ISM/OSM yet again

[FIRE'd@51]

Thanks for the summary report, youbet. I haven't had a chance to listen yet. I am encouraged that they are expecting positive earnings for 2009. So long as they have earnings, we can breathe more easily.

The interest payments will drop off pretty sharply after this month's, due to the low inflation in November and December. I suppose this could put some downward pressure on the price near-term, but probably nothing serious.

 

[FUEGO]

From yesterday's Seeking Alpha:

SLM Exchange Traded Debt: Attractively Valued -- Seeking Alpha

The author of the article gives ISM/OSM good reviews and seems to think they are mispriced. Not sure if they fly under the institutional investor's radar as the author suggests, since there used to be institutional ownership of some of these.

The author points out what I pointed out 2 posts above. That is, you are getting investment grade BBB- debt with a crazy high yield.

Maybe the deflation scare is holding these CPI-linked securities down? Heck, with zero additional coupons they are still yielding ~10-11% YTM.

 

[RustyShackleford]

Heck, with zero additional coupons they are still yielding ~10-11% YTM.

You mean the real yield is 10-11 %, wow ! (The moneychimp YTM
calculator chokes with "error" when I put in 2%, 11 -> 25, and 8 years
til maturity).

What happens to the interest payments when CPI declines, does it have
a floor at 2 or 2.05 %, respectively ?

 

[FUEGO]

You mean the real yield is 10-11 %, wow ! (The moneychimp YTM
calculator chokes with "error" when I put in 2%, 11 -> 25, and 8 years
til maturity).

What happens to the interest payments when CPI declines, does it have
a floor at 2 or 2.05 %, respectively ?

IIRC no floor other than zero. You'll have to check the prospectus for additional info. Worst case, assuming they pay back par and make required interest payments, is 10-11 real return assuming negative inflation for 8 more years.

 

[haha]

IIRC no floor other than zero.

This seems to be correct. From the offering prospectus:


The Interest Rate for the Interest Period beginning on the Closing Date will be 6.398%. Beginning February 15, 2006, the Interest Rate on the Notes will be adjusted monthly and will be linked to changes in the Consumer Price Index. The Interest Rate for the Notes for each month thereafter will be a rate determined as of the applicable Interest Determination Date pursuant to the following formula:

[(CPIt – CPIt-12) / CPIt-12] + Spread

Where:

CPIt = Current Index Level of CPI (as defined below), as reported on Bloomberg CPURNSA;

CPIt-12 = Index Level of CPI 12 months prior to CPIt;; and

Spread = 2.05%.

In no case, however, will the Interest Rate for the Notes be less than the Minimum Interest Rate, which will be 0.00%.

Worst case, assuming they pay back par and make required interest payments, is 10-11 real return assuming negative inflation for 8 more years.

Yes, in the case of OSM, if there were no interst payments, but the bond redemmed at par on 3/15/2017 we would have earned about 10 1/2%. Clearly the question on the market's mind is will this happen.

I believe that the chances of 8 years of deflation are smaller than the chances of being hit by lightning at least once in those eight years.

ha

 

[RustyShackleford]

IIRC no floor other than zero. You'll have to check the prospectus for additional info. Worst case, assuming they pay back par and make required interest payments, is 10-11 real return assuming negative inflation for 8 more years.

Better than that actually. I'd say 10-11% NOMINAL return, which translates
to even better REAL return with net deflation over the period !

 

[FUEGO]

Better than that actually. I'd say 10-11% NOMINAL return, which translates
to even better REAL return with net deflation over the period !

.

 

[youbet]

Fuego - Thanks for the article. Interesting.

Anyone - Yahoo says ISM traded in excess of 400k shares today. Seems awfully high. Anyone hear anything?

 

[haha]

Fuego - Thanks for the article. Interesting.

Anyone - Yahoo says ISM traded in excess of 400k shares today. Seems awfully high. Anyone hear anything?

My Brokerage Supplied trading platform says the same. Identifies one block trade. Also OSM shows volume of 1,237,251. Also one block trade identified. Last trade size was 20,000 shares. I cannot understand where this liquidity could have come from- how were the shares found to satisfy this demand without moving the price much more than it moved?

