ISM/OSM yet again

[ats5g]

Originally Posted by justin

Practical question: if these get delisted, will they go to the "pink sheets" or something similar? In other words, less liquidity and bigger bid/ask spreads, but it'll eventually sell for something?

Justin,

IIRC, equities are quoted on the Pink Sheets and corporate bonds are quoted on the Yellow Sheets, but I think Pink Sheets, LLC owns both [yellowsheets.com redirects you to pinksheets.com]. But these are just places for market makers to only post quotes, there's no execution system. Corporate bond executions are usually reported to TRACE.

hth

[FIRE'd@51]

Originally Posted by haha

Also, I would like to comment on another poster who took comfort from the fact that 2 large banks have made loans here. IMO, this means zilch. Though I haven't spent the time to try to find out the details of this case, typically bank loans go to the front of the queue, senior to unsecured debentures. So in some circumstances, it could even be advantageous from the POV of the banks to let it slip into BK.

The two large banks are BAC and JPM. Both are part of the purchasing group; so, should the deal go through, they will have a sizable equity position in the private SLM, which will be at the bottom of the BK queue.

[Texas Proud]

Anybody who thinks that any buyer will pay many billions of dollars for an equity position only to have it go in BK is kidding themselves..

Also, the securities might be delisted from NYSE, but could they go to NASDAQ or somewhere else?? I would think that the SEC would require them to be continue to keep following GAAP and make all the filings because of the various issues that they have... they are in the hands of the general public, not the (can't remember what it is, but 144 or something?) high dollar people which do not have to file much... maybe someone who has the time could read one of the prospectus and see what they put down for filing requirements.

[haha]

Originally Posted by Texas Proud

Anybody who thinks that any buyer will pay many billions of dollars for an equity position only to have it go in BK is kidding themselves..

Of course they don't want it to go into bankruptcy, but the efficient market is saying that when the buyout was announced, risk increased. Remember, after the buyout offer the bonds in question came to rest between 16 and $17, down from $22 -$23. That is where a supposedly efficient market balances the risks and rewards on this one. If it works out, the ROI will be way in excess of TIPS. Some of that can be explained by illiquidity; and the rest, by perceived risk.

To pass on this thing is not the same as predicting bankruptcy. Anyway, at least we all are finally up to speed about what class of securities we are talking about here.

Ha

[ats5g]

Originally Posted by Texas Proud

Anybody who thinks that any buyer will pay many billions of dollars for an equity position only to have it go in BK is kidding themselves..

Also, the securities might be delisted from NYSE, but could they go to NASDAQ or somewhere else?? I would think that the SEC would require them to be continue to keep following GAAP and make all the filings because of the various issues that they have... they are in the hands of the general public, not the (can't remember what it is, but 144 or something?) high dollar people which do not have to file much... maybe someone who has the time could read one of the prospectus and see what they put down for filing requirements.

The 6/27/07 Proxy Statement says

Delisting and Deregistration of Common Stock

If the merger is completed, the Company’s common stock will be delisted from the NYSE and deregistered under the Exchange Act and we will no longer file periodic reports with the SEC on account of the Company’s common stock.

However, according to the 10-K SLM Corp currently also has the Series A + B, preferred stock, and CPI linked notes [ISM/OSM] registered under Section 12(b) of the '34 Act. Unless SLM deregisters all of its securities registered under Section 12(b), it will still be obligated to file reports with the SEC.

I also didn't see anything mentioned about the delisting of the other securities anywhere. See also Sallie Mae Transaction Facts:

Regulatory
• Sallie Mae will continue to have publicly traded debt securities and as a result will continue comprehensive financial reporting about its business, financial condition and results of operations.

- Alec

[justin]

"Sallie Mae will continue to have publicly traded debt securities"

Trading on the pink/yellow sheets would still be "public". It just wouldn't be listed on one of the main exchanges, right?

