Marc Cohodes On The EIC Ponzi Scheme

(MENAFN- ValueWalk) Farmer Marc Cohodes is one of the world's most feared short sellers. Former General Partner of Rocker Partners/ Copper River from 1985 to 2009, Cohodes has made a name for himself by focusing on the details. He calls out companies where the numbers don't add up, and he's usually right. In the financial crisis, he hit the jackpot when he correctly called the demise of Lehman Brothers. After retiring in 2009, Cohodes has since returned to the markets, betting against Canadian mortgage lender Home Capital and Valeant Pharmaceuticals among others.

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His latest crusade is against Exchange Income Corp; a Canadian company focused on opportunities in aerospace and aviation services, and equipment and manufacturing.

The EIC Ponzi Scheme

At the Fall 2017 Grant's conference, Cohodes laid out his case against EIC calling the company a "Ponzi scheme" as it is paying out more cash in dividends than it can realistically afford.

Indeed, the famous short seller notes that EIF has increased its debt load by CAD$462 million and issued over CAD$230 million of shares to fund its CAD$700 million deficit for the five and a half years to June 30, 2017.

Not only is the business currently paying out more than it can afford, but according to Cohodes' calculations, the company has paid out more in dividend than it has ever earned. The company is not hiding this fact. As shown below, in EIC's annual report it clearly shows that the business has paid out CAD$291 million in dividends since inception against net income of CAD$248 million.

Cutting corners to sustain the dividend

EIC's problems are deeper than financial engineering. According to Cohodes' proprietary research, the company is also cutting corners when it comes to safety checks to improve margins. In his presentation he cites comments from a former employee:

' What was asked of me in the meeting was to create plausible deniability when creating task cards, to allow aircraft to be released when required for our operations, even when an aircraft is unsafe for flight. … In all three of these scenarios there were no reports of safety issues. This has become a norm in our department, a general feeling of complacency that has gone on for far too long. Our management team has cultivated this through personal attacks, discreditation, and punishment for following rules when it causes an operational delay. '

If this isn't enough to discredit the business, there's also evidence that management is spending money on spurious acquisitions. EIC acquired RegionalOne in 2013 for $90 million.

RegionalOne accounts for most of EIC's EBITDA and all of the EBITDA growth but the company is headquartered in a liquor store, and there's evidence that the subsidiary is using financial engineering to boost growth, resulting in an overvaluation of CAD$350 million.

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