Alliance Semiconductor Is A Liquidation Gone Wrong, But Potential Remains – ALSC

Alliance Semiconductor is the story of a liquidation gone wrong. In 2005, after years of poor performance, the company found itself targeted by activist investors seeking liquidation. After agreeing to dismantle itself, Alliance set about selling off its portfolio of venture investments and shareholdings in other companies. In the largest of these transactions, QTV Capital paid $123.6 million for nearly all of Alliance’s venture capital holdings.

Flush from asset sales, Alliance paid special dividends totaling $4.35 per share through July 1, 2008. In September, the company announced its board of directors announced its intentions to begin liquidation proceedings. On September 5, 2008, Alliance Semiconductor filed to deregister its stock.

That’s when the trouble started. Seeking to maximize yield on its remaining cash, Alliance had invested nearly $60 million in auction-rate securities issued by AMBAC. A good explanation of these securities is available here, but two features of these securities are salient to the Alliance Semiconductor story:

Liquidity – Rates on the AMBAC auction-rate securities purchased by Alliance were to be reset in frequent auctions, which would also provide liquidity to holders. Outside of these auctions, liquidity for these securities was extremely limited.

Put Rights – Under certain conditions, AMBAC possessed the right to force the auction rate securities trusts to purchase AMBAC preferred stock, effectively converting these auction-rate securities into AMBAC preferred stock.

In October 2008, Lehman Brothers failed and the entire financial world plunged into crisis. The auction process for auction-rate securities failed, and transactions in these securities virtually ceased. Worse, for Alliance Semiconductors, AMBAC was decimated by losses suffered on the sub-prime mortgage products and derivatives it insured.

Instead of holding the safe, liquid cash alternatives Alliance Semiconductor thought it had purchased, the company now held $60 million worth of completely illiquid securities issued by a distressed sub-prime insurer. Interest on these securities was still being paid, but the company found itself unable to continue its liquidation as scheduled.

Alliance Semiconductor’s management certainly bears the blame for investing nearly all its cash in these auction-rate securities, but they were hardly the only ones to make the mistake. Before the crisis, auction-rate securities were widely considered to be cash alternatives. A failure of the auction market for these securities was nearly unimaginable.

Faced with an outcry from the many business and individuals who had purchased auction-rate securities, many banks and investment banks repurchased these securities at par value in 2008. Alliance Semiconductors was not so fortunate. Reeling from losses and facing the threat of bankruptcy, AMBAC was in no position to repurchase these securities and instead exercised its right to exchange these auction-rate securities for preferred shares.

As can be determined from this filing, AMBAC swapped each $25,000 worth of auction-rate securities for a share of AMBAC preferred stock with a par value of $25,000. Alliance received 2,277 shares. Due to AMBAC’s distressed status, market value for these preferred shares was nowhere near par value, causing Alliance to suffer large losses. AMBAC eventually declared bankruptcy in November, 2010.

In the following years, Alliance Semiconductor pursued legal channels to receive full value for its former auction-rate securities. The company filed a claim with FINRA against JP Morgan, alleging the risks of the securities were not fully explained prior to Alliance’s purchase. FINRA, however, disagreed, denying all of Alliance’s complaints in November, 2011.

Deregistration, the losses on the auction-rate securities conversion and a near-complete lack of communication with shareholders lead Alliance’s share to dip to a low of 10 cents in mid-2012. Little hope seemed to remain for shareholders, as the company’s legal efforts were denied and AMBAC’s bankruptcy seemed to indicate the AMBAC preferred shares would wind up worthless as well.

But on Friday, after market close, Alliance filed a new quarterly report indicating its AMBAC preferred shares do have value after all!

As of December 31, 2012, Alliance still held 2,277 shares of AMBAC preferred stock and listed these as having a value of $11.95 million, or $5,250 each. Even better, the company sold 80 of these shares for $6,750 each on February 4.

Assuming the market price of these shares still stands at $6,750, Alliance’s balance sheet is as follows, and it’s very simple:

ALSC balance sheet

 

All of Alliance Semiconductor’s assets and liabilities are current. With $15.47 million in adjusted equity and 33.05 million shares outstanding, Alliance has 46.8 cents per share in net current assets/equity. Alliance stock last closed at 27 cents, a 42.3% discount to net current assets. The company also has $71.8 million in NOLs, capital loss carryforwards and unrealized losses, all of which are currently fully reserved against.

This calculation comes with a few caveats. For one, the market price of the AMBAC preferred stock may be volatile and could easily decline. (Anyone with access to a current quote on these $25,000 par securities is encouraged to contact me!) Another significant issue with non-operating companies is cash burn. Fortunately, Alliance is consuming only about $60,000 per quarter. A third issue is strategy. Alliance may trade at a large discount to net current assets, but what if management decides to retain cash and make a bad acquisition? Or what if liquidating the remaining assets takes another five years, killing the IRR? There is some indication that the process might linger on, as the company’s tax filings for the years 2008-2012 remain open to IRS scrutiny.

Investors should be aware of these factors and discount Alliance Semiconductor accordingly. However, if a final liquidation happens sooner rather than later, the current share price offers material upside.

Disclosure: No position.

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11 Responses to Alliance Semiconductor Is A Liquidation Gone Wrong, But Potential Remains – ALSC

  1. Michael says:

    I own this. The Ambac preferred are complicated securities to say the least and will take a long time to work out.

