ISM/OSM yet again

[copyright1997reloaded]

Would you expect to get a 15% yield on adequately secured debt? (JSM)

Ha

No.

So then it becomes a calculation of risk/reward, i.e. probability of default and maybe more importantly assuming default, what they might pay.

I am seriously asking what others think, i.e. what are you guessing probability of default and payouts. I have been nibbling at things over the last few days.

 

[clifp]

I bouight some more OSM and ISM at 11.05 and 11.20 today.


I did this after digging around SLM balance sheet and SEC filing, so I'd say it was kinda of large back of the envelope calculations. Having said this I didn't do anything close to the level that somebody like Brewer or Saluki would do.

And my track record on financial is certainly nothing to brag about my first purchase of ISM/OSM was in the 21 BAC at 48 etc....

Looking at the big picture as 6/30 Sallie had 163 Billion in Assets vs 158B of Liabilities leave stockholder equity at 5.5 Billion

As Brewer says a 30x leverage ratio. Given that the vast majority of Sallies assets are loans, it doesn't take much of an error on valuing the assets to make SLM technically insolvent. The stock market is giving SLM a market cap of 5.3 billion or roughly book value.

The short term situation doesn't look too bad total expense (interest and operating expenses) is 1.8 billion so they have enough cash on hand to last 9 months, even with zero revenue. On the other hand I know they have paper constantly coming due so how much debt they need to refinance is a mystery to me. The good news is they are a profitable but much of there profitablility comes trading and hedging and who knows how they will work in the future. Their core business making Student loans appears to be slightly better than break even, since Congress has cut the profitabilty of the business in the last year. This is a big reason the Flowers Group walked away from the deal last year. An idiot SLM CEO of course didn't help.

So I don't think the market is overreacted at pricing SLM stock and bonds as likely to have a default. So what happens in the event that Sallie goes bankrupt definitely a $64K question (actually in my case a bit more.)

Looking at SLM balance sheet they have 4 major class of assets cash/short term investments; 18.5B Federal guarantee student loans 116B, private student loans 18B, and other assets 16B (all approximate).


The main asset is the federal student loans. Uncle Sam in the past guaranteed 99 on the dollar this was cut to $.95 recently and I don't know if old loans were grandfather or not. Still they won't generally default and they are safe and the government does provide a modest interest subsidy to the banks for holding/servicing them. If we say they are worth $.95 that give Sallie $110B in secure assets.
The private loans are far worse, ~10% are delinquent, 10% in deferral and interest rates fairly high lower than credit cards but higher than anything else. Sallie is out of the business cause they are unprofitable. Valuing them at $.50 on the dollar is my SWAG but if people say $.20 ok. So say $4-9 B more.
Cash and securities lets call it $16 B
other assets (good will, offices, weird off balance stuff) say $.25 = 4 B

Adding it up
Fed loans 110B
Private loans 4-9B
Cash 16B
Other 4
========
Total 124-129B vs liability of 163 B

Which works out to be roughly .75 on the dollar.

The big question to me is who is ahead of ISM/OSM bond holder in bankruptcy and who is behind. I dug as much as I could at the SEC and salliemae.com for a comprehensive list of securityies and wasn't able to find them.

From what I can tell Sallie has very little senior debt I found one 2043 6% bond for a only .275B (JSM) that was ahead of ISM/OSM. Presumably the banks would be a head of bond holders, with claims to fed guarantee loans. But it appears that most debt that Sallie has issued is similar to ISM/OSM/ as subordinated unsecured debt. SLM has securitized a modest amount of Student loans but as far as I can tell the securitized debt is off balance sheet. SLM preferred stock is getting traded at between .16 to .40 to dollar.

At the end of the day I gave my self a 30% safety margin to account for all the stuff I didn't know figured that I'd get .50 on the dollar. In the meantime I am collecting 13% interest rate, while waiting for the other shoe to drop.

 

[youbet]

Thank you very much for sharing that analysis. I'll be going in and trying to duplicate some of your work as a learning process. ISM/OSM has been quite an interesting experience!

One comment. You referred to ISM as subordinated. I believe they are unsubordinated (per quantumonline.com). Or am I looking at something incorrectly?

 

[copyright1997reloaded]

I bouight some more OSM and ISM at 11.05 and 11.20 today.

I tried to grab some in the low 10's today but missed. Tomorrow is another day, and with the way things have been going in the market, opportunities lost aren't usually lost for long .

In any case, THANK YOU for the analysis!

 

[haha]

I bouight some more OSM and ISM at 11.05 and 11.20 today.


