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Non-Tech : Creditrust Corp. (CRDT)
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To: Doug (Htfd,CT) who wrote (6)3/22/1999 11:21:00 PM
From: bgarner  Read Replies (1) of 11
 
Doug,

You ask can a company get into a trap where the temptation arrises to do bigger deals. I say the answer is yes. Again look at CFS. When Bartmann realized that his recovery operations were a net money loser and his cash flow projections on the bonds were much weaker than projected, he funded the servicing of the bonds out of his own pocket to continue the ponzi scheme. If I am correct, the average life of the company's Citibank receivables purchase was about 6-7 years old. That is quite old paper, hence the company only payed about 1 penny on the dollar for it. Nevertheless there is no chance in hell of profitably recovering your investment using only a 20% servicing fee. Maybe 20% is enough on fresh paper 6 months to a year old. But anybody in collections knows that at least a 50% servicing fee is required on 6/7 year old paper to even begin thinking about generating profits. Just think of the costs involved in even locating somebody who is 7 years delinquent.

So the game here is to cut your servicing fees and loss money on the front end so that the net recoveries look good on the back end. Even so the front end isn't enough to fund the back end. You ask what assumptions go into the determination of the value of a portfolio. Its very complicated and highly volatile.

The most important thing to remember here is: the only thing allowing this game to continue is the bond insurance offered by Asset Guarantee. Their guarantee allows the bonds to get rated AA and thus sold to investors. Without the sale of these securitizations to investors the game is up. Think about it. No investor would consider buying this paper if it didn't have a AA rating. I don't know what the company is paying for the bond insurance but I'm sure that it makes its cost of funds ridiculously high. Even so the gains they are taking because of the securitizations even far surpass the cost.

Again...if Asset Guarantee decides to pull the plug..watchout. Also if the cash flow on the bond is not meeting projections and the company has to use its own cash to fund the deficet..watchout.

Whats the franchise here? A money losing collection business? A promise of future income based on one company's (Asset Guarantee)decision to provide bond insurance. To me there are a number of achilles heels in CRDT that if hit make this an ugly situation.

Its not too often that a screaming short is staring you right in the face. Well take a good look.
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