Heh, ISM/OSM again

[brewer12345]

IIRC, there are specia (PITA) accounting rules you have to use if you are operating in an inflationary currency/country. If memory serves, I think the trigger was something liek a 100% increase in prices over a 3 (?) year period. There was a period where the US was pretty close to having to use those rules.

 

[wabmester]

Guys... I want to thank you for the info on this board.... I bought my mom some of the JSM this morning, but only got a few shares as the price jumped up... might buy some more soon as the yield is pretty good.. just have to get her to move some money to her brokerage account...

Why would you want to buy a speculative bond? You can get around the same yield without the single-issuer risk by buying a junk bond fund. I'm sure JSM will do fine, but I just can't see buying any long-term bond with an unknown rating.

When I buy bonds, I'm buying a stable sure source of income. If I wanted risk and potentially higher return, I'd buy stocks.

 

[haha]

I no longer have a position, but I am still interested because I have never followed closely an LBO before.

I don’t know enough about how these deals are structured to say for sure, but I think some of the statements above in this thread are not necessarily so. While Bof A and JP Morgan are in with cash, expect this debt taken on to finance the buyout to be refinanced toute suite!

Likewise I don't think that we should take too much comfort from the idea that Christopher Flowers is a smart guy and wouldn’t spend all this money and expect to lose it. That he isn’t looking to lose money is a truism, but let's not forget that he is probably playing with house money once the deal is signed. Up front fees can be huge. Flowers once aborted a deal to acquire the futures business of bankrupt Refco. The bankruptcy judge was appalled at the money being taken off the top, and insisted that Flowers' fees be lowered. So J. Christopher nixed the deal and walked. Also, his equity is likely largely supplied by investors from whom he of course gets fees.

I have not seen the exact deal, and it may not have to be made public, I don't know. But it appears that Bank of America and J.P. Morgan may be getting a big hunk in return for supplying the debt financing and pledging the back-up credit lines without which the deal could not have been done. Lots of up front fees here too!

If we on this board could pull crap like this we could stop obsessing about SWR.

I hope Brewer or anyone who has access to more detail will post it as it become available.

Ha

 

[brewer12345]

I hope Brewer or anyone who has access to more detail will post it as it become available.

For sure. They haven't made the filing yet, so we don't have the details. But I see SLM equity selling off today, so the market clearly includes a fair number of skeptics on the deal's chances of getting the necessary approvals.

 

[brewer12345]

Why would you want to buy a speculative bond? You can get around the same yield without the single-issuer risk by buying a junk bond fund. I'm sure JSM will do fine, but I just can't see buying any long-term bond with an unknown rating.

When I buy bonds, I'm buying a stable sure source of income. If I wanted risk and potentially higher return, I'd buy stocks.

I will respectfully disagree. There is big money to be made in individual junk names, presuming you can sucessfully do the necessary credit analysis.

 

[wabmester]

I will respectfully disagree. There is big money to be made in individual junk names, presuming you can sucessfully do the necessary credit analysis.

OK, I'll give you that one. As long as you can successfully predict the future do the necessary credit analysis.

 

[youbet]

If hyperinflation occurs, I think there will be a lot of other problems than a few defaulted bonds...

Good point. I should have simply said a high inflation period rather than hyperinflation.

 

[soupcxan]

ISM fell below 20 for the first time today...come on, 18! We need a buying opportunity.

 

[brewer12345]

ISM fell below 20 for the first time today...come on, 18! We need a buying opportunity.

Maybe. Check out SLM's stock price. Sliding further and further away from the deal price. Suggests that the deal might be in jeopardy. A collapse of the deal would be very good for existing bondholders.

 

[FIRE'd@51]

Maybe. Check out SLM's stock price. Sliding further and further away from the deal price. Suggests that the deal might be in jeopardy. A collapse of the deal would be very good for existing bondholders.

Yup, and apparently the buyers of SLM have a no-cost out if Congress passes legislation that would make the deal less attractive.

The proposed deal gives the buyers -- J.C. Flowers & Co., Freidman Fleischer & Lower, JPMorgan Chase & Co., and Bank of America Corp. -- a chance to walk away if Congress passes legislation that is more harmful to the lender's business than President Bush's proposal earlier this year.

Bush proposes cutting subsidies to lenders and forcing them to shoulder a greater share of the risk of students defaulting on loans. A proposal by Sen. Edward Kennedy, which was leaked to markets, would cut subsidies a little more steeply and foist much more of the default risk on lenders

http://biz.yahoo.com/ap/070420/slm_ahead_of_the_bell.html?.v=1

 

[bongo2]

But this is what I don't get: on this news both ISM and SLM fall. Can it be bad for both the bonds and the stocks?

 

[brewer12345]

Yup. If the deal does fall apart, I will be heavily tempted to sell the bonds and buy the stock (especially if it goes under 40).

