CapitalSource Part Three: Securitization Residuals
So far, I’ve looked at CapitalSource Bank and CapitalSource’s net leased health care properties. The two combined have a book value of almost $1.3 billion and intrinsic values that are likely 20% higher than this value. Yet CapitalSource has a market cap below $500 million.
Today I’m taking a look at CapitalSource’s interest in six separate securitizations. These bonds were issued between 2004 and 2007, and CapitalSource retained all classes subordinate to triple-As. Because of the amount of these securities retained, CapitalSource believes that they are the primary beneficiary of each issue and therefore record all the individual trusts assets and liabilities on their own balance sheet.
This couldn’t be more confusing. The liabilities of the individual trusts are not the responsibility of CapitalSource. However, CapitalSource has purchased over $162 million in loans that experienced a credit event from these trusts. This was done, presumably, to maintain the credit quality of the trusts, but in effect seems like a liability if these purchases are more or less required.
In effect $4.6 billion in loan assets on CapitalSource’s balance sheet are offset by $3.6 billion in debt within these trusts. CapitalSource estimates about $900 million in equity in these residuals.
Like many securitizations, the credit quality and repayment rate are difficult to determine. In determining a valuation, I would be skeptical of ascribing significant value or income from these residuals. Given the repurchases of problem loans in the past from these trusts, I do not want to view them as an asset or a liability in any valuation. If there is income available after the triple-As have been paid, I would consider that a nice benefit as a CapitalSource shareholder. This income and the equity in these residuals are effectively part of the margin of safety in a CapitalSource investment.
Disclosure: I currently hold shares of CapitalSource
April 3rd, 2009 at 4:47 pm
[...] Bank, CapitalSource’s Health Care Real Estate Portfolio, and CapitalSource’s equity in securitization residuals. The equity in each component of these businesses is $916 million, $650 million, and $910 million [...]