Bloggers Discuss Aborted UCP Debt Issuance

As originally appeared in the Troubled Company Reporter.

PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 14% of PICO. Other activists at (RPN) have taken to the Internet to advance the shareholder cause.

The bloggers make several observations on the recent changes at PICO, namely the firing of CEO John “The Juicer” Hart and installation of his replacement, Max Webb, former CFO. But first, the bloggers address the lack of progress on their Red Hawk investigation.

“We have received no word from the Board on our Red Hawk investigation. Best practices demand that the PICO Board hire independent forensic experts to ascertain the truth of the Red Hawk transaction and to communicate that truth frequently and expeditiously to the owners of the business.

“There are a few interesting ironies in Squeeze The Juicer. First, Juicer did this to himself. If Juicer had entered into a Compensation Scheme that paid him $500,000 annually, a reasonable bonus based on NAV or PICO’s stock price, and a termination payment of $1 million, it would have been accepted as the path of least resistance. He probably would have overseen the 5-year liquidation of PICO and made lots of money in the process. But like every corrupt and incompetent egomaniac, he got greedy – and that was his downfall.

“Second, when Juicer negotiated the Central Square Settlement Agreement and the Leder Settlement Agreement, he probably never dreamed that they would be used against him only 7 months later. Recall that per their respective Agreements, Central Square and Leder Holdings must vote with the recommendation of the Board. Now, the Board is recommending that shareholders toss Juicer — so both Central Square’s and Leder’s votes go against Juicer. The irony is almost Shakespearean.

“Another interesting irony is the role that newly-minted CEO Max Webb and Hart-appointed Director Michael “Desperado” Machado likely played in Squeeze The Juicer. Mr. Webb worked with Mr. Hart for almost two decades. Desperado has been on the Board since 2013, and was one of the knaves who signed his name to the criminal Hart Compensation Scheme. If these men wanted to remain at PICO, it was incumbent upon them to ruthlessly turn on the man who was responsible for both their positions and paychecks for a long time.

“(PICO better have language in Tangled Webb’s employment agreement indicating he must resign from both PICO and UCP Boards once he is not an employee of PICO.)

“We wonder out loud which attorney is providing counsel to PICO on the consent solicitation effort. The ironies would continue if it was Keith Gottfried, Esq., at Morgan Lewis & Bockius, LLP. Long-time readers of RPN have come across Mr. Gottfried on several occasions — he has been the lawyer behind innumerable measures that were abusive of shareholders, destructive to value and served only to entrench the corrupt and incompetent Legacy Directors.

“The last and final irony is that Juicer is upset. Juicer stacked a corrupt Board to procure a larcenous employment agreement. He worked 6 months into a 5-year term. He was confronted with PICOGate, which was a golden opportunity for Delaymond and Hapless Howie Brownstein to save shareholders $11 million in termination payments. Unfortunately, Delaymond and Howie took the easy way out, which prejudiced shareholders. After all that, Juicer walks with $11 million of shareholder money. What’s Juicer complaining about?

“To the extent that Juicer had a hand in placing Raymond “Delaymond” Marino and Howie Brownstein on the Board — he chose wisely. When we broke the PICOGate story, we provided the Board with sufficient justification to conduct a full-scale investigation of Juicer and his past executive conduct. An independent investigation likely would have produced sufficient evidence to fire Juicer for cause, saving shareholders $11 million. But Delaymond and Howie did right by Juicer and wrong by shareholders — they refused to conduct a thorough investigation, thereby unnecessarily handing Juicer $11 million. Juicer chose well — neither Delaymond nor Howie had the integrity to conduct a thorough investigation.

“The bloggers are feeling smug and encourage other shareholders to bask in the good vibe. “It is interesting to reflect back to one year ago and marvel at how far PICO shareholders have come. In October 2015, PICO suffered from an entrenched Board, a corrupt and incompetent CEO, extreme value destruction and little hope. There were 7 Legacy Directors, focused on entrenchment.

“With the removal of Juicer, 6 of those 7 Legacy Directors are gone. Starting with Julie Sullivan who left in October, in only 10 months PICO shareholders have turned over almost the entire Board. This is an amazing feat.”

The bloggers note that Moody’s rated UCP’s proposed debt offering then pulled the rating when UCP aborted the issuance. “On October 14, 2016, Moody’s Investors Service assigned a B3 CFR to UCP and a B3 rating to UCP’s proposed 2021 Senior Notes. According to a Moody’s Evolution of Default Probability Matrix, B3 implies about a 9% probability of default within the first year.

On October 28, 2016, Moody’s withdrew its UCP ratings. Under ‘Rating Rationale,’ it said, ‘Moody’s has withdrawn the rating for its own business reasons.’

The bloggers note, “From Moody’s withdrawal we assume that a future UCP Senior Notes offering is about as likely as RPN receiving a Christmas Card from Juicer. When UCP pulled the issue, there was talk that it might wait for an improvement in market conditions or better financial results. We assume that withdrawal of the Moody’s rating means that UCP has given up on this avenue of financing and will resort to Plan B. We don’t know what that Plan B is and options are limited. Corrleone Family Asset-Based Lending may be UCP’s only alternative.”