 

[haha]

From Analyst James Fotheringham of Goldman Sachs:

"The proposed deal gives the buyers -- J.C. Flowers & Co., Freidman Fleischer & Lower, JPMorgan Chase & Co., and Bank of America Corp. -- a chance to walk away if Congress passes legislation that is more harmful to the lender's business than President Bush's proposal earlier this year.

Bush proposes cutting subsidies to lenders and forcing them to shoulder a greater share of the risk of students defaulting on loans. A proposal by Sen. Edward Kennedy, which was leaked to markets, would cut subsidies a little more steeply and foist much more of the default risk on lenders.

If the legislation or something like it passes, which Fotheringham said is about 60 percent likely, it would give the buyers the option to ditch the deal.

With the stock trading at $54.97, there's not enough reward for the $60-per-share deal closing to justify buying the stock with the risk the deal could fall through, he said."

http://biz.yahoo.com/ap/070420/slm_ahead_of_the_bell.html?.v=1

This is the first I have heard about this "get out safely clause", and it could describe an eventuality that if were to happen would be at the same time negative for the bonds and the stock, by damaging the business. True the deal wouldn’t go through, but SLM sales and cash flow might suffer. Remember that both ISM/OSM and SLM common were all trading down since the Dems took over congress.

It is a complex situation for sure.

Ha

 

[soupcxan]

Yup. If the deal does fall apart, I will be heavily tempted to sell the bonds and buy the stock (especially if it goes under 40).

Can you explain the logic behind this swap? Curious.

 

[bongo2]

Well, if the deal goes through then ISM falls on a downgrade. If the deal falls apart ISM falls on poor future prospects for SLM. That would seem to suggest selling now, right?

 

[brewer12345]

Can you explain the logic behind this swap? Curious.

The bonds would most likely crest nicely over 21 once the specter of a multi-notch downgrade due to piling many billions of new secured debt on the balance sheet goes away. The stock would sell off heavily, since it was in the low 40s before the deal was announced. If it is a REAL panicky rout, the stock might sell off irrationally far, so much so as to make the company a bargain. Somewhere in the 30s I would start getting real interested.

 

[soupcxan]

Whats up with the big moves yesterday and today?

 

[brewer12345]

Whats up with the big moves yesterday and today?

Dunno. I note that the stock is also up despite some pretty unfriendly regulatory-related headlines. I am a suspicious bastard, so I am starting to think that someone knows or suspects that another offer from a different type of buyer may be in the offing. Time will tell.

 

[youbet]

CONSUMER PRICE INDEX: APRIL 2007

The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.6 percent in April, before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. The April
level of 206.686 (1982-84=100) was 2.6 percent higher than in April 2006.

The above from the BLS and emailed out today.

Looks like the July 15 to Aug 14 yield on ISM will be 2.6% + 2.05% = 4.65% at PAR.

Talk about ISM has been quiet lately. Anybody heard anything further?

 

[brewer12345]

Since the bonds traded back up to where they were before the buyout was announced, I liquidated.

 

[cute fuzzy bunny]

Me too.

 

[justin]

Still holding. I'm certainly regretting NOT putting in that buy limit order at 20.00. Shoulda coulda woulda...

 

[FIRE'd@51]

Still holding. I'm certainly regretting NOT putting in that buy limit order at 20.00. Shoulda coulda woulda...

I'm still holding too - of course, ISM/OSM are only about 1% of my portfolio. It does appear that 20 was probably a very good buy. Seems like nothing fundamentally has changed over the past month - perhaps the probability that the deal won't go through has increased slightly. Maybe it was simply a "knee-jerk" over reaction by the marketplace to the buyout.

 

[justin]

I have ~4% of my portfolio in ISM. My only bond position. If I only got back 80 cents on the dollar (which would equate to 68 cents on the dollar paid out based on par), I'd be happy enough with that outcome. In the meantime, I'm getting paid a reasonable coupon comparable to similar maturity bonds.

 

[clifp]

Bondholders took a ratings cut for SLM Corp. (SLM), or Sallie Mae, in stride Monday morning: the cost of protecting its bonds barely changed after Standard & Poor's cut the student lender's ratings two notches to triple-B-plus from single-A late Friday.
Sallie's credit default swaps, or CDS, which are privately negotiated contracts that allow investors to wager on a company's creditworthiness, are three basis points wider at 173/178 basis points Monday morning, according to Wayne Schmidt of AXA Investment Management. This means the cost of protecting a notional $10 million of Sallie's bonds against a possible default for five years is between $173,000 and $178,000 per year.
"The downgrades were probably already priced in," Schmidt said.

Ok any advice for those of us who weren't smart enough to get out when ISM/OSM went back to there pre-buyout levels. The bonds are 20.20/20.25 respectively.

I assume that with the bad news already out they bonds will rally if the deal falls through and then stay pretty stable, until the details of the takeover are known.

Does anybody have the current yields or YTM of inflation index bonds with comparable credit ratings?

Why does losing 5% on bond issue upset me so much more than a 5% move on a stock?