ISM/OSM yet again

[FUEGO]

Yes I think there is a decent chance we will get our money back.

I don't know - that's only a 5 yr contract and my ISM/OSM doesn't mature for another 8 yrs or so.

 

[youbet]

Yes I think there is a decent chance we will get our money back.

What a pleasant thought!

 

[SC]

Dark clouds on the horizon for SLM?

This was being discussed earlier this year, but then the issue seemed to fade. Now it's back in the news again:

The head of a key U.S. congressional panel will introduce legislation on Wednesday calling for ending a college student loan program that for years helped lenders such as Sallie Mae thrive.

The troubled Federal Family Education Loan Program, or FFELP, would be discontinued in July 2010 under a bill to be offered by Democratic Representative George Miller, chairman of the education committee of the House of Representatives.

link

I'm going to see if I can find out what % of SLM's income is related to FFELP. It'd be nice to know if this is a big deal or a little deal.

 

[haha]

This was being discussed earlier this year, but then the issue seemed to fade. Now it's back in the news again:

link

I'm going to see if I can find out what % of SLM's income is related to FFELP. It'd be nice to know if this is a big deal or a little deal.

I couldn't get the link to work. I would like to read this.

Found something on Yahoo. It seems that Rep. Miller is putting forth legislation to do what Obama said they were going to do. SLM is off slightly; ISM/OSM steady. I think as far as the debt is concerned, SLM should be able to survive as an originator/servicer. A much reduced role, but probably viable with a different culture. Also, the fat lady hasn't yet sung, so we don't know what the final shape of any legislation might be. If ISM/OSM were trading at 22-24, I'd be gone. But the risk reward seems different here. Or maybe I am just being stubborn about selling a loser in an IRA?

Ha

 

[ERD50]

I couldn't get the link to work. I would like to read this.

Ha

looks like some extra characters got into there, try this:


Lawmaker to back Obama student loan shake-up - Yahoo! News

here's another:

US lawmaker to back Obama student loan shake-up | Markets | Markets News | Reuters

try the tinyurls if those got chopped up:

Lawmaker to back Obama student loan shake-up - Yahoo! News

US lawmaker to back Obama student loan shake-up | Markets | Markets News | Reuters

anyhow, SLM down ~ 3% to 9.16 as I type... on an up day.

-ERD50

 

[FUEGO]

I couldn't get the link to work. I would like to read this.

Ha

Here is the link.

I also saw a statement from Obama saying that $12 billion in new spending on a community college initiative would be paid for by "eliminating wasteful spending" on federal student loan lending. Ie - private loan providers.

But in the meantime, I just got another small interest payment from ISM.

 

[haha]

looks like some extra characters got into there, try this:


Lawmaker to back Obama student loan shake-up - Yahoo! News

here's another:

US lawmaker to back Obama student loan shake-up | Markets | Markets News | Reuters

try the tinyurls if those got chopped up:

Lawmaker to back Obama student loan shake-up - Yahoo! News

US lawmaker to back Obama student loan shake-up | Markets | Markets News | Reuters

anyhow, SLM down ~ 3% to 9.16 as I type... on an up day.

-ERD50

I see it down 11 cents, or a little over 1%. From this not much can be gleaned. Maybe if SLM wants better treatment, they should promote that their employees form a union?

I think most of us hold the debt, not the stock. All we have to do is limp home.

Ha

 

[SC]

Sorry for the broken link, thanks to fuego and erd50 for stepping up.

I looked through SLM's investor documentation and found that FFELP loans made up a little over 80% of their loan originations in Q1 2009, up from about 70% of loan originations in Q1 2008. The increase isn't a surprise given that private lending has gotten tighter, but the absolute percentages are higher than I'd expected. (The data is on p.38 of their Q1 2009 earnings supplemental, link to pdf). So in that sense the discontinuation of FFELP loans would be huge.

On the other hand, if SLM gets to play a role in the servicing of those loans, they'll probably survive. I found an article that claimed SLM now supports the expansion of the direct lending program, if they get to originate and service those loans. (For what it's worth, JP Morgan liked the prospect enough to upgrade their outlook on SLM.) It appears Rep. Miller's legislation would handle all originations through the Direct Lending program, but opens the door for SLM's involvement in servicing those loans (source):

The legislation will ensure that all federal student loan borrowers receive the best possible customer service when repaying their loans by forging a new public-private partnership that allows private lenders to compete for contracts to service loans.

I wouldn't touch their stock with a 10 foot pole (except maybe to short it) but I'll keep the bonds for a while longer.

 

[youbet]

A few pages back in this thread, we were all busy bashing SLM for paying an ISM interest paying incorrectly and having to withdraw it and then pay the correct amount. Well......... I guess the USA govt is following along the same path! My interest payment from my 2029 2.5% TIP was paid, withdrawn and repaid a couple of days ago. Guess our govt can't get it any better than SLM!

 

[haha]

Bill for Federal Takeover of Student Lending Clears House Committee

washingtonpost.com

Looks worrier and worrier. SLM common seems a poor holding. The bonds, who knows?

The wuotes seem to be taking this in stride; perhaps it was expected.

Next O takeover Las Vegas? How about the NFL? Congress chould apply Title 9 to it.

Ha

 

[youbet]

I understand that the current admin and congress wishes the program of subsidizing loans made by private lenders to end and future loans to be made directly by the govt. But I don't understand what will happen to the outstanding loans SLM already has on the books and is currently collecting. Even if SLM is out of the new loan business, wouldn't a skeleton staff still continue to collect the loans and apply that revenue against SLM outstanding debt (bonds issued)?