I did this after digging around SLM balance sheet and SEC filing, so I'd say it was kinda of large back of the envelope calculations. Having said this I didn't do anything close to the level that somebody like Brewer or Saluki would do.

And my track record on financial is certainly nothing to brag about my first purchase of ISM/OSM was in the 21 BAC at 48 etc....

Looking at the big picture as 6/30 Sallie had 163 Billion in Assets vs 158B of Liabilities leave stockholder equity at 5.5 Billion

As Brewer says a 30x leverage ratio. Given that the vast majority of Sallies assets are loans, it doesn't take much of an error on valuing the assets to make SLM technically insolvent. The stock market is giving SLM a market cap of 5.3 billion or roughly book value.

The short term situation doesn't look too bad total expense (interest and operating expenses) is 1.8 billion so they have enough cash on hand to last 9 months, even with zero revenue. On the other hand I know they have paper constantly coming due so how much debt they need to refinance is a mystery to me. The good news is they are a profitable but much of there profitablility comes trading and hedging and who knows how they will work in the future. Their core business making Student loans appears to be slightly better than break even, since Congress has cut the profitabilty of the business in the last year. This is a big reason the Flowers Group walked away from the deal last year. An idiot SLM CEO of course didn't help.

So I don't think the market is overreacted at pricing SLM stock and bonds as likely to have a default. So what happens in the event that Sallie goes bankrupt definitely a $64K question (actually in my case a bit more.)

Looking at SLM balance sheet they have 4 major class of assets cash/short term investments; 18.5B Federal guarantee student loans 116B, private student loans 18B, and other assets 16B (all approximate).


The main asset is the federal student loans. Uncle Sam in the past guaranteed 99 on the dollar this was cut to $.95 recently and I don't know if old loans were grandfather or not. Still they won't generally default and they are safe and the government does provide a modest interest subsidy to the banks for holding/servicing them. If we say they are worth $.95 that give Sallie $110B in secure assets.
The private loans are far worse, ~10% are delinquent, 10% in deferral and interest rates fairly high lower than credit cards but higher than anything else. Sallie is out of the business cause they are unprofitable. Valuing them at $.50 on the dollar is my SWAG but if people say $.20 ok. So say $4-9 B more.
Cash and securities lets call it $16 B
other assets (good will, offices, weird off balance stuff) say $.25 = 4 B

Adding it up
Fed loans 110B
Private loans 4-9B
Cash 16B
Other 4
========
Total 124-129B vs liability of 163 B

Which works out to be roughly .75 on the dollar.

The big question to me is who is ahead of ISM/OSM bond holder in bankruptcy and who is behind. I dug as much as I could at the SEC and salliemae.com for a comprehensive list of securityies and wasn't able to find them.

From what I can tell Sallie has very little senior debt I found one 2043 6% bond for a only .275B (JSM) that was ahead of ISM/OSM. Presumably the banks would be a head of bond holders, with claims to fed guarantee loans. But it appears that most debt that Sallie has issued is similar to ISM/OSM/ as subordinated unsecured debt. SLM has securitized a modest amount of Student loans but as far as I can tell the securitized debt is off balance sheet. SLM preferred stock is getting traded at between .16 to .40 to dollar.

At the end of the day I gave my self a 30% safety margin to account for all the stuff I didn't know figured that I'd get .50 on the dollar. In the meantime I am collecting 13% interest rate, while waiting for the other shoe to drop.

Thanks for your analysis. It is a complex picture!

Look at the last 10 pages or so of the 10Q2. As I read it, there is a lot of asset backed debt on balance sheet, and to the extent that they can float these ABS, they plan to continue. Still, following Brewer's suggestion to look at the unpledged assets vs. the debt in the senior unsecured class that we hold, it appears to me that this would stink as a liquidation, but should be reasonable if the senior unsecured debtors were to wind up owning the company as a going concern in a Chapter 11 re-organization, given current trading prices for ISM /OSM. It seems to me that a liquidation would be very unlikely as this company both originates and services a huge amount of FFELP and private loans

Also, are you sure that JSM is ahead of ISM/OSM? I didn't find this; I see only that all these are senior unsecured debt, and as such first in line with other senior debt behind a negligible amount of bank debt in claims on the unpledged assets.

There is a fairly large hunk of "other assets" as I remember about $10b- do you have any idea what this is?

The picture is complex. Overall, I feel that the government will have to show a degree of forbearance to them so that they don't destroy the business model. We have almost 10 years to go here! Anyway, I am neither selling or buying, though happily I don't have a very large amount. Enough to hurt but not kill, should things not work well.

