ISM/OSM yet again

[clifp]

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it. I knew OSM was worth a bit more than ISM, but .40 is more than I thought.

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

 

[Nords]

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it.

175 posts later, I was wondering if we'd learned anything from this experience...

 

[FIRE'd@51]

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

PFK is rated A3 by Moody's and A+ by S&P. It's structure and maturity are similar to OSM/ISM but it yields about 300-350 basis points less.

 

[haha]

Damn now that I know the rest of the board is on to this little arbitrage opportunity I am going to give up on it. I knew OSM was worth a bit more than ISM, but .40 is more than I thought.

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

I believe that there is a very low chance that SLM bonds don't pay interest until maturity, and get paid off in full at maturity. The world has changed since the JC Flowers bid was pulled. Whatever might happen to SLM the stock, or SLM Corp the company, someone if only the US treasury will pay off these bonds.

PFK is good too, but I prefer PRU the common in this case at recent quotes, though I did own PFK from fall 07 until earlier this year.

ha

 

[cute fuzzy bunny]

BTW, Anybody know of other corporate inflation linked bond with a higher credit rating?

With vanguards high yield admiral fund tossing out 9+% with pretty minimal risk of losing more than a low single digit % of your capital, and that being higher than most cpi linked corporate issues that arent likely to take all of your capital away, I personally dont see a whole lot of reason to look elsewhere for good returns, capital safety and excellent sleep at night factors. Inflation would have to run at very high levels for a very long time to get a stable company's cpi linked bonds into the same territory. Or you can get that fat yield all year, every year.

Look at the holdings. Tell me whats going to default...there isnt much junky junk in there.

It isnt a very good diversifier for an equity heavy portfolio, but its a nice fat monthly dividend check.

 

[JohnEyles]

With vanguards high yield admiral fund tossing out 9+% with pretty minimal risk of losing more than a low single digit % of your capital, and that being higher than most cpi linked corporate issues that arent likely to take all of your capital away, I personally dont see a whole lot of reason to look elsewhere for good returns, capital safety and excellent sleep at night factors. Inflation would have to run at very high levels for a very long time to get a stable company's cpi linked bonds into the same territory. Or you can get that fat yield all year, every year.

Not to disagree with the main point of your post, but I've lost
about 6.5% of my principal since I bought into VWEHX almost
exactly a year ago. Of course I've made probably slightly more
in dividends during that year ...

 

[cute fuzzy bunny]

I dont think I'd have bought it a year ago. I know some people made a recommendation to buy junk in the middle of last year but that seemed a little premature. IIRC the spread between treasuries and the HY fund was only around 3% last year and it was only paying around 7.x%. I dont get that interested until the spread is at least 5%, like it is now.

Its also one of those funds I'd buy to stay in for a very long term and not sweat the principal that much. If I remember right from a long look I took a few years ago, the fund tends to lose a percent or two per year on average over the long term, but pays 8-10.x% most of the time.

A 7-8% annual income return certainly looks a bit pale compared to ISM if the company holds up and pays par when the bonds mature. Looks frickin great if they eat it and you dont get your money back. You do also have that protection from high inflation, but you'd have to believe you're going to see 5%+ reported cpi rates for a good long time to make that worthwhile.

 

[RustyShackleford]

On the ISM/OSM arbitrage, I see more than a buck difference right
now (OSM higher). Unfortunately I'm all the way over to ISM now.

 

[FUEGO]

On the ISM/OSM arbitrage, I see more than a buck difference right
now (OSM higher). Unfortunately I'm all the way over to ISM now.

I'm seeing ISM ask at $0.01 higher than OSM bid. In other words, you might have a hard time making a quick buck on this one.

 

[haha]

At this moment there is no profit in trading either way, as one would have to buy ISM for example at the ask, and sell OSM at its bid. Huge spread for ISM.

When ISM and OSM go down in price, as well as as time passes, accretion of discount becomes a larger and larger part of the ytm for either security, hence decreasing time to maturity and decreasing price both increase the premium that should be applied to OSM price. As Fuego said above, at the $17.50 area OSM is on a ytm basis worth about 40 cents more than OSM.

Either one of these are spectacular income investments as long as the payments keep coming and they do get redeemed at maturity.

Ha

 

[youbet]

You do also have that protection from high inflation, but you'd have to believe you're going to see 5%+ reported cpi rates for a good long time to make that worthwhile.