Assuming that the bulk of the PAR value of SLM issued bonds was converted to student loans, wouldn't collecting 50% or so of those loans result in being able to redeem outstanding bonds at about today's market value? That is, SLM stock might go to zero since there is no ongoing business, but wouldn't there be ongoing revenue from collecting existing loans to service debt, at least to the extent that the govt allows them to continue collecting their already outstanding loans?

Or better, might the govt, under it's new program, buy the outstanding SLM loans paying SLM and then collecting from the borrowers?

I'm optimistic that even if/when the govt puts SLM out of the ongoing student loan business, the value of already outstanding loans will be applied to debt and we'd receive some percentage of PAR at maturity. This is different than the GM case where bond holders got totally screwed.

Comments on my optimistic specualtion?

 

[FIRE'd@51]

Based on today's CPI-U report for July (-2.1% over the past 12 months), it looks like there will be no interest payment in November.

A few months back this is what we feared (for different reasons ).

 

[youbet]

Wow! SLM, OSM and ISM all up big time today. Any observations other than the favorable earnings announcement?

 

[FUEGO]

Not sure why the big pop in SLM ISM OSM. Maybe people think the likelihood of SLM staying solvent is real?

On a different note, anyone holding ISM can currently arbitrage into OSM by only paying commissions. ISM bid is at $13.35 and OSM ask is at $13.35 as I write. I just did my arb trade, so I figured someone else with relatively small holdings might want to upgrade their SLM bond holdings.

 

[RustyShackleford]

On a different note, anyone holding ISM can currently arbitrage into OSM by only paying commissions. ISM bid is at $13.35 and OSM ask is at $13.35 as I write. I just did my arb trade, so I figured someone else with relatively small holdings might want to upgrade their SLM bond holdings.

Which did we decide is more valuable (OSM I presume), and by how
much per share ?

 

[FUEGO]

Which did we decide is more valuable (OSM I presume), and by how
much per share ?

Yes, OSM. You'd have to do the calcs on YTM and also accept that Yield to Maturity is the best way to value these things. OSM is worth somewhere in the neighborhood of $0.50 more per share than ISM at the share prices we are seeing now. The cheaper it gets, the more OSM is worth relative to ISM.

 

[clifp]

Based on today's CPI-U report for July (-2.1% over the past 12 months), it looks like there will be no interest payment in November.

A few months back this is what we feared (for different reasons ).

As inept as Sallie Mae's management has proven to be. Even they are not stupid enough to default on bonds where they have to pay no or virtual no interest.

 

[RustyShackleford]

Based on today's CPI-U report for July (-2.1% over the past 12 months), it looks like there will be no interest payment in November.

Mathematically (since it's inflation + 2% or 2.05%, I can't keep the
two straight), the interest rate and payment should be negative.

I can't see this happening, but I wonder if they're allowed to recoup
this once the interest rate goes positive again ?

 

[FIRE'd@51]

Mathematically (since it's inflation + 2% or 2.05%, I can't keep the
two straight), the interest rate and payment should be negative.

I can't see this happening, but I wonder if they're allowed to recoup
this once the interest rate goes positive again ?

According to the prospectus, the minimum interest rate is zero, and there is no recoup.

 

[youbet]

Soooooo...... Why have ISM and OSM popped up to over $16? Still BBB-. No news I've noticed.

Anyone have any ideas?

 

[clifp]

No specific idea, but I would point out the capital appreciation from 16 to 25 over the next 7 years when OSM is due is around 6.2% and the current yield for Jan is 1.14%. So even with mild deflation 7.3% current YTM is pretty decent and if inflation picks up and Sallie Mae actually pays us back, these bonds are likely to have low double digit returns.

 

[brewer12345]

Cannot specifically comment on the issuer, but go look at BBB spreads in general. I bought wads of corporate debt in the first quarter of 2009. The higher rated stuff (single A rated) got to par 3 or 4 months ago and I sold. The high BBB stuff got to par in November or so (and I sold). What I have left is some BBB-, some BB+ and some real junk. The BBB- is finally knocking on the door of par now. The junk is a touch over par (due to the enormous coupon) and the jury is out on the BB+ bonds because the last trade was a month ago. I think the low BBB stuff is rallying again, so ISM is getting a bid.

 

[youbet]

Thanks.

I DCA'd into ISM "way back when" as it was falling in price. I've riden it down into the pits and now back to where I'm about at break-even. That, of course, leaves me with the question as to whether to get out or side with the folks who are buying at these prices and hold on.

It's not an important part of my RE portfolio. And it's been very interesting to own. Still, I know my feelings will be hurt if SLM takes a dump and defaults.

Guess I'll noodle it for awhile.........

 

[youbet]

There was a TIPS auction today. It was a re-issue of the ten yr bond maturing 1/15/2020 and today's results were 1.43%

Based on today's closing price of $16.15, ISM (matures 1/16/2018) is at 3.17%.

So, the difference between BBB- ISM and govt guaranteed TIPS with similar maturities is 1.74%

I have no clue what that means....... Just saying.......

 

[RustyShackleford]

Based on today's closing price of $16.15, ISM (matures 1/16/2018) is at 3.17%.

That seems low to me; I get an annual return of 5.6% even without
any coupon payment (in other words, the 8th root of 25/16.15 is 1.056).

With the coupon, the yield is so high that the money bond calculator:

Bond Yield Calculator

... can't handle it (but it'd be in excess of 5% even if price were 20).

Are we talking about the same thing ?!?