My expectation is that we will likely hold till maturity, or sell at a good price somewhere along the way, with no defaults. But I might have thought that about AIG too!

Ha

 

[clifp]

Thanks for your analysis. It is a complex picture!



Also, are you sure that JSM is ahead of ISM/OSM? I didn't find this; I see only that all these are senior unsecured debt, and as such first in line with other senior debt behind a negligible amount of bank debt in claims on the unpledged assets.

There is a fairly large hunk of "other assets" as I remember about $10b- do you have any idea what this is?

To be clear, the words SURE and my understanding of anything related to SLM should never be in the sentence.

The only differences I saw in the description of JSM vs ISM/OSM is the word Senior is used to describe the notes, now if that makes them higher up on the priority list for being paid. I honestly have no idea. Senior sounds better. But re reading the description it appears they are equal.

The other assets include Goodwill, which I complete eliminated in my analysis, off balance sheet securities which I valued at $.20 on the dollar and everything else which I picked a number out of my butt and called the whole thing worth .25 on the dollar.

My biggest problem was trying to figure out which assets were pledged as collateral for liabilities. If anybody can help figure this out I'd be indebted..

 

[haha]

To be clear, the words SURE and my understanding of anything related to SLM should never be in the sentence.

The only differences I saw in the description of JSM vs ISM/OSM is the word Senior is used to describe the notes, now if that makes them higher up on the priority list for being paid. I honestly have no idea. Senior sounds better. But re reading the description it appears they are equal.

The other assets include Goodwill, which I complete eliminated in my analysis, off balance sheet securities which I valued at $.20 on the dollar and everything else which I picked a number out of my butt and called the whole thing worth .25 on the dollar.

My biggest problem was trying to figure out which assets were pledged as collateral for liabilities. If anybody can help figure this out I'd be indebted..

I am heading for bed now- but that figure is given in the 10Q.

If I have time tomorrow I'll get you the page #.

Ha

 

[cute fuzzy bunny]

the words SURE and my understanding of anything related to SLM

I'm sure someone is going to lose money on this and maybe a lot of someones. And that the tax form is going to have a few entertaining bits.

 

[clifp]

I'm sure someone is going to lose money on this and maybe a lot of someones. And that the tax form is going to have a few entertaining bits.

Probably right but the upside is CAGR of 20%+ over 9 year period if SLM pays off the loans nothing to sneeze at.

The volume of these bonds is low enough that they are probably too small for mutual/hedge/institutional to spend time analyzing and accumulating. I wouldn't be surprised if a respectable fraction (say 1%) of the volume of ISM/OSM over the last couple of years has been from board members.

I am huge believer of the collective intelligent of the internet when they work on a common problem. So if, I present my analysis and HA say no you are missing X, and youbet says what about Y, then Brewer comes along and says naw you dummies, you've forgotten about Z, we are collectively better off.

At this level ISM/OSM is in lieu of putting 5-6% of my assets in Vanguard High Yield. If I find several bonds with the potential of 20%+ yields I can afford to have most go bust and I only get back 50% of my money in a few years, as long as some pay off.

 

[copyright1997reloaded]

Bought a bit of this today @ 10.65 this morning before the afternoon updraft (sung to "happy days are here again").

 

[cute fuzzy bunny]

I am huge believer of the collective intelligent of the internet when they work on a common problem.

Yahbut, we all got our heads together a little over a year ago and decided that this was a steal at around $20-something per.

Seems that so far we were wrong by 50%.

Even Ha bought some back then, and I figure when he buys something its been scrutinized so closely you could take eyeball prints off it...

I'm just pleased to have gotten in, collected a couple of interest payments and then jumped back out without losing anything.

Proved to me once again that no matter how much you know or how many people look at something, there can be ridiculous things you dont know anything about.

Did anyone every figure out who the 'mystery' buyer was who was scarfing the stuff up by the boatloads when it was around $16-17?

 

[Nords]

I bouight some more OSM and ISM at 11.05 and 11.20 today.

And people think angel investing is risky...

This type of analysis makes me happy to stick with equity.

Did anyone every figure out who the 'mystery' buyer was who was scarfing the stuff up by the boatloads when it was around $16-17?

Ace Greenberg?

 

[copyright1997reloaded]

I do not express buy or sell opinions on securities here any more, as a general rule.

Fair enough, as the risk/reward ratio isn't the best (in terms of posting buy/sell opinions here).

For myself, it is a trivial bet as I would never put serious money on a distressed situation like this. I did buy yesterday (10.65), and sold this morning (12.91) (couldn't resist the quick profit in a Roth), and in fact bought back the position lower (11.73) not too much later. But, it's sort of like playing poker on the Titantic in terms of the value of this trade vs what is happening overall.