If your buy at $17.50 and cpi runs only 3%, your ISM payout would be about 7.2%. At cpi = 5% it would be about 10.1%. YTM would be higher.

It's just that single issue risk that makes the play so dicey.......

Of course, the nature of the student loan business makes total insolvency unlikely. Some foolish ex-student might keep paying or the government might step in and make partial payments for the students... or whatever. You'd likely get some percentage of par paid to you eventually, not zero. I'm running a few examples such as what if you pay $17.50, cpi runs 4% and you wind up getting 50% of par redeemed at maturity......? Etc.

 

[cute fuzzy bunny]

Eh, I was talking about general CPI linked investments producing a 9+% yield as an average return in response to Clifs request for higher than ISM/OSM credit rated CPI+ bonds.

You're not going to get that unless theres high inflation or you're picking junky single issues like ISM/OSM.

Considering that over the long haul your odds of significant capital loss in the vanguard high yield fund isnt that high, its sort of impressive that you can get a regular monthly return that otherwise requires you look for REAL junky stuff or something junky AND cpi indexed AND get high inflation with the latter.

I'm figuring that people in this end of the pond are looking for some combination of high return and inflation protection without a big potential for loss of capital. My thinking is that over a 20 year period you're not going to get a legitimate low to moderate risk bond or bond fund of any kind that'll throw off over 9% whether there's high inflation or not, or a CPI indexed one that'll average 9%+. The odds of seeing 6-7% inflation persistently for 10 years of the 20 is pretty gosh darn low IMO.

As far as the ISM/OSM thing...well...even in my riskier investing days when it was more of a game than my livelihood, I wouldnt have touched it with a ten foot pole. I dont think you'll get a full default, but I'll be pretty impressed if these make it to maturity and you get full price for them.

IIRC one of the big thoughts on buying ISM/OSM when they were originally kicked around was that perhaps they werent being priced right because they were obscure and thinly traded. Seems based on the persistence of pricing at and below the price they were at that time, that wasnt the case. They're priced where they are because a fair number of potential buyers dont see them as being much of a bargain because the business sucks and might get suckier, and the guy running the place is batshit crazy?

 

[ERD50]

I keep seeing this thread pop up, and I look at ISM/OSM to see about 5,000 shares traded ~ $16-$17.

There appears to be a lot more talking than trading going on with those things. Interesting beasts but I've got burned on a few high yield investments - hopefully you guys/gals do much better.

-ERD50

 

[youbet]

Yep, volume seems very low lately. Apparently the yields through the next few months are attractive enough that folks aren't interested in selling at these prices. That's pretty much my situation. Don't own much and have found them very interesting to study and play with.

If SLM folds completely tomorrow with zero payout to debt holders, that will be far from the worse financial kita I've experienced! In the meantime, yields are very attractive........

 

[clifp]

Eh, I was talking about general CPI linked investments producing a 9+% yield as an average return in response to Clifs request for higher than ISM/OSM credit rated CPI+ bonds.


IIRC one of the big thoughts on buying ISM/OSM when they were originally kicked around was that perhaps they werent being priced right because they were obscure and thinly traded. Seems based on the persistence of pricing at and below the price they were at that time, that wasnt the case. They're priced where they are because a fair number of potential buyers dont see them as being much of a bargain because the business sucks and might get suckier, and the guy running the place is batshit crazy?

The original appeal of ISM/OSM was that student loan was a pretty safe business, sure Congress probably would screw around with the subsidy level, but no reason to suspect they were in worse shape than any other A rated corporation, and 300 basis over TIPs made them pretty attractive. In fact, student loan a predictable enough business to attracted private equity, and that was the beginning of the end of ISM/OSM being just boring corporate bonds.

The way I figure I've been through so much drama with these bonds that actually being paid $25 in 2017 will be anti-clamatic. I am waiting for the crazy chairmen to take a shot at the bankruptcy judge. Meanwhile I'm collecting my .12-.13 share each month

 

[youbet]

For reasons I'll never understand, all three of the firms that issued opinions on SLM this year seem positive:

10-Jun-08 Sandler O'Neill Initiated Buy
6-May-08 Lehman Brothers Upgrade Equal-Weight to Overweight
13-Feb-08 Friedman Billings Upgrade Mkt Perform to Outperform

And the ISM/OSM rating still stands at BBB-

I'm not sure if my ISM is junk or junque.

