The cc said that the liabilities are being priced higher causing a GAAP loss.......just like Davis said. But I thought RAS owns a goodly amount of those liabilities........... Why not discuss this potential improvement in situation?
Davis has suggested the repricing upwards was due to assets prepaying....... Wouldn't the tranches RAS owns soon start to come into the money if the CDOs are repairing themselves........again, why not discuss that possibility........I guess it is all a big distraction when everything else seems to be working, but inquiring minds want to know:-)
The liabilities that RAS owns of the Tabernas are eliminated in consolidation. Not affecting the calc. What is being repriced are the senior most bonds - which are both shortening in term and improving in coverage meaning if they were issued today they would have a MUCH lower rate. If you value them they would have a huge increase in FMV (i.e., a premium) - which if it was an asset would be great (i.e., a gain) but on a liability the MTM is a loss. Nothing has changed in the economics....these eventually will start reversing as the bonds are paid down.....
"senior most" is probably the wrong description - all the ones that are not owned by RAS (and eliminated). All these bonds are being repriced - probably as Level III items - using discounted cash flow discounting expected cash flows (including coupon interest at fixed rates/spreads from years ago). Biggest change period over period is proably the more junior of these third party held bonds because those have the biggest spread from coupon to market and the longest remaining duration - ergo generating the highest premium. They didn't need to do this by the way - someone ELECTED to fair value the debt under SFAS 159 (one time election once you make it you are stuck with it - its irreversible).
Actually, what is being repriced are more junior bonds, but its complicated, because it isn't the bonds that are being repriced, but their liability value. What you need to keep in mind is that each bond has TWO relevant values.
One value is its value on the open market, and we've basically been told that there is no market for the Taberna bonds, which means their open market is whatever it was when the bonds last traded (pretty close to zero) That value has pretty much been written down everywhere and won't be going up unless and until there is an auction market for the Taberna bonds.
The second value is each bonds libability value, which is what RAS owes on them. That value started to write down as the Tabernas stopped passing tests and income was redirected from junior bonds to senior bonds. Liability values never went down for the most senior bonds (the ones that had income redirected to them and had every prospect of being paid in full, but they went down a lot for the most junior bonds, and continued to go down as the more and junior bonds stopped paying at all, with the most junior bonds going to zero because there was no expectation that they'd be paid at all.
Which is why these write-downs in the Tabernas are actually increases in the liability value of less senior bonds. The most serior bonds are already fully priced for liabilitiy value. As they are paid off less senior bonds "come into the money" by receiving payments again. When that happens, their liability value is "written up", which results in a non-cash loss.
This happens routinely as senior bonds are paid off. Right now I think the baseline for right ups is about $10M a quarter (I don't have a confirmation of that from RAS; it's just what the quarterly data suggests). It happens more quickly when there are loan payoffs that result in principal being paid to senior bondholders in order of seniority. That's why I think some loans were paid off this quarter.
RAS has, for the most part, the most junior bonds. The Tabernas will have to write up just about all of the senior bonds it owns will be written up. I expect that, when this happens, the write-ups to liabilities will be offset, at least for RAS bonds, by corresponding right ups in RAS expectations for return of principal. Actual payments will show up as decreasd investment interest expense.
I understand that the RAS owned bonds are eliminated in consolidation, but why not give us a bit of color so we can see if we are improving our position, or losing ground.......
You mention the lowering of interest rates makes the higher paying bonds worth more, which is certainly true........further, the market is valuing #$%$ stuff at higher values as everyone stretches for yield.......
Do you know what model they use to value these assets and liabilities? It is doubtful that any of it is actively traded. Thanks.