 

[haha]

Proof that these things trade in a little world of their own is today. SLM, which has to be more risky than ISM/OSM is up 28% while ISM is up 4%.

I say set it an forget it. I cheacked all my holdings last night. The biggest one is less than 8%. One has to put his effort where it counts most.

Like I said above- I expect we will all cash out somewhere along the way, or at maturity, having had a very respectable yield.

Ha

 

[youbet]

Proof that these things trade ina little world of their own is today. SLM, which has to be more risky than ISM/OSM is up 28% while ISM is up 4%.

I say set it an forget it. I cheacked all my holdings last night. The biggest one is less than 8%. One has to put his effort where it counts most.

Like I said above- I expect we will all cash out somewhere along the way, or at maturity, having had a very respectable yield.

Ha

Agree on all points......

 

[cute fuzzy bunny]

ISM seen dipping under $10 today...


...how LOW can she GO!

 

[clifp]

ISM seen dipping under $10 today...


...how LOW can she GO!

0. Unless there is a hidden clause which requires bond holders to pay for the Chairmen's media training classes, in which case we could be on the hook for countless millions.

 

[youbet]

While the low per share price gets my attention, I'm even more interested in the low volume this lil puppy trades at. With 75M shares outstanding, we typically only see a few K change hands per day. Even if you assume that each trade is pegged to a unique trader and each trader has never traded ISM before, these numbers would lead me to believe that the vast majority of the shares are still in the hands of the original buyers. Just seems kinda stange.....

 

[FUEGO]

While the low per share price gets my attention, I'm even more interested in the low volume this lil puppy trades at. With 75M shares outstanding, we typically only see a few K change hands per day. Even if you assume that each trade is pegged to a unique trader and each trader has never traded ISM before, these numbers would lead me to believe that the vast majority of the shares are still in the hands of the original buyers. Just seems kinda stange.....

I believe it is 3 and 4 million shares of each ISM and OSM (respectively). Total par value was $75 million and $100 million for these issues. So volume may not be as low as you think. Maybe 1/2 of a percent of all shares change hands each day?

 

[clifp]

I assume this is true for most corporate bond. ISM/OSM are actually unusual in that they are exchanged traded, so we have an idea of the volume. I imagine they are plenty of corporate bond issues where there are many days when no bonds get traded.

I own a stock SENEB makers of the Jolly Green Giant canned vegetables which also has ~3 million shares outstanding, average volume is about 800 shares. The low volume is why I've given up investing in microcaps stocks.

If it wasn't for the forum ISM/OSM volume would be even lower

 

[youbet]

Yep, the IPO prospectus does say $75M which would be 3M shares. The trading summary box on Schwab clearly states "number of shares outstanding" - 75M. I've wondered about that before, so now I've finally got it straight. Thanks.

If it wasn't for the forum ISM/OSM volume would be even lower

Ain't dat the truth!

 

[youbet]

For anyone who doesn't have this cranking out of their computer automatically......

Nov 15 through Dec 14 yield for ISM, at PAR, will be 7.42%

If you bought some at ten bux, it'll yield ya 18.55% assuming SLM stays in business that long, the feds don't intervene, the check isn't lost in the mail, yadda, yadda yadda.....

 

[haha]

assuming SLM stays in business that long, the feds don't intervene, the check isn't lost in the mail, yadda, yadda yadda.....

This fed intervention is starting to look like risk #1. They are awfully quick off the blocks to arrange a "save". I hope there is a bar that will make it their business to explore this federal overreaching in courts of law.

I had thought the most likely event, following "muddle through", would be Chapter 11, followed by either being bought as a going business with the senior debt intact, or a Chapter 11 reorg with the senior debt replacing equity in a going concern. Face it, SLM performs functions that would be very expensive to replace de novo.

With Darth Vader now in charge I think the risks are much greater. I wish I owned less; but I am glad I don't own more.

Ha

 

[copyright1997reloaded]

I actually tried buying some today on the cheap (well, at least cheap for the moment) around 10.20 but missed. (I had sold the shares I bought on the 19th @11.73 on 9/25 @ 12.99.) Maybe I should stop playing with this one, and stick to non-financial stocks. (I agree with the comment regarding Darth Vader...there have been some pretty amazing moves, especially Wachovia.)

 

[cute fuzzy bunny]

I'm thinking risk #1 is that the fed has their hands plenty full and runs out of money before they can bail them out when they crash and burn.