Charlestown Capital Advisors, LLC Releases Letter to Signature Group Holdings, Inc.

NEW YORK, March 28, 2013 /PRNewswire/ -- Charlestown Capital Advisors, LLC ("Charlestown Capital"), a private investment and merchant banking firm based in New York, today announced the release of a letter to the Board of Directors of Signature Group Holdings, Inc., (OTCQX: SGGH) ("Signature Group Holdings", "the Company").

Mr. Raj Maheshwari, Managing Director of Charlestown Capital, commented, "After waiting patiently in private for too long, today we are making public our deep dissatisfaction with the management of Signature Group Holdings, Inc. (OTCQX:  SGGH). As detailed in the attached letter we sent to the Independent Board of Directors on March 11, 2013, we are very troubled by the decline in shareholder value that we believe has resulted from the Company's failure to maximize  its most valuable asset, the $900 million in Net Operating Losses (NOLs), as well as its continued cash burn. We raised our concerns with the Company's management this week.  We attempted to engage in a frank and constructive dialogue of specific steps and a realistic timetable for action. However, all we heard in response were vague reassurances that management had an effective strategy to use the NOLs. Moreover, there was no hint to us that the Company's cash burn would end in the foreseeable future. Unfortunately, we now believe that management does not seriously share our concerns that real change is needed.

It has been three years since SGGH emerged from bankruptcy. We believe that thirty-six months is sufficient time for the Chief Executive Officer and his team to deliver results to shareholders. By our calculation, based on publicly available information, in our opinion the liquidation value of SGGH now far exceeds the market value of the Company, without giving any value to the NOLs.

We have been patient, but that patience is being exhausted. We are considering our alternatives to protect our and the shareholders' interests. While we will keep the lines of communication open, the Company needs to understand that the status quo is unacceptable to us."

Letter to the Board of Directors

March 11, 2013

Mr. G. Christopher Colville
Mr. John Koral
Mr. Patrick E. Lamb
Mr. Philip G. Tinkler
Signature Group Holdings, Inc.
15303 Ventura Boulevard
Suite 1600
Sherman Oaks, CA 91403

Dear Messrs. Colville, Koral, Lamb and Tinkler:

Our investment company, Charlestown Capital Advisors, LLC, and its affiliates, owns an equity position in Signature Group Holdings, Inc. (OTCQX: SGGH). We are writing to express our growing frustration and dissatisfaction with SGGH's failure to maximize the value of its assets since emergence from bankruptcy almost three years ago. We believe that many other shareholders are similarly frustrated and dissatisfied.

We have been shareholders of SGGH for several years.  We are particularly aware of and appreciate the potential value of the company's unique and large tax asset. During the contentious proxy contest last year, we considered management's arguments as well as the arguments of the so-called "dissident group", specifically the views of Messrs. McIntrye, Blitzer and Peiser. After due consideration, we voted for the current board with considerable enthusiasm, almost exclusively because of the involvement of Equity Group Investments ("EGI"). Knowing of EGI's impressive track record in making good use of Net Operating Loss Carry Forwards (NOLs) in other vehicles, we felt EGI would be very qualified to assist SGGH in unlocking the value of the company's largest and most valuable asset. We also assumed, given our experience and our conversations with management and board members, that the realization of value could happen within a reasonable period, say twelve months.

It looks like our assumption will be proven to be wrong. It has been almost nine months since that vote and in our view nothing has changed - absolutely nothing. 

During the proxy contest, in the course of our conversations with the dissident group, we discussed their assertions that Mr. Noell was neither incented nor qualified to execute the company's strategy of acquiring operating businesses that would maximize the value of the NOLs. Given the involvement of EGI, we were willing to give Mr. Noell the benefit of the doubt and vote our shares with management. 

Unfortunately, it now appears to us that there may have been real merit to the dissidents' arguments that management did not have a viable plan to realize value from the NOLs. This lack of a plan may also explain why the CEO has not been able to execute a strategy to use the NOLs to the benefit of shareholders. As the dissidents argued, there is nothing in Mr. Noell's background to suggest he has any direct experience running a publicly traded company, especially one dependent on a strategy requiring real expertise in mergers and acquisitions. Mr. Noell has spent most of his career as a corporate or asset-based lender. Nor does he appear to us to have the management skills relevant to SGGH's situation. At this point, we do not believe that Mr. Noell will lead SGGH into the next phase of its evolution.

It is remarkable that in almost three years, with interest rates at historic lows and credit spreads extremely favorable to the issuers of debt, SGGH could make only one small acquisition (NABCO). While we acknowledge that NABCO has been a good transaction, it is not material to the value of SGGH's equity. It appears to us that SGGH's persistently depressed share price reflects the market's concern that the current state of affairs will persist and simply lead to the NOLs "withering on the vine."

We believe the company is squandering an incredible opportunity to build a profitable enterprise. It is a cause of great concern to us that the cash burn has not stopped almost three years post-emergence.  While we recognize that several factors are contributing to the company's cash burn, to us the current employee head count defies logic. In addition, we do not see a correlation between executive compensation and business outcomes at SGGH. If our assessment is wrong, we would welcome an opportunity to better understand the value each employee brings to the company and how executive compensation and incentives are tied to the value of SGGH equity.

We believe it is now time for the Board of Directors to meet its responsibilities to the shareholders consistent with its fiduciary duties by undertaking the following steps:

1. Identify and close a meaningful acquisition as soon as practical;
2. Aggressively encourage greater engagement of EGI in identifying and executing M&A transactions that can maximize the value of the NOLs;
3. Demand that employee head count and other overhead be dramatically reduced;
4. Begin a search for a new CEO whose skill set is more consistent with a publicly traded acquisition vehicle; and
5. Withhold renewal of executive and management contracts in cases where the employees are found not to be executing the company strategy as laid out by the Board.

We believe these simple steps will improve the equity value of SGGH and will be viewed favorably by shareholders and potential M&A targets. We are very confident that a majority of shareholders would enthusiastically support such actions by the Board of Directors.

Charlestown Capital also requests a meeting with the independent directors of SGGH in order to:

1. Further discuss our concerns;
2. Engage in a constructive discussion of ways to increase shareholder value of SGGH; and
3. Better understand the Board's future course of action and its plan to find the right leadership of the company.

Please note that we have retained legal counsel in this matter. We are prepared to exercise our rights as shareholders of SGGH including public disclosure of our efforts to maximize shareholder value. Though we hope to avoid the necessity of a proxy contest, we are fully prepared to propose and elect our own slate of directors at SGGH, perhaps including some of the current independent directors.

We look forward to expressing our concerns directly to the Board and having a constructive dialogue with you.

Thank you for your consideration. We appreciate your service to the company.

Sincerely,

Raj Maheshwari
Managing Director

About Charlestown Capital Advisors, LLC

Charlestown Capital Advisors, LLC is private investment and merchant banking firm founded in New York City in 2005. Charlestown invests in and advises emerging companies across multiple sectors and multiple geographies.

General  Inquiries:  
Vivian Chen
Managing Director
Grayling
Phone:  347-481-3711
Email:  [email protected]

SOURCE Charlestown Capital Advisors, LLC