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Re: Heh, ISM/OSM again
Old 04-13-2007, 01:59 PM   #41
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Re: Heh, ISM/OSM again

I am trying to understand why the spread between OSM and ISM is so large currently (1 hour before market close) OSM is 21.32B 21.33A
and ISM is at 20.89B and 20.99A. ISM pay an extra $.0125 year interest payment but mature 9 months later than OSM, without whipping out my calculator I thought the YTM on both issue should be very close.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 01:59 PM   #42
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by FIRE'd@51
If rates have gone down, the bond will trade right around par (the market will assume it will be called). If rates have risen the bond will trade at a discount (the market will assume it won't be called).
That's why I assumed it would be volatile. It'll trade some days like a 35-year bond and other days like a 1-year bond with the market always trying to predict the potential call date.

BTW, anybody else who thinks that those large blocks that traded the other day were insider trades? Retail investors are always the last to know. :P
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:03 PM   #43
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by clifp
I am trying to understand why the spread between OSM and ISM is so large currently (1 hour before market close) OSM is 21.32B 21.33A
and ISM is at 20.89B and 20.99A. ISM pay an extra $.0125 year interest payment but mature 9 months later than OSM, without whipping out my calculator I thought the YTM on both issue should be very close.
Unsettled market and relative illiquidity of ISM (Smaller issue).

I note that the prices of both are rising as the market starts to figure out what I thought: SLM is a better target for a large, creditworthy bank rather than a private equity shop. If a AA-rated bank buys SLM, it would be a definite positive for bondholders (look at the spread on WFC debt vs. SLM, for example).
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:08 PM   #44
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Re: Heh, ISM/OSM again

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Originally Posted by wab
That's why I assumed it would be volatile. It'll trade some days like a 35-year bond and other days like a 1-year bond with the market always trying to predict the potential call date.
Doesn't work quite that way. The bond won't trade above the call price by more than the accrued interest because investors fear it will be called. Take a look at a chart for PFX as Brewer has suggested.

If rates have risen so that the bond trades at a discount, it will trade pretty much like a non-callable bond.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:13 PM   #45
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by brewer12345
I note that the prices of both are rising as the market starts to figure out what I thought
ISM is back down again. The market hasn't figured anything out. The volume indicates it's just a few retail traders like us.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:16 PM   #46
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Re: Heh, ISM/OSM again

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Originally Posted by wab
ISM is back down again. The market hasn't figured anything out. The volume indicates it's just a few retail traders like us.
We'll see. I still cannot see how his would work as an LBO. That's one of the reasons I bought the bonds in the first place.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:28 PM   #47
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Re: Heh, ISM/OSM again

Heh, and now the bid is back up, in size.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:30 PM   #48
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Re: Heh, ISM/OSM again

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Heh, and now the bid is back up, in size.
Yeah, that was me. (Kidding. I'm not interested in speculating on bond ratings.)
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:45 PM   #49
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Re: Heh, ISM/OSM again

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Originally Posted by brewer12345
We'll see. I still cannot see how his would work as an LBO. That's one of the reasons I bought the bonds in the first place.
Rumor is now that Blackstone is the buyer. That means LBO, right?
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:47 PM   #50
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Re: Heh, ISM/OSM again

Well, one thing this does help explain is why PFK has been trading at a significantly lower YTM, even though it is a single A rated piece of paper just like ISM/OSM. The "market" must have known something.

Nevertheless, those who bought this for the inflation-protected payment stream will probably be OK (unless the LBO were to lead to a default). The real question is do you add to your position (assuming it isn't already too large) if these puppies trade significantly lower.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 02:51 PM   #51
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by wab
Rumor is now that Blackstone is the buyer. That means LBO, right?
Maybe, and that is what the bondholders are obviously afraid of. But if they stack a ton of leverage on SLM, it will get downgraded which will kill their access to cheap financing for student loans. So I don't see how you could do an LBO without killing the business.

