Haven’t been really busy this month looking at stocks thanks to some vacation time, but wanted to post a quick update that I sold the last few shares of my position in Origen Financial today. The majority of my sell order was already filled earlier this month.
If you read the comments below my original write-up you can see that my analysis missed some relevant facts. It’s going to take longer that I originally thought before the trusts hit their optional redemption threshold. The first trust to reach this threshold is the 2004-A trust when less than 20 percent of face value of the contracts is outstanding. In the past twelve months this amount dropped 12% from 88.7M to 78.1M. At this rate it will take roughly four years before the 47.8M redemption threshold is reached
The trusts taking a bit longer before the optional redemption thresholds are hit isn’t a big problem, but it’s also not so clear what will happen at that moment. The Origen Financial corporate structure has high overhead costs: last year the company generated ~13M in cash flow while paying out ~11M in dividends. The ~2M difference are costs related to running Origen Financial. If you are confident in a liquidity event in a few years time these costs wouldn’t be a big problem, but if the assets remain locked up in an inefficient structure this would be a good reason for a big discount, and it would in fact be easy to argue that the company is currently overvalued if you don’t expect a reduction in overhead costs in the future.
Taking these new insights in consideration I would not have bought Origen if I didn’t already own it, so I decided to sell my position. I’m going to continue to follow the company, and maybe there could be an opportunity to re-enter a position if there is more clarity about future costs.
No position in ORGN.PK anymore
Are the reasons for funds being locked up summed up in comments to the original post? I.e. loans can not be sold and ORGN will buy them and hold for 20 years.
Yeah exactly, and while I do think they should be able to structure this efficiently with low overhead costs (just as is done with the current trusts, and eliminate Origen), I’m not sure that that is going to happen. Because I’m thinking that today overhead costs could also be lower, because what really needs to be done at the Origen corporate level? They basically just need to pass through the cash they get from the trusts. I don’t think that really needs to cost 2M a year.