[ats5g]

Originally Posted by justin

"Sallie Mae will continue to have publicly traded debt securities"

Trading on the pink/yellow sheets would still be "public". It just wouldn't be listed on one of the main exchanges, right?

heh heh... True, I guess the PS would still technically be "public". The above caption did say that SLM "will continue comprehensive financial reporting about its business, financial condition and results of operations," which could mean that SLM will still file reports with the SEC, which indirectly results from the fact that they will have to file reports. Why? Because their other securities will still be registered under Section 12 and/or listed on a national exchange, and hence no delisting of other securities.

I left a message for Joe Fisher @ SLM IR [(703) 984-5755] just to be sure.

- Alec

[Texas Proud]

Originally Posted by haha

Of course they don't want it to go into bankruptcy, but the efficient market is saying that when the buyout was announced, risk increased. Remember, after the buyout offer the bonds in question came to rest between 16 and $17, down from $22 -$23. That is where a supposedly efficient market balances the risks and rewards on this one. If it works out, the ROI will be way in excess of TIPS. Some of that can be explained by illiquidity; and the rest, by perceived risk.

To pass on this thing is not the same as predicting bankruptcy. Anyway, at least we all are finally up to speed about what class of securities we are talking about here.

Ha

True, true... the risks have risen and the price has declined accordingly.. but the risk of BK is still pretty low for the company.. I know somebody has the percentages with the ratings (ie, AAA is .1% in any year etc...)

And yep, up to speed.. well, maybe still a little slower than other

[twaddle]

Moody's rates this issue Baa1, which has a historic default rate of less than 0.1% in any given year, but has a default rate of nearly 8% in a 10 year period.

pdf link

[haha]

Originally Posted by twaddle

Moody's rates this issue Baa1, which has a historic default rate of less than 0.1% in any given year, but has a default rate of nearly 8% in a 10 year period.

pdf link

Assuming for the moment that ratings mean anything anymore, this would appear to be a good bet at current prices, -if- one could somehow invest in 1000 such deals that were miraculously uncorrelated.

I was thinking the same thing re: the thread on viaticals. People who did this business got absolutely killed because their risks were highly correlated. When the field got going, the main market was men with AIDS. Men who thought they were terminal, as did their doctors. Then to the great joy of all right thinking people, and certainly the patients, but to the likely consternation of the viatical firms, alone came AZT and other anti-virals.

Even if a firm were able to avoid concentrated disease risk, it would still need many insured lives to get the actuarially predicted result- and then they are subject to the same risk as annuity writers- breakthroughs in big diseases such as heart disease, stroke, diabetes and cancer.

Not to mention that it would be a morbid business suitable only for misanthropes.

Ha

[twaddle]

Originally Posted by haha

Assuming for the moment that ratings mean anything anymore, this would appear to be a good bet at current prices, -if- one could somehow invest in 1000 such deals that were miraculously uncorrelated.

Yup, I like that it's exchange traded. I like that there are two similar issues (great for tax loss harvesting, arbitrage, etc). I like that it's CPI-linked. But I don't like the single-issue risk on junk bonds. Too easy to diversify that risk away by buying something like VWEHX instead.

[youbet]

And the beat goes on...............

Sallie Mae Can Expect Favorable Hearing: Financial News - Yahoo! Finance


This sure has been interesting. If somehow SLM could collect the 900 Mil penalty from Flowers et al, would that be enough to improve the credit rating on ISM/OSM? SLM would march on with degraded government subsidies but with an improved cash position.

[haha]

Originally Posted by youbet

And the beat goes on...............

Sallie Mae Can Expect Favorable Hearing: Financial News - Yahoo! Finance


This sure has been interesting. If somehow SLM could collect the 900 Mil penalty from Flowers et al, would that be enough to improve the credit rating on ISM/OSM? SLM would march on with degraded government subsidies but with an improved cash position.

Youbet, thanks for posting this very interesting article.

To me, the main risk to bond buyers is not the reduction in government subsidies- the estimates of earnings reductions put forth on the low side by Sallie Mae and on the high side by the buyout group would not matter to a bondholder. The risk is that the buyout takes place. This is nicely outlined in the final few paragraphs of the article.