Intersting also that today was a moderate down day for SLM stock. Maybe someone did an arbitrage between these ISM, OSM and some $1000 face similar bonds.

Ha

 

[FIRE'd@51]

From yesterday's Seeking Alpha:

SLM Exchange Traded Debt: Attractively Valued -- Seeking Alpha

FWIW, at prices of 11, the YTM's are actually about 18% using a 3% inflation assumption, not the 22% the article says. Inflation would have to exceed 5% in order for the YTM's to be in the 22% range. The author doesn't say what inflation assumption he used.

Other than that, an interesting article, especially this comment:

"Interestingly, SLM has other debt issues of roughly the same maturity which are currently trading with a yield-to-maturity slightly below 10%."

although it doesn't say what the ratings of those issues are. I would guess not BBB-


Just checked JSM, and at a price of 12 it's YTM is about 12.7%. JSM is similar to ISM/OSM in that it is senior unsecured debt with a BBB- rating. However it's maturity is 2043, so it is more risky from a credit risk point of view, plus it has no inflation protection.

 

[FUEGO]

FWIW, at prices of 11, the YTM's are actually about 18% using a 3% inflation assumption, not the 22% the article says. Inflation would have to exceed 5% in order for the YTM's to be in the 22% range. The author doesn't say what inflation assumption he used.

{I sure hope this post doesn't get deleted due to an ancillary political nature since SLM may benefit greatly by democratically proposed student lending bailouts}


I noticed that too. I think the seeking alpha writer was using near-recent CPI of 5% or so and extrapolating that forward till maturity, without realizing there is a 3 month delay between CPI numbers and the interest payments based on those CPI numbers.

 

[clifp]

{I sure hope this post doesn't get deleted due to an ancillary political nature since SLM may benefit greatly by democratically proposed student lending bailouts}


I noticed that too. I think the seeking alpha writer was using near-recent CPI of 5% or so and extrapolating that forward till maturity, without realizing there is a 3 month delay between CPI numbers and the interest payments based on those CPI numbers.

I think the author should have googled OSM and ISM and checked with the experts on this thread, LOL. I am not sure if I am happy to see these OSM/ISM appear above the radar screen or not.

 

[FUEGO]

I think the author should have googled OSM and ISM and checked with the experts on this thread, LOL. I am not sure if I am happy to see these OSM/ISM appear above the radar screen or not.

If you are trying to exploit market inefficiencies and take advantage of lack of information about these two issues, then "below radar" seems a good place for these two to fly. I wonder if anyone is/was nibbling in the sub $11 range here?

I think the last bit I picked up was at $13 or so, and I didn't want to get more exposure to this issue when there's a general fire sale on so many other issues and asset classes.

 

[haha]

I think the last bit I picked up was at $13 or so, and I didn't want to get more exposure to this issue when there's a general fire sale on so many other issues and asset classes.

The trouble is that for many securities the fire sale may be premature as they are still burning.

 

[FUEGO]

The trouble is that for many securities the fire sale may be premature as they are still burning.

That remains to be seen. I know we are throwing buckets full of stimulus on those flames. The question is whether the buckets are full of water or gasoline.

{Hopefully this post won't throw the ISM/OSM thread into the FIRE-related political topics thread or get this post deleted and/or moderated}

 

[clifp]

I bought some at $11 back in Sept.

 

[SC]

Bad news for Sallie Mae

Renewing a battle waged during the Clinton administration, President Barack Obama proposed to eliminate private lenders from the student-loan market and have the federal government make all such loans directly.

In his spending blueprint for fiscal 2010, Mr. Obama said the shift to the Department of Education's so-called direct-lending program would save more than $4 billion a year in subsidies paid to private lenders and eliminate uncertainty for students "because of turmoil in the financial markets."

Direct-Lending Program for Student Loans Proposed; Sallie Mae Shares Drop - WSJ.com

That's a big "D'OH" for holders of these bonds.

At the moment SLM is down 40% to $5, ISM and OSM are down about 20% to ~$8. Could be a huge buying opportunity, or the last chance to board a sinking ship.

 

[haha]

Direct-Lending Program for Student Loans Proposed; Sallie Mae Shares Drop - WSJ.com

That's a big "D'OH" for holders of these bonds.

