement to do the paperwork,  is unable or unwilling to do the paperwork, or things simply get lost in the mail.

As a result shareholders owning 75.05% of the company provided tax forms and equity certification forms. This means that a relative large part of the shareholder base isn’t getting any money from future distributions, either because of their own inattention or the inability of their broker to process the form. Based on some unhappy shareholder letters in the docket not all brokers were willing to do this. Luckily for me Interactive Brokers proved to be quite capable in handeling this weird situation. As a result the second liquidation payment contains a nice windfall profit for those who did manage to do all the paperwork. The first liquidation payment of approximately $8.0 million resulted in a distribution of~$0.38/share while the second liquidation payment of $8.0 million resulted in a distribution of ~$0.51/share.

As an added twist, because the payment wasn’t made to all shareholders it couldn’t be processed by the Depository Trust Company (DTC) and instead shareholders got a paper check. In the Netherlands checks haven’t been used in decades, and this was the first time ever in my life to receive one, but luckily my bank is able to handle them for a nice fee… It also creates a nice tax headache for those owning the stock in for example an IRA account since you are effectively doing a withdrawal from your account.

What about short sellers

Directly distribution money to shareholders while bypassing the depository raises an interesting question: how the hell do you handle this if people have lend out shares and other people have sold stock short. I think it’s mostly a theoretical question. As far as I know I didn’t lend out any shares on the record date, and I got the full payment per share. There are no issues for me. But imagine how messy it would be there would be a lot of people short. A potential scenario:

  1. I own 100 shares.
  2. I lend them out to a short seller
  3. He sells them to person X.

So how to deal with this situation? If I would claim ownership of 100 shares, and person X would claim ownership of 100 shares the liquidation trust is going to pay money to the same shares twice. If I couldn’t claim ownership of the shares, but only person X (I think this is the most correct implementation) I wouldn’t be able to fill out the equity distribution form. Maybe person X doesn’t fill out the equity distribution form. So there is no payment to X, and the short seller could claim that there should also be no payment to me. But lets say that I owned another 100 shares that I did successfully fill out the paperwork on. Now it’s clear that I got a certain payment per share. The short seller is supposed to pay me whatever I would have gotten on the shares if I would not have lend them out. So he would be on the hook for the $0.51/share payment. But how would that money get to my account? I know I got the payment, but it’s a paper check. My broker doesn’t know how much if any money I got and the same goes for the depository. And even if they would know, can they fix it on an account by account basis?

If this is not yet messy enough, if I would have owned all the shares and done the paperwork the distribution/share would have been a little bit lower for everybody (still assuming X didn’t do the paperwork). So maybe the short seller shouldn’t pay the full $0.51/share? Or what about the case when the short seller closed his brokerage account in the time between the cancellation of the stock and this liquidation payment. Is his broker then on the hook for it?

If anyone has anything intelligent about this to say I’m interested. Did you lend out any shares? Did you get paid on these shares? Someone who has been short this stock on the record date? Lending out shares to short sellers is supposed to be sort of risk-less. But I’m pretty sure the process breaks down in this obscure case. My guess is that either some people lend out a few shares, and simply didn’t get paid on those, or the trustee paid twice (or more) for some shares “screwing” everybody else by a tiny amount.

Disclosure

No position in BINDQ, yet still have the right to remain all future liquidation payments

Why bitcoin is overhyped

It’s probably a sign of the times that every self respecting value investing blog has to have a post about bitcoin. And when you tell a random person that you invest the first question these days is if you own (or trade) bitcoins or not. So I guess “The Alpha Vulture” can’t stay behind, and share with the world what it thinks about bitcoin, whether you want to hear it or not. As the title of this post implies I’m skeptical about bitcoin, and most other software projects that are based on blockchain technology[1].

To explain why I’m skeptical I’ll first try to explain in the simplest possible way what the whole fuss is about because I suspect that part of the reason why people are so enthusiastic about the blockchain is the fact that they don’t really understand the technology. If you read an explanation about bitcoin you hear cool terms like distributed trust (which is actually cool) and stuff you probably don’t understand without a computer science background (like hash functions). These things are actually not that hard to explain, but not really necessary to understand the key idea behind the blockchain. What you basically do is, instead of trusting security to a single party that (hopefully) has a smartly designed system you substitute that by a large amount of computational power provided by multiple parties. There is a lot more to it than that, but that is just noise and implementation details.

The fact that you don’t rely on a single party is great! I’m not going to dispute that.

The fact that the security is provided by a large amount of computational power is bad.

Just a large amount of computational power would actually not be bad. Chips always get faster and more efficient. But it’s not just a large amount, it’s a relative large amount. The security only works because the amount of computational power required to “take control of the network” is simply too expensive for a malicious third party to acquire (even temporary). So if chips get 10 times faster the computational power required to keep the network secure simply increases with the same factor. If chips get 100 times more energy efficient, the amount of energy required to keep the network secure doesn’t drop at all[2].

Additionally, the amount of computational power required scales with the value of the transactions being done on the network. You need enough computational power to make it unattractive for an attacker to acquire even more computational power and take control of the network. How much computational power this exactly is, is quite an interesting theoretical question (I don’t know the answer). But for sure the amount is high. An attacker only needs a short moment to inflict huge and long-lasting damage on the network. They could for example double spend coins, hurting not only those who would receive them, but also causing a massive loss of trust in the system that would be longer lasting.