A reasonable precedent is probably GMAC. Private equity deal that involved no incremental leverage to finance the transaction. But I think a large bank could afford to pay more if SLM is for sale.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:02 PM   #52
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Re: Heh, ISM/OSM again

Bloomberg sez:

The perceived risk of owning Sallie Mae's bonds surged. Credit-default swaps based on $10 million of the company's bonds more than doubled to $76,000 from $36,500 yesterday, according to New York-based broker Phoenix Partners Group. The contracts, used to speculate on the company's ability to repay its debt, were the most actively traded today, according to Phoenix.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:10 PM   #53
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by wab
Bloomberg sez:

The perceived risk of owning Sallie Mae's bonds surged. Credit-default swaps based on $10 million of the company's bonds more than doubled to $76,000 from $36,500 yesterday, according to New York-based broker Phoenix Partners Group. The contracts, used to speculate on the company's ability to repay its debt, were the most actively traded today, according to Phoenix.
Uhuh. But that implies a 76BP spread to treasuries. ISM is priced more like a 170BP spread.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:13 PM   #54
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Re: Heh, ISM/OSM again

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Uhuh. But that implies a 76BP spread to treasuries. ISM is priced more like a 170BP spread.
Interesting. Thanks for the translation.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:15 PM   #55
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Re: Heh, ISM/OSM again

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Originally Posted by wab
Interesting. Thanks for the translation.
I should also mention that the CDS market is very much not transparent, especially compared to public equity markets. Sometimes funny things happen in the short term in the CDS market that make no fundamental sense. So it can be hard to infer stuff from a given CDS quote.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:28 PM   #56
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Re: Heh, ISM/OSM again

Brewer do you know who would have to approve these transaction? It seems to me that Congressional Democrats who are big fans of expanding Student Loans would less than thrilled about some greedy LBO firm taking over Sallie Mae and creating turmoil for student loans. Or is this just wishful thinking on my part?

Interestingly I was about to put OSM/ISM as a low risk recommendation for a client of mine. I must say when researching this investment, I didn't really consider an LBO as a possible risk. (A Fanne Mae type scandal was certainly a possibility though.)
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:35 PM   #57
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Re: Heh, ISM/OSM again

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Brewer do you know who would have to approve these transaction?
Lots and lots of people. The most stringent of which are probably the FDIC and the commerce department. But no doubt Congress would horn in, and I imagine that a brief trawl of teh regulation section of their annual report woudl net an alphabet soup of agencies that would get to opine on any deal. Since SLM owns an industrial loan complany and there is currently a moratorium on transfers of t hese, I would think that would be issue #1.
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:35 PM   #58
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Re: Heh, ISM/OSM again

I'm trying to come up the learning curve on CDS. You guys are in bonds 301 and I'm back in bonds 102. Does the 76bp mean if I buy the swap, I pay the seller 76bp per year, and he guarantees me principal and interest (or just principal) in the event of a default?
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Re: Heh, ISM/OSM again
Old 04-13-2007, 03:55 PM   #59
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Re: Heh, ISM/OSM again

I just saw an analyst from Keefe, Bruyette Woods in a video clip from earlier today. I had thought (hoped) that the need for Sallie Mae to retain a good credit rating would be an important business consideration for any acquirer, even PE. This analyst felt however that since most of their loans are securitized and that perhaps more securitizations could be done, this need for a good credit rating in itself might not be a block. He did feel that a bank acquirer might have other business reasons to be able pay more for SLM than this (assumed) current offer.
My memory from their 10 K is that they have a lot of student loans on their own balance sheet, especially the private loans. I suppose however that if jumbo non-compliant mortgages can be securitized, why not private student loans?

Frankly it is beyond my ability to guess. Overall not good news, and possibly somewhat bad. A positive factor, saying Blackstone does succeed with a takeover, is that they have to maintain the business on order for them to come out the other side with a good ipo price.

Ha
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Re: Heh, ISM/OSM again
Old 04-13-2007, 08:15 PM   #60
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Re: Heh, ISM/OSM again

Quote:
Originally Posted by FIRE'd@51
I'm trying to come up the learning curve on CDS. You guys are in bonds 301 and I'm back in bonds 102. Does the 76bp mean if I buy the swap, I pay the seller 76bp per year, and he guarantees me principal and interest (or just principal) in the event of a default?
Exactly. The tenor of the contract can be from 1 to 10+ years, although usually when you see babble from the media about this they are talking about 5 year contracts. Note that the contract may expire before the bond does.
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