T11 Capital is currently long shares of IMH. Original research report outlining the opportunity can be found here.
Unfortunately, a majority of investors don't listen to conference calls that pre-announce a capital raise as being forthcoming. Additionally, a lot of funny money has become involved in Impac on both the long and short side, causing the tremendous spike in volume and volatility over the past couple of weeks. When a cash raise comes together with the sudden onset of volatility brought about by a gaggle of new speculators, you are bound to have the challenges of misinformation.
Here is some clarity:
1. In the Q1 conference call that took place in late-April management said, "we are currently in discussions with various parties to provide between $25 million and $50 million of debt and/or equity capital."
2. They announced on Friday that they are raising $25 million in a convertible note offering at 7.5% convertible in January 2016 at a conversion price of $21.50 per share. Mandatory conversion takes place if after January 2016 the stock trades above $30.10 for 20 consecutive trading days.
3. Why do they need this money? The company is facing skyrocketing origination volume. As a result they face increased "warehouse haircuts." A warehouse haircut is essentially the portion of the credit line advance that the originating lender is responsible for. It typically falls in the 1-2% range. Warehouse haircuts increased from $20 million in Q4 to $30 million in Q1 as origination volume increased dramatically. This is the cost of doing business as a lender. As cash flows continue to increase warehouse haircuts will take care of themselves. However, given that the company is facing growing pains of a sort at the initial onset of their new business model a cash infusion is necessary. Additionally, the cash will be used to "retain mortgage servicing rights and working capital to fund the growth of origination volumes and contingent consideration payments associated with the acquisition of CCM."
With the growth of CashCall into a total of some 40 states from 11 in Q1, advertising expenses will rise dramatically. Initially, the capital outlay to secure advertising in all of those new states will be substantial until those states begin producing mortgage origination revenue to offset the advertising costs. As the additional states begin producing revenue, the overall efficiency of their advertising model increases because of the volume discount they receive by increasing advertising basically nationwide.
Dilution is only a bad thing if management can't achieve returns on capital they receive via dilution. Impac is in a stage of its business growth where high returns on capital are not only possible, but exceedingly likely. This has been proven by the already dramatic effects of the CashCall acquisition on the entire business model. The dilution shareholders are facing here is reasonable when taking into account the return management is likely to achieve on this capital given both micro and macro factors influencing the business presently.
Additionally, the structure of the conversion of the notes keeps a pretty tight lid on the float until 2016 when notes can be converted to equity. As IMH continues to grow earnings in 2015, the tight float (keep in mind Pickup family owns 40% of the outstanding float and they aren't selling) will aide in getting shares over $30 by the time 2016 rolls around causing a mandatory conversion. The 7.5% rate on the notes only become burdensome if it is held for years. In this case, total interest paid will more than likely be very reasonable when all is said and done given the mandatory conversion clause.
