Description

casper719's writeup on AFHIF, and the ensuing thread, do an outstanding job of describing Atlas, its history, and the current state of affairs.

Formerly an insurance carrier specializing in taxi, limo, and non-emergency para-transit, Atlas pivoted to a pure play MGA and is in the process of gaining its footing amidst a combination of cities reopening and the restructuring of its debt, which is the subject of this write-up.

AFHBL is the publicly traded debt of AFHIF.  There are 1m shares outstanding at a current price of $10 per share.  The securities were issued at $25, thus at $10, they trade for 40c on the dollar.

AFHBL matures in April 2022, and pays 6.625% (it is currently in default).

It is about to be restrutured into a new piece of paper.

On August 31, 2021, Atlas Financial Holdings, Inc. (the “Company”) entered into a Restructuring Support Agreement (the “RSA”) with holders of approximately 48% of the Notes (AFHBL). Each such holder is supportive of a proposed exchange of the Notes.

Under the terms of the RSA, the exchange of the Notes is expected to be completed by March 1, 2022, resulting in a one-for-one note exchange with a five-year extension of the stated maturity and other agreed modifications, which the Company believes will enable it to satisfy its obligations under the new notes and create value for stakeholders. Additional Note holders are able to join the RSA via an accession letter which can be obtained from the Company.

In November 2021, Atlas gave the market an update on the Restructuring:

The Company has been working in recent months to address the upcoming maturity of its 6.625% Senior Notes due April 26, 2022. During the quarter, Atlas announced that it was pursuing a financial restructuring through an exchange of the Company’s 6.625% Senior Unsecured Notes due April 26, 2022 (the “Notes”) pursuant to an  arrangement that, if successful, it believes will allow for additional financial flexibility to continue to pursue its MGA strategy. On August 31, 2021, the Company entered into a Restructuring Support Agreement (the “RSA”) with holders of approximately 48% of the Company’s Notes and then holders of an additional 6.59% of the Notes acceded to the RSA for a total of 54.59% (collectively, the “Supporting Noteholders”). The Company expects that the contemplated restructuring will enable it to satisfy its obligations under the modified notes and create value for stakeholders. Additional Note holders are able to join the RSA via an accession letter which can be obtained from the Company.

The RSA contemplates that the Note Restructuring will be effectuated through (i) a scheme of arrangement in respect of the Notes pursuant to section 86 of Part IV of the Companies Act (2021 Revision) of the Cayman Islands (the “Scheme”) and (ii) a recognition proceeding with respect to the Scheme pursuant to chapter 15 of title 11 of the United States Code. Under the terms of the RSA, the Note Restructuring is expected to be completed by March 1, 2022, resulting in a five-year extension of the stated maturity through April 26, 2027 and other agreed modifications. The Company expects that the contemplated restructuring will enable it to satisfy its obligations under the modified notes and create value for stakeholders.

WHAT DOES THIS ALL MEAN?

Basically, in order to extend the Notes, the Company needs the affirmative vote of 75% from all noteholders who elect to vote.

Based on the ~55% commitments the Company already has under the RSA, it is highly unlikely that the Caymans scheme will not pass, and that the Notes will NOT be extended.

SO WHAT ARE THE NOTES WORTH?

Answer: more than 40c on the dollar.

Again, casper719 does an excellent job of showing the future potential values of the Atlas MGA.

The Note overhang (and lack of coverage, liquidity, and market cap size) has caused both the Note and Common (AFHIF) values to collapse.

At even half the premium of the former insurance carrier running back through Atlas' agents, the MGA could earn $8-$10m in EBITDA.

Again, there are 1m Notes at a par value of $25 per Note.

Every observable MGA transaction of the last 5 years has gone off at 8-15x EBITDA.  I do not see a scenario where these Notes, with a 2027 maturity are not worth par ($25m) plus accrued should AFHIF regain its earnings power.

A FEW THINGS HELP HERE

- interest expense moving to PIK on New Notes vs cash pay on the Existing Notes

- a new activist shareholder (that took a Board seat) who owns both common, Existing Notes and a new Pref that ranks BELOW the Existing Notes

- $4m or so equity in an office building that could be disposed of in 2022

- tax loss selling abating

- continued expansion of a large customer (Buckle)

Investors have a few shots at these Notes trading for something in the high teens once this deal gets done in March 2022.

WHY NOT OWN THE COMMON TOO?

The common is also a great risk/reward at 40c and could be supercharged the minute the Note deal gets done.

I would advocate for owning both (we do).

If there is a six sigma event and this deal is not done, the Company should still be worth more than the $10m that the Notes are trading for, though all liquidations are messy.

Catalyst

Appears to be a foregone conclusion that the Note Restructuring in Cayman gets done.

Investors are paying 40c on the dollar for Notes that will become New Notes - these New Notes should be worth Par + accrued.