    Where did you see recent financials? I checked their website – no recent updates.

  2. Thomas Braziel says:

    Hey guys I took a look at this yesterday. Cannot get a quote on them through Bloomberg or secondmarket.com (although secondmarket.com has them listed as being available for sale with no price quotes). Remember these received zero in the bankruptcy plan so the only value is through litigation. ALSC (along with other owners) are suing Ambac for breach of contract. The claim is that the circumstances under which the securities were converted from ASRs to Preferred Shares was a breach of two clause in the put agreement. The contract clauses in question are:

    First disputed clause:

    7.4 Ambac Assurance hereby covenants and agrees that if Arnbac Assurance’s financial strength rating is ever lowered while this Agreement remains effective, Arnbac Assurance shall provide written notice to the Trustee, on behalf of the Sub-Trust, of such lowered rating.

    Second disputed clause:

    [put agreement is only valid if] 9.1 (g) it [Ambac] is not in default under any agreement to which it is a party or by which it or its assets is or are bound and no litigation, arbitration or administrative proceedings are current or pending, which default, litigation, arbitration or administrative proceedings are material in the context of this Agreement;

    Here is a link to the supreme court search engine: http://iapps.courts.state.ny.us/iscroll/. Search “Alliance Semi” or use this index number: 653869-2012

    Happy investing, Thomas

  3. theboss says:

    Hi guys,

    thanks for posting! this is one of the more interesting and strange situations I’ve seen lately.

    So I spent some time on this and I don’t think it’s compelling from here at all. I talked to a trader who has done a decent amount of volume in these AMBAC preferreds and he said that the range in pricing he has seen over the past 2 quarters has been from 6% to 20% and that “someone” came to bid with 100 of these and could only get 80 done at that ~30% value so I think that using the 30% value is using the peak value of something that is not certain has ANY value at all. That 30% value is certainly NOT the value that ALSC could get if they tried to sell all their holdings.

    Even if you assume the case goes favorably there will be endless back and forth in bk about where any value paid out will even come from as any payments in this bk will be at the expense of someone else who will not be happy. At BEST this will take years and years before ALSC sees a dime and at worst these preferreds get shot down and are worth $0. Not to mention whatever lawyer fees accrue in the billions of hours these lawyers always seem to use up or any other admin and cash burn ALSC will experience over the next 2-3 years.

    If this thing were trading at say $3m market cap then it is an interesting option but at current valuations I don’t know what the equity is thinking since there is a decent change (more likely than not) that this thing is a donut and at best this will take many years and the upside isn’t even that compelling depending on what legal fee assumptions are used.

    I’ve done some litigation and bk investing before but I’m not a lawyer or specialist so maybe I’m missing something here and would be open to hearing the bull case but if this thing had more liquidity it would be a compelling short imo.

    • otcadventures says:

      I am inclined to agree with you at current prices. There can be no assurance that the company will succeed in selling its remaining preferreds at anywhere close to where they sold the last lot. This is worth watching in case it slides back to the low 20 cents range, but above that I would not be buying.

      • Thomas Braziel says:

        Guys just to clear up some facts here. The bankruptcy plan was confirmed last year. The preferred securities received zero in the bankruptcy plan. The litigation (and only course of recovery for the preferred securities) is completely separate from the bankruptcy proceeding, and can be found at the below mentioned link.

        • Anonymous says:

          Not only course of recovery by my understanding… Ambac subsidiary AAC is in runoff, but has over $27B of assets. Ambac equity will be wiped out upon plan confirmation, but not preferred. So to the extent there is any money left in ACC after settling outstanding policies, it will go to preferred first before accruing to the debtor.

          Here is a quote from my notes. I think the source is the disclosure statement:

          These notes and the AMPS (auction market preferred shares) are obligations of AAC and it would have to be made clear that these obligations will be able to be paid or settled in full with their holders along with all policyholders and other obligations before the Debtor could realize residual equity value in AAC.

          In practical terms, AAC’s main assets are future installment premiums, the holdings in its investment portfolio, and litigation recoveries, whereas AAC’s liabilities include payment of all current and future policy claims, surplus notes, and its AMPS. In order for there to be residual equity value available at AAC, all of AAC’s liabilities, including surplus notes, AMPS, and all other obligations must first be paid in full.

          • Thomas Braziel says:

            Hi there,

            Thanks for the information. I see what you are saying. I don’t expect you to share if you done the analysis, but have you constructed a waterfall to see if the preferred’s are anywhere close to being in the money. Is it worth a few days of analysis? If you think it is, I’ll do the work and post up here for everyone.

            Thanks, Thomas

  4. Michael says:

    I’ve done no extensive waterfall analysis because frankly it seems too hard. I think some of the policies will be in effect for 30 years or so.

    I have just owned ALSC for a long time and followed the twists and turns over the years.

    Not buying or selling at these levels though.

  5. Tj says:

    Has anyone stayed up on this company’s situation? Completed the sale of all the preferred and is now a cash box. Possibly some value if they can utilize their NOLs. I don’t know enough about the interim CEO to buy. Wondering if someone that’s followed it closer than I has an opinion.

    • Michael says:

      I sold half but still own.
      92 cents cash last September – Lloyd Miller bought B Riley’s position (I think 60%) so he controls it.
      One of the directors was a director of Footstar and is well aware of their transaction with CPEX in which they monetized the NOL.
      Curious to see what they do next.

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