Heh, ISM/OSM again

[brewer12345]

I am surprised at the markets modest reaction to news on OSM/ISM both trading around 21.10 at the opening. With SLM trading at 55+ I guess there is a hedge opportunity to buy SLM and if the deal goes through make money on the stock, while losing money on the bonds.

I'm stunned that ISM actually traded up this morning (so far). Either there is some hedge activity going on, or this is an indication at how cheaply the bonds have been priced all along. I can tell you that there is a strong bid for *any* non-zero coupon bond trading at 80 cents on the dollar, regardless of rating.

 

[haha]

I can tell you that there is a strong bid for *any* non-zero coupon bond trading at 80 cents on the dollar, regardless of rating.

I have been thinking about this. At 2.00 and 2.05, the coupons on each of these is below current market, so even if they were AAA and there were no question of stability they would not trade at 25, with 10 year TIPS selling at 2.30%.

It also appears to my less educated eye (relative to Mr. B), that whatever happens ratings wise it is unlikely that these bonds will not pay every interest payment and principle on time.

Thanks B for the explanation of how they would jigger the balance sheet to pay off the buyout financing.

Ha

 

[soupcxan]

Maybe the investors who hold these bonds are so unsophisticated that they don't know they're supposed to be freaking out and dumping them at fire sale prices (so I can sneak in and pick them up at 18). Brewer - can't you make a few phone calls and stir up some panic?

 

[dm]

How about a tax question. I am showing a loss on my ISM shares. Can I sell them for a loss and buy OSM?

 

[wabmester]

JSM is taking a pretty big hit, but the yield is "only" at around 7% now. Can't tell if that's reasonable for the potential downgrade of "multiple" notches.

What's a reasonable yield on these issues if they get downgraded to "speculative." 9%ish?

 

[Texas Proud]

Brewer...

What about the two mega banks... each own 24.9% would indicate that if there were some problems one or both would step in and fix it... maybe even buy out the buyout firm... sounds to me like they are the 'anchor' for the reg filing..

 

[brewer12345]

On swapping ISM for OSM: I dunno if thsi would be OK, but I would think so. AFAIK, you have to buy a security that is significantly different to get the write off. Different maturity and coupon seems like it would be OK. Anyone care to opine?

Wab: it depends on where they get downgraded to. If they were BB rated, I would guess that 225BP spread for ISM and OSM would be about right. I don't know what a reasonable bumber for B ratings would be, maybe 300-350BP. 225 would imply about 20.50 for ISM/OSM, 300+ would imply about 19. I would be slobbering and drooling to buy at 18.

TxProud: My read of thinsg is that the two banks will explicitly or implicitly state to the ratings agencies that they will in no way guarantee SLM's obligations. To do so would invite a downgrade of their own ratings. Now I could see either one evetually buying out the other partners and servig as the "exit strategy", but that would be years down the road.

 

[wabmester]

Fitch rating is in: link (F1 = not bad!)

Moody's still pondering: link

These pups will likely be falling significantly from here. Not sure 18 will be the floor, but it might be close.

 

[brewer12345]

These pups will likely be falling significantly from here. Not sure 18 will be the floor, but it might be close.

Yup, probably falling from here, but how far or how long is an open question. But again, at 18 I will be buying, and i still want to see them get the necessary regulatory approvals. The stock price is at almost a 10% discount to the offer price, which suggests the market has some skeptics on the deal as well.

 

[wabmester]

Eh, I don't mind owning junk. I just don't like paying prime-quality prices for it.

Update on the CDS market:

The perceived risk of owning Sallie Mae's bonds surged. Credit-default swaps based on $10 million of the company's debt rose by $30,000 to $116,500, according to Deutsche Bank AG prices. The price of the contracts has more than trebled since April 12. The contracts are used to speculate on the company's ability to repay its debt.

 

[brewer12345]

Eh, I don't mind owning junk. I just don't like paying prime-quality prices for it.

That was always the appeal of these bonds: prime credit for a scratch & dent price. Now the credit might match the price. Pity the poor slobs who bought JSM at 24 and change earlier this month.

 

[saluki9]

On swapping ISM for OSM: I dunno if thsi would be OK, but I would think so. AFAIK, you have to buy a security that is significantly different to get the write off. Different maturity and coupon seems like it would be OK. Anyone care to opine?

As long as the bonds have different coupons or maturity dates you are clear of the wash rules.

 

[haha]

I owned too much of this, and I am relieved to have gotten rid of a good bit but not all at <$0.35 per share loss.

I would have sold more at my price, but once the rating change was out the bids evaporated.

My take home:

Corporate bonds have unquantifiable event risk which is some ways make them no less risky and possibly more so than well-financed equity.

My plan going forward-

Any amount can be invested in treasuries. All other debt should be treated like an equity security and limited to no more than 5% exposure invested in any one issuer.

This income stream looked so inviting that I failed to follow that plan.

Ha

 

[wabmester]

I owned too much of this, and I am relieved to have gotten rid of a good bit but not all at <$0.35 per share loss.

