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Old 10-11-2007, 11:58 AM   #41
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I assume this kind of news would drive the wedge between the Flowers Group and SLM even deeper.

Sallie Mae Lost $344 Million in 3Q: Financial News - Yahoo! Finance


This whole caper has helped me understand the concept of individual issue risk!
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Old 10-11-2007, 12:07 PM   #42
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This whole caper has helped me understand the concept of individual issue risk!
The best education ever!

Take a rock-solid business with government backing and prime-rated debt. Hmm, how can we blow that up? Oooh, I know! How about a few college marketing scandals, followed by an LBO, followed by the government withdrawing their backing. Oh, and toss in a liquidity crisis for good measure!
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A Lot Not To Like
Old 10-11-2007, 02:15 PM   #43
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A Lot Not To Like

among the personalities involved in this SLM "deal".

In the Trenches at Sallie Mae - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
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Old 10-11-2007, 11:57 PM   #44
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Very interesting read Ha. Thanks.
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Old 10-12-2007, 12:41 AM   #45
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The best education ever!

Take a rock-solid business with government backing and prime-rated debt. Hmm, how can we blow that up? Oooh, I know! How about a few college marketing scandals, followed by an LBO, followed by the government withdrawing their backing. Oh, and toss in a liquidity crisis for good measure!
Interestingly the very first security I ever purchased was a corporate bond. I had saved up $2000, and with a 2 year scholarship for college didn't really need the money until my junior year. I found out that I could buy a bond from a blue chip company that was yielding more than 10% with only a 3 year term (rates were higher in 1977). I asked the broker if it was safe to buy this bond and he said yes I think despite the recent trouble the company would certainly be around to pay back the money. Unfortunately for me the company was Chrysler and the news went from bad to worse to threatened bankruptcy. Luckily Lee Iaccoca got a government loan guarantee, and I got paid off. But I remember cursing myself that I had all the agony associated with Chrysler, but unlike stock holder who would have made a fortune in Chrysler stock, I all I got back was my lousy 10% interest.

Fast forward, 30 year latter to my second individual corporate bond purchase ever, namely ISM and OSM. Once again a seemly safe boring bond turns into anything but dull.

So far this education on the perils of individual bond purchasing has cost me a quarter worth of tuition at a public university in realized losses, and entire years worth of tuition a private school in paper losses. I wonder if Lee Iaccoca is still available?

The morale of the story is that individual bond purchases have none of the upside of stocks but much of the downside. I thought I learned this 30 years ago but I guess not. The obvious take away for the rest of you is if I buy a bond, you should sell!!
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Old 10-12-2007, 11:11 AM   #46
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The morale of the story is that individual bond purchases have none of the upside of stocks but much of the downside.
That's an incorrect assumption based on your limited experiences in the fixed income universe...if you had bought JSM at 17 you'd be sitting on a 12% gain right now. But your point that less diversification = more risk certainly holds true for bonds as well as stocks.
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Old 10-12-2007, 11:31 AM   #47
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But I remember cursing myself that I had all the agony associated with Chrysler, but unlike stock holder who would have made a fortune in Chrysler stock, I all I got back was my lousy 10% interest.
I think this is a very important point, easy to forget when we are looking for income. Years ago I had a great older broker who owned a small botique shop. This was before a lot of rules and regs about information control. His first rule was don't buy anything other than a treasury or a group of AAA municipals unless you have reason to expect a speculative payoff that more than compensates for what is inherently an unknowable risk. I got the feeling that he only included municipals because people hate to pay tax. His second rule was don't buy anything where you don't have relationships with the executives involved.

The second rule is less useful today when investing has become democratized and rule-burdened. I try to substitute an awareness of insider buying/selling for this aspect.

Today when stocks only go up I don't expect many people would be in a mood to listen to this fuddy-duddy advice, but its time will likely come again.

Ha
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Old 10-16-2007, 11:44 PM   #48
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I used to own some FDC, which was recently taken private via LBO. This will give you an idea of what the debt of a completed LBO might yield: 10.875%!

