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OSM is trading below 18 which is a real YTM of nearly 6%. This is a very attractive return for a fixed income instrument. The risk to a buy and hold investor, of course, is that SLM defaults on its debt. Here's what I'm thinking.
SLM shareholders vote on the proposed deal August 15. IMO, they will approve the deal at 60, given SLM is currently trading around 48, which will force Flowers' hand. However, I think Flowers et al will demand a renegotiation of the deal at a considerably lower price given the unfavorable legislation that is working its way through Congress and is likely to be signed by President Bush. There's even a possibility that Flowers et al will walk away from the deal altogether. So where does that leave the bondholders?
Case I: Flowers walks away claiming the new legislation has materially affected the business going forward. Although, the business is less profitable going forward, the company should remain a going concern and the bondholders get paid what they expect (i.e. no defaults). This scenario may even result in an increase in the bond's rating.
Case II: Deal is done at a lower price (possibly significantly lower). Assuming the % debt involved in the deal remained the same, it seems this would result in less debt overall for SLM, which would be positive for the bondholders. This case is harder to evaluate.
Case III: Deal is done at the original $60 price - this would obviously be the worst case for current bondholders, and coupled with the likely new legislation, could put the future of SLM in peril. For this reason, I can't imagine this Case actually taking place.
At current ISM/OSM prices, is anyone interested in dabbling in these notes under the assumption of Cases I or II being the likely outcome? And does anyone have any strong feelings as to which case will occur? Or, do I have it all wrong? I'd be interested in thoughts from those of you who have followed this saga.
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