So why is this all so problematic? It’s simple: high computational power requirements translate into (relative) high transaction fees. And that’s a problem for a lot of the applications that have been proposed for the blockchain. Using bitcoin as a currency is the biggest obvious problem. Most banks for example process millions of transactions daily, and most of these transactions are almost free because running a nice secure sever that handles a million transaction a day isn’t a lot more expensive than one that handles just a few transactions[3].

If you use bitcoin to speculate on the value of bitcoin transaction costs of a few dollar[4] aren’t very problematic. If you use bitcoin like some sort of virtual gold slash store of value it’s not a real problem. If you use bitcoin for money laundering or other black market transactions it also not a problem[5]. But for the first two to work out I think you need bitcoin to become a broadly used medium for transactions, and just betting on there being a large black market is a questionable proposition as well in my mind. The current hype is mostly driven by speculation, and for most real-world applications high transaction fees are a very serious obstacle. There are probably some niches where it makes sense, but I think broad adaptation of blockchain technology would in most cases be a step backwards. And I’m only looking at the financial angle here, not even mentioning the environmental impact it would have…

Disclosure

Author has zero blockchain related exposure[6]

[1] I’m using the blockchain and bitcoin sort of interchangeably in this post. I know it’s not the same.

[2] I doubt this is true. There is probably some complex relationship between both the cost of new chips, the energy requirement and perhaps even some other tangential factors.

[3] At least not a factor million more expensive. Scaling performance is still hard. It is also going to be hard for bitcoin.

[4] Average transaction fees are now already ~$4, and this is despite the fact that miners are currently also compensated by newly mined bitcoins. Currently miners get 12.5BTC for every block mined. With roughly 2,000 transactions per block and a current price BTC of ~$5500 one transaction actually costs almost $40.

[5] The fact that all transactions are publicly stored in the blockchain might be though…

[6] I used to own a couple of dozen bitcoins in 2011 or something like that back then when mining them on your own graphics card was still economical. Sold them between $20 and $30. Still better than buying two pizza’s for 10,000 BTC though.

Exited Retail Holdings, this time for real

Earlier this month I sold Retail Holdings, only to quickly buy it back after I realized there was a mistake in my sheet. Since then the price of the company has increased a bit more than 6% while the underlying asset value actually declined a tiny bit. Since the discount earlier this month was just 12.7% (using a 33% discount on the non-remittance shares) these relative small movements are enough to change the story. At the moment the remaining discount is 6.01% which translates to 10.1% after the dividends have been paid. Given that there are for sure some costs at the holding company level, and that it quite possible that a fair discount on the non-remittance shares is actually higher than 33% I sold my position. There might be a bit of upside left (especially if this Seeking Alpha author is right with respects to the licence fees), but I think the Retail Holdings story has mostly played out at this point in time.

I bought my initial position a bit more than three years ago. Taking into account the dividends paid out in the meantime I generated a more than solid internal rate of return of 20.2%:

 DescriptionDateCash flow
Buy6/4/2014-18.95
Dividend10/6/20141.00
Dividend10/6/20151.00
Dividend4/13/20165.00
Dividend5/17/20172.00
Sell10/13/201723.24
IRR:20.21%

Disclosure

Author has no position in Retail Holdings anymore

Exited Retail Holdings (updated)

Some readers might have noticed that I briefly published a post about selling Retail Holdings yesterday. One reader quickly noticed that there was a pretty big mistake in my sheet (note to self: maybe don’t update sheets and trade while on the train…) which does change the story a bit. I thought that a discount of 33% on the non-remittance shares would mean that there was almost no upside left in Retail Holdings, while in fact the discount is still 21.1% (pro-forma for the $10 in dividends that will be paid in the coming months). It is tempting to rationalize your previous selling decision and find a new reason to support the move, but a mistake warrants a fresh evaluation. While the discount isn’t particularly big I think I’m happy to continue owning a (smallish) position. So I decided to correct my mistake of yesterday, and I rebought today.

I still think that it was a disappointing development that the company sold their SVP notes for a nominal amount last month. They had been written down in the past to zero already, but with a face value of $32.7 million it provided a nice bit of optionality that is now definitively gone.

Disclosure

Author is long Retail Holdings

Retail Holdings sells majority stake in Singer Sri Lanka

Retail Holdings announced today that they have sold 61.7% of their stake in Singer Sri Lanka for a total consideration of $69.0 million. Because the stock was owned through Sewko Holdings in which the company has a 54.1% stake the consideration attributable to Retail Holdings shareholders will be $37.3 million. This is pretty significant news since Singer Sri Lanka was one of the last remaining big position besides Singer Bangladesh. According to the press release Retail Holdings hasn’t yet determined what the cash will be used for, but based on their history of paying out (large) dividends another one of those is a safe bet. With 4.65 million shares outstanding the $37.3 million payment would enable a dividend of a little more than $8/share, in addition to the $1 dividend that already has been announced for November.

For some reason the company didn’t sell their whole stake in Singer Sri Lanka, but they are keeping a 9.5% stake with the option to sell it to the acquiring party within 12 to 15 months. I have no idea why they have structured the transaction in such a way, but my guess is that it has to do with taxes or other rules that make disposing of the whole stake in one go less attractive. Following the transaction the acquiring party is obligated to launch a tender offer for all shares so presumably they want to acquire everything, while Retail Holdings wants to exit. No reason to think that the remaining position won’t be sold in the time frame of the option.

While Retail Holdings is up a bit based on this news I think the stock is still cheap. It is currently trading at a discount of 25% to underlying asset value, which is not that huge, but if you take into account that shareholders will most likely receive $9/share in dividends the discount on the remaining holdings rises to 37%.

Disclosure

Author is long Retail Holdings