 

[haha]

SLm Reports Earnings Down, But Spreads Improving

Student loan giant SLM Corp., or Sallie Mae, posted net income down 72% amid higher, but improving funding costs, which the company has said threatened its ability to remain profitable.
Sallie Mae reported net income of $266 million, or 50 cents a share, compared with $966 million, or $1.03 a share, a year earlier. Excluding a $477 million derivatives gain and other times, the company recorded so-called core fell to 27 cents from 43 cents.
Student loan originations fell about 8% to $3.3 billion, amid shifts in the way the company deals with external lending partners and a shift from purchasing to servicing their loans.

July 24 - Standard & Poor's Ratings Services said today that its rating on SLM Corp <SLM.N> (BBB-/Stable/A-3) will not be affected by the company's second-quarter earnings announcement. SLM Corp reported adequate earnings supported by solid asset quality metrics for the quarter. There is also evidence of declining funding costs and increasing availability of funding. Core earnings net income of $156 million was slightly down from the linked quarter of 2008 and the comparable quarter in 2007, due somewhat to restructuring charges. Compared to the prior quarter, the company's managed private education loan portfolio exhibited lower levels of both delinquency and forbearance. We see this as encouraging given the increasing financial stress in the consumer sector. This stress remains an overall concern for us given the difficulties in the housing market and the overall deteriorating economy. SLM showing strong asset quality metric trends in the future would be a positive rating factor. We will continue to monitor this portfolio for possible spillover effects from other sectors. We are also encouraged by declining spreads in the asset-backed securitization markets this quarter, and SLM's ability to issue unsecured debt. Future ratings will largely depend on Sallie Mae's ability to refinance its 364-day, asset-backed commercial paper financing facility on favorable terms. Declining spreads and the issuance of unsecured debt are further signs that the company's financing costs are dropping and that the company's access to funding markets is improving.

SLM common took a huge hit, ISM/OSM down quite a bit too. Still, this is senior debt, and this company is still making money. S&P left its ratings unchanged on yesterdays report.

It's ugly, but probably as secure as anything else paying this kind of current return, and with this kind of prospective YTM.

Ha

 

[cute fuzzy bunny]

Jeez louise Ha...you've almost talked me into buying back in.

Fortunately I've only had one sip of wine...

 

[cute fuzzy bunny]

Bonds down 4.9% and 5.6% today, stock down over 16%. Ouch. Good news is that the stock scouter rating has gone from a 2 out of 10 six months ago to a 3 out of 10.

Bad news is that google finance wont even pull up ISM and OSM anymore. Says there was a server error, try again later.

Them google guys know everything.

 

[haha]

From Barrons, Sat 7/26

Any financials look interesting?

Cooperman: One is Sallie Mae [SLM]. Probably 95% of its loans are government-guaranteed and the stock sells at 10 times earnings. A year ago, a private-equity firm wanted to buy Sallie for 60 bucks. You can buy it now at 18.

Ha

 

[youbet]

Well...... new inflation numbers are out.....

ISM will pay 7.65% for the Oct 15 to Nov 14 time period (at PAR). If you buy at $16, it'll pay 11.95% for that same period.

 

[soupcxan]

At ISM's closing price of 14.98, looks like the yield would be about 12.8%.

I am really tempted by this...I wish the jerks at E-trade hadn't forced me to close my account by threatening to charge me an inactivity fee.

 

[SC]

ISM just dropped to 13.75-13.9, OSM to 14.5. Very low volume, but what a yield. Is anybody else nibbling at these levels?

 

[haha]

ISM just dropped to 13.75-13.9, OSM to 14.5. Very low volume, but what a yield. Is anybody else nibbling at these levels?

There is an unusually large offer of 3000 shares at $13.98. (ISM) OTOH, the common, SLM, is up for the day. I can't understand what be going on, other than simple confusion and fear in us retail holders. I bought some this morning @$13.90, which was the ask at that time. I have to be careful not to get too heavy into this, but I can't imagine what could be bothering the senior debt that would not bother the equity more. I think the hedge fund menace is long gone, and though SLM is experiencing funding stress it should affect the common more.

I suppose there may be fear of political change and an expansion of federal direct loan programs, but that is a possibility not at all a reality yet. This kind of thing can get very expensive to an already overburdened treasury.

Ha

 

[SC]

Yes, I feel like I must be overlooking something, but I also can't see a good reason for these to have dropped like they did. My inner vulture took over and I couldn't help adding to my stake at these levels. Good to know I'm not the only one. Thanks for your take on this, Ha.