At the moment SLM is down 40% to $5, ISM and OSM are down about 20% to ~$8. Could be a huge buying opportunity, or the last chance to board a sinking ship.

Well this is definitely not good news. I have been wondering what has been weighing on SLM and the bonds lately.


However, this does not necessarily mean that the bonds will default. First, the student lenders have friends in congress. Next, it may become clear that once the government infrastructure to make and service these loans is paid for the program would lose money, not save it. It is quite possible that although SLM might be less profitable under a 100% federal funding scheme, it will still be necessary to make and service these loans. No reason Sallie couldn't be a major player here. As bondholders we are in a better position than the common stock holders

When it rains, it pours, doesn't it?

Ha

 

[haha]

Here is an SLM response to this plan:

Sallie Mae Issues Statement: Financial News - Yahoo! Finance

 

[clifp]

I'm still confused, I thought that private student lending had become very unprofitable, enough so that most banks and Sallie Mae were decreasing it or in some case getting out of the business.

While I guess in the future private lending could potentially more profitably than than guarantee lending business, they aren't currently due to high defaults, with no government repayment of principal.

 

[youbet]

It seems that this news has driven the price of ISM/OSM to levels near the typical historical default recovery rate for unsecured senior dept. Therefore I see little point in bailing out now in the $8 - $9 range as that amount would likely be recovered if default occurs. (No guarantees, of course!)

My real interest is in whether or not SLM can continue as a viable concern operating in the private student loan arena without gov't guarantees or subsidies and with the gov't as a direct competitor. I'd like to think I can hold my ISM until maturity and collect at PAR. The return would be fabulous and the timing is good considering my age.

In the meantime, ISM is a small portion of my net worth and I already have what I consider the worst case scenario (default - lengthly period of non-access to funds - eventual recovery of about one-third of PAR) built into my plans.

This has really been an adventure!

 

[youbet]

Here's an interesting read:

Sallie Mae Gets in a Fight | Page 2 of 2 | Banks | Financial Articles & Investing News | TheStreet.com

Note:

More recently, Sallie Mae has been able to take full advantage of all the recent credit market-stimulus plans. It has participated in the TALF program, with the government buying up SLMA bonds with the intent to juice the credit markets


Does this mean that if the gummint goes into business in competition with SLM and causes SLM to fail and default on its debt, that the gummint will have a bunch of SLM bonds it owns default?

Would the gummint have priority over private debt holders in recovering funds if SLM defaults? Are private citizen ISM/OSM holders behind their gummint in line to collect whatever is left when/if Sallie drops her drawers?

 

[youbet]

If ya don't wanna read..... watch this:

Videos On Stock Market & Wall Street News, Trading & Investing News & Market Analysis Videos | TheStreet.com

This guy seems to think the gov't will be overwhelmed by the prospect of developing an organization to service student loans (with high default rates) and will eventually decide to continue to dole the job out to private firms such as SLM, Citi, etc.

Maybe......

 

[haha]

If ya don't wanna read..... watch this:

Videos On Stock Market & Wall Street News, Trading & Investing News & Market Analysis Videos | TheStreet.com

This guy seems to think the gov't will be overwhelmed by the prospect of developing an organization to service student loans (with high default rates) and will eventually decide to continue to dole the job out to private firms such as SLM, Citi, etc.

Maybe......

Statists don't give a damn if what they takeover doesn't work, they just want the power and control. Still, I think we will eventually see considerably higher quotes on ISM/OSM, just because of the political process.

There must be some Democratic lawmakers around who can see the risky fallout if they take this over and can't adequately administer the program. How about the prospect of having millions of student borrowers calling their congresspersons seeking help with their payback schedules?

It would be much surer, safer, and likely cheaper also, to just squeeze the private lenders on the amount of subsidy provided. The lenders will have been frightened enough by this shot across the bow to "flexible" in any negotiations.

This has been a truly awful investment, but from where I sit at least although I don't want any more exposure to it, it could be OK at current or even higher quotes.

Ha

 

[Darryl]

Dec. 07 buy at $19.90 and Jan&Feb 08 sale at $19.79 & $20.42 to close out.

Let me take a moment again to say Thank You to those of you who very politely told me I didn't know what I was doing.