KKR Bankers Sell $2.2 Billion of First Data Bonds
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Old 10-17-2007, 06:58 AM   #49
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That's an incorrect assumption based on your limited experiences in the fixed income universe...if you had bought JSM at 17 you'd be sitting on a 12% gain right now. But your point that less diversification = more risk certainly holds true for bonds as well as stocks.
I am not saying that you can't make very good returns on corporate Bonds. The total return on ISM/OSM assuming 2-3% inflation is in the 11-12% CAGR and probably a similar number for JSM. I know that big smart bond investor routines buy highly distressed bonds for 5 to 20 cents on the dollars and often triple their money, when the company comes out of bankruptcy.

I am just saying that there is a risk premium with individual investment grade corporate bonds, and has Ha Ha's broker wisely said the risk is highly unknowable. In the case of ISM/OSM there was no opportunity for speculative pay off. My orginal post when I decided to buy these things on Feb 25 was this.

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Well I sat down and created a spreadsheet to compare ISM vs TIPs. ISM is better, assuming you can live with the risk that Congress decide to get out of the business of guarrantee Student Loans which would impact Sallie Mae. Assuming a reinvestment of dividends for both ISM and a mythical 11 Year TIPs bond @2.375%. (Which obviously isn't practically because of the monthly dividends from ISM)
It looks like ISM provides a future value that is almost 200 basis points higher than the same TIPs at the current price of $21.32

The major assumption I made was that ISM approached par at either a linear rate or an exponential rate of 1.3% per year. Varying interest rates didn't seem to matter much.
I was aware of some risk associated with buying these bonds but as it turns out I had no clue about any of the real risks. My upside is clearly limited. I sold 2012 TIP bond with 3.5% coupon (and current real rate of around 2.3%) and used the proceeds to buy ISM and OSM at prices right around 21.30. In fact, I intend to hold the bonds to maturity and so very may well end up $25k richer in 2017 than if I had done nothing.

Now obviously in hindsight I wish I hadn't made the purchase. The realization for me on this whole experience is I don't have the temperment for corporate bond purchases. The small incremental income isn't for me worth the head ache. It is somewhat ironic that at least dozen stocks in my portfolio have had bigger price swings in the last 8 months then the 20% drop in ISM/OSM. In some case I've sold the stock, in other case I've bought more, but I haven't lost a nights sleep.

For me bonds are something you buy, you hold until they mature, or you buy a bond fund. I'm finding that is not something you can do with corporates.
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Old 10-17-2007, 12:29 PM   #50
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Now obviously in hindsight I wish I hadn't made the purchase. The realization for me on this whole experience is I don't have the temperment for corporate bond purchases. The small incremental income isn't for me worth the head ache. It is somewhat ironic that at least dozen stocks in my portfolio have had bigger price swings in the last 8 months then the 20% drop in ISM/OSM. In some case I've sold the stock, in other case I've bought more, but I haven't lost a nights sleep.

For me bonds are something you buy, you hold until they mature, or you buy a bond fund. I'm finding that is not something you can do with corporates.
Similar feelings here. I've taken worse hits on equity positions and shrugged it off but, for some reason, the SLM/ISM/OSM situation has been irritating. As others have already mentioned, I suppose it's because I picked up a few of these to place in the income generating portion of my portfolio where I place "sure thing" income producers. What I wound up with is a speculative holding!

They did poop out another interest payment this week though!
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Old 11-08-2007, 12:43 PM   #51
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Frustrating...... Sallie Mae increases salary of chief executive | News | Market News | Reuters


Interesting..... Sallie Mae Buyout Trial Set for July: Financial News - Yahoo! Finance

I notice that ISM and OSM are up today while SLM is down sharply. My education continues.......
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Old 11-08-2007, 01:30 PM   #52
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Bernanke came out today and said inflation is a problem. He said to expect the "headline" CPI to go up. So, CPI-linked bonds are doing well today, and ISM/OSM are some of the cheapest available right now.
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Deal dead, SLM sinks, ISM, OSM up somewhat
Old 12-12-2007, 09:59 AM   #53
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Deal dead, SLM sinks, ISM, OSM up somewhat

Hard to imagine a more screwed up management than Mr. Lord et al at SLM. Deal last summer for $60; FLowers lowered offer to $50, but Sallie stood tall and called their "bluff". But it wasn't a bluff, SLM trading today for less than 50% of the original deal price.