I lightened up Friday with a small profit. Still holding the rest till maturity (SLM willing, of course).

 

[dm]

I sold my ISM for a loss and will be watching OSM.

 

[saluki9]

I owned too much of this, and I am relieved to have gotten rid of a good bit but not all at <$0.35 per share loss.

I would have sold more at my price, but once the rating change was out the bids evaporated.

My take home:

Corporate bonds have unquantifiable event risk which is some ways make them no less risky and possibly more so than well financed equity.

My plan going forward-

Any amount can be invested in treasuries. All other debt should be treated like an equity security and limited to no more than 5% exposure invested in any one issuer.

Because I don't analyze debt for a living, my personal policy is to only loan money to those who can print more of it when they need to pay me back.

 

[brewer12345]

This income stream looked so inviting that I failed to follow that plan.

Ha

We've all done it, Ha. Hard to be disciplined when things look too juicy. Unfortunately, someone else with bigger pockets sometimes comes along and swipes the pie.

 

[clifp]

Corporate bonds have unquantifiable event risk which is some ways make them no less risky and possibly more so than well-financed equity.
My plan going forward-

Any amount can be invested in treasuries. All other debt should be treated like an equity security and limited to no more than 5% exposure invested in any one issuer.

I haven't changed my positions, and plan on keeping the large quantity in my IRA. The smaller amount in my taxable account which have now swung into the loss column I probably will sell.

A significant part of the appeal of these instruments was the security offered by the quasi-governmental status. I understand much of this is illusionary, i.e. the government isn't going to reimburse us bondholders. Still I think too many powerful people in Washington and Wall Street, would work much harder to keep something really bad from happening to Sallie Mae. If Sallie Mae goes bankrupt or fails to repay bondholders, it will relect badly on Fannie Mae, Freddie Mac, the Farm Credit Bank, etc and ultimately on the treasury department.

This being said I now remember why I have essentially avoid non-governmental backed debt. The upside gain is small and the downside risk is large (default, rising interest /inflation rates)

 

[cute fuzzy bunny]

Just goes to show, once again...if it looks too good to be true, someone else knows something that you dont...

 

[terminator]

An article mentioning the credit default swaps and the proposed SLM deal . . .

http://www.businessweek.com/bwdaily/dnflash/content/apr2007/db20070417_348128.htm?campaign_id=yhoo

 

[haha]

Interesting article. What is to prevent a PE firm or hedge fund from picking up a cds then start shooting the fish in the barrel by making a bid for that company? I wonder if the SEC watches this market as closely as it does the equity options market for front running and inside information?

Beats hell out of asset allocation and riding out the market swings!

Ha

 

[youbet]

The March CPI-U is out. 205.352.

ISM will pay 4.83% (based on $25 PAR) for the period June 15 through July 14.

Of course, this assumes they haven't defaulted by then sending their bond holders to window ledges preparing to jump.......!!!

Is anyone familar with what a default might look like in the ISM/OSM instance? Suddenly, they just stop paying monthly? We get partial payments monthly? Would a total default be their announcement that the bonds no longer receive monthly payments and also would not be honored at maturity?

 

[brewer12345]

Is anyone familar with what a default might look like in the ISM/OSM instance? Suddenly, they just stop paying monthly? We get partial payments monthly? Would a total default be their announcement that the bonds no longer receive monthly payments and also would not be honored at maturity?

We are a long, long, long way from default, so I wouldn't get hysterical.

If a large issuer is in trouble, you will hear about it for months or years before a default.

If they default, they would just stop paying. Then the bankruptcy process would start, which can take years. In this case, teh senio unsecured bond holders (llike ISM/OSM/JSM) would typically come out of the BK owning the company.

 

[youbet]

We are a long, long, long way from default, so I wouldn't get hysterical.

No hysteria here. Just curious.

If a large issuer is in trouble, you will hear about it for months or years before a default.

If they default, they would just stop paying. Then the bankruptcy process would start, which can take years. In this case, teh senio unsecured bond holders (llike ISM/OSM/JSM) would typically come out of the BK owning the company.

Do they stop payments on all issued bonds simultaneously? Or do they get to pick and choose?

If unsecured bond holders wind up owning the company, could that result in their bonds having some value, even if it is much less than PAR?

 

[brewer12345]

Do they stop payments on all issued bonds simultaneously? Or do they get to pick and choose?

If unsecured bond holders wind up owning the company, could that result in their bonds having some value, even if it is much less than PAR?

Usually default happens on everything at once. Once you default on an obligation, the bondholders can petition to push you into BK. The holder s of all other obligations then have the right to join the petition. So it is usually not pick-and-choose.

Sometimes the bondholders get less than par recovery, other times they get more than par. There is currently a gigantic fight among the holders of various securities issued by Delphi (the BK auto parts company) over who gets what. Bonds are trading at or above par even though the company is still bust. People who bought Conseco bonds at the right time made a fortune.