In another recent article (I think it was in the business section of last Sunday's NY Times) I read that the Flowers group would be respnsible for half of the $900,000,000 breakup fee. This is a big hit to the Flowers group, and would likely be enough to annoy his limited partners severely. So he has motivation to get it done. Plus, the swing from complete to non-complete will costs Flowers Group $650,000 because he/they will lose a $200,000,000 completion fee. The same is true of Chairman Albert Lord at SLM. He stands to become close to a billionaire on completion, adding his buyout winnings to his go-home and stay home pay from SLM. What does a few $$ million mean compared to losing the deal?

From the article cited by Youbet:


The new student loan law at the center of the dispute cuts about $20 billion in federal subsidies to companies like Sallie Mae, while halving the interest rate on government-backed student loans.
Sallie Mae says the buyout group was on notice about the new law, and the anticipated reduction in earnings isn't a valid reason for the buyers to back out of the deal.
While Sallie Mae says the new student loan law will reduce its net income between 1.8 percent and 2.1 percent each year over the next five years, the buyers group forecasts a much bigger cut in profits: 14.4 percent in 2009 and 20.1 percent in 2012.
Some Wall Street analysts say the legal wrangling is nothing more than a negotiating tactic that Sallie Mae is employing in hopes of closing the deal.
Friedman, Billings, Ramsey analyst Matt Snowling said in a research note Tuesday that Sallie Mae's lawsuit is "a tactic to establish a time line to bring a possible resolution." "Faced with the cost of litigation and a disruption of a deal breaking, we suspect that Sallie is willing to take a reasonable offer," of around $55 to $57 per share, Snowling said.

Ha

[clifp]

For those still with OSM/ISM, anybody want to hazard a guess if the bonds are fairly priced or not? They jumped about 5% today on the news of the deal falling through.

Assuming the article is correct and the sides are fighting over the $900 mil deal cancelation fee and not just trying to negoiate a new deal it seems to me that bonds are underpriced. They currently are yielding just under 7% and if they are held to maturity you'll get a capital appreciation of about 45% admittedly in 10 years!

On the other hand the twist and turns of the Sallie Mae saga are far from over, the generous subsidies on student loans vendors I suspect are things of the past, and the risk premium for bonds has sky rocketed over the summer.

[twaddle]

The yield seems high to me given the rating. And I figure the rating agencies are smarter than I am about estimating the risks. I would nibble at these prices, but avoid large bites.

[youbet]

Originally Posted by twaddle

The yield seems high to me given the rating. And I figure the rating agencies are smarter than I am about estimating the risks. I would nibble at these prices, but avoid large bites.

What is the rating now, and where can I look it up?

[haha]

Originally Posted by twaddle

The yield seems high to me given the rating. And I figure the rating agencies are smarter than I am about estimating the risks. I would nibble at these prices, but avoid large bites.

I figure in a situation like this, the market knows more than the rating agencies, and they both know more than I do or could. This is a classical insider play. What really counts is known only to a few people on either side of the deal. And they are only guessing about the other players.

Ha

[twaddle]

Originally Posted by youbet

What is the rating now, and where can I look it up?

Current rating is Baa1 / BBB+ and I believe the rating agencies have them on credit watch. I.e., these ratings only reflect current conditions and they may be downgraded (again) if the LBO happens.

Check QuantumOnline.com for various fun facts about these issues.

[youbet]

Thanks.

[justin]

Originally Posted by youbet

What is the rating now, and where can I look it up?

I look at quantumonline.com.

The current rating is Baa1/BBB+. Last reviewed 8/21/07.

I think this rating places ISM/OSM firmly at the top of the heap when it comes to junk bonds. This rating is higher than essentially all of the bonds the Vanguard high yield fund holds. One step below A grade.

I wonder though, if the rating is based on current operations and not the speculative takeover that may/may not occur. In other words, SP and moody's reviewed the company's ability to pay based on their current operations and balance sheet and ignored the fact that in a year or two, they may be privately held, leveraged up with debt.

edit: cross post w/ twaddle