FORTUNE: Daily Briefing Buyers reject Sallie Mae again

Ha
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Old 12-12-2007, 11:00 PM   #54
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Can someone please help me understand ISM/OSM going up 4% while SLM drops 10% today. Does it make sense they're moving in opposite directions?
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Old 12-12-2007, 11:42 PM   #55
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Actually I was expecting OSM/ISM to move up more like 10%.

Remember the deal was that Mr. Flower with help of BofA, and Citi was going to give shareholders $60 primarily (exclusively?) in cash. Of course nobody had the billions in actual cash, so buy out group was going to issue bonds back by Sallie future revenues and profits.

The prospect of mountain of debt being added to SLM's balanced sheet caused Sallie credit rating to drop to the junk range driving up the cost of borrowing for the Flowers group. It also hosing us existing bond holder cause why loan to Sallie at 7% when you wait for a few months and get paid 10% (examples ) when the Flowers group issues new bonds.

Now that the prospect of Sallie Mae take over dimmed, the prospect for us bond holder are much brighter. We just have to deal with horrible credit market, the inept management, and government crack down on student loan profit margins .The prospect look much worse than when the bonds were trading in the $21-$22 but not as bad with all of those factors plus a take over. This a huge relief for SLM bond holders. I think I'll stop worrying about the stupid things.

At least some of Sallie Mae business is so simple borrow money at X% loan to students at X+Y%, package the bonds and sale them to investors with a government guarrantee, that even an idiot CEO can't screw it up. (I am not willing to bet on him doing good just not driving the company into bankruptcy.)
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Old 12-13-2007, 10:39 AM   #56
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Now that the prospect of Sallie Mae take over dimmed, the prospect for us bond holder are much brighter.
OK. I guess I was just thinking that that aspect was already baked into the price. It's been a while since I thought the Flowers deal might still go through.
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We just have to deal with horrible credit market, the inept management, and government crack down on student loan profit margins
Yeah, and it just seemed like it's bad enough that not only should (and is) the equity value of SLM heading into the dumpster, but SLM's credit rating could plunge even further, dragging ISM/OSM into the dark valley of junk minus minus minus..... Hope not.

I think it's still BBB+. Right?
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Old 12-13-2007, 12:15 PM   #57
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OK. I guess I was just thinking that that aspect was already baked into the price.
A tricky assumption. Get this, from today's WSJ:


Credit Suisse analyst Moshe Orenbuch, in a client note, slashed his target price on the stock to $27 from $60, partly due to rising expectations of student loan defaults. He rates the stock at "Neutral."

Where has this guy been? Did he suddenly discover yesterday that SLM was worth more than 50% less than he thought the day before?

Incidentally, I notice ISM, OSM and the other traded Sallie debt is heading down again today. Maybe this is overdone, but most observers probably feel like I do-- "Who cares? It is a mess in any case!"

Ha
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Old 12-13-2007, 03:53 PM   #58
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ISM/OSM both down big time today. Looks like a one day delayed reaction to the poke SLM took yesterday.

This fits my common sense test a little better......

It just seems that when SLM is being punished, it has to reflect in the price of the bonds they've issued as the credit rating goes somewhere south of gawdawful.

What an education!
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Old 12-13-2007, 04:11 PM   #59
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Ok now it is my turn to be baffled. I guess you are right market already figured that Flower deal was kaput. (Personally, I thought there was 25% chance of it going through in some fashion.) Still roughly speaking the bonds pay $1.10 a year in interest plus .75c a year in capital appreciation for YTM of ~10-11% the Vanguard junk bond fund is only paying 8%. Is Sallie Mae financial situation that bad? I'm not sure if people are more inclined to default on their student loans or their mortgage with negative equity. Both are bad for your credit rating. Too bad they can't repossess diplomas
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Old 12-13-2007, 04:20 PM   #60
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Ok now it is my turn to be baffled.
We're not taking turns being baffled. I'm always baffled! You just join me once in a while!
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YTM of ~10-11% the Vanguard junk bond fund is only paying 8%. Is Sallie Mae financial situation that bad?
And that's my question too. I don't own too much. If it defaults, we won't see any change in lifestyle. I planned to hold to maturity. Still, if I thought they were going to default, I'd take my $4/share loss like a good boy and just chalk it up to lessons learned......like all the other losses I've taken over the years.
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