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Assured Guaranty Ltd. Message Board

  • tony27719 tony27719 Jul 22, 2009 1:16 PM Flag

    FSA bonds--When fear became an opportunity.

    During the first quarter of this year I began to buy the FSA bonds aggressively when I saw their prices fall to a point that was ludicrous. For example, I bought FSF from about $20 in 2007 to $3.78 this year. I wish I could say that I bought thousands at $3.78, but that would be a fib. I had a limit order for 1000, but all that was executed was a big 100. The point I'm making is that fear drove down the prices of the FSA bonds to an absurd point. I remember thinking: This is sheer insanity. What happened this year to the FSA bond prices is equivalent to a 100 year flood. It's probably not going to happen again in the lifetime of any one reading this post.

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    • _I felt the comment was NOT clear and worse yet POTENTIALLY misleading._

      Pls explain why the comment is misleading?

    • _The prices tell the story- _

      The prices do not tell a uniform story :-))

      Ambac 2011 trades at 65-78 !

      Ambac 2035 trades at 39-40

      whereas AKF and AKT trade at 21%

    • Go to the trust preferred section of quantumonline. These are preferred issues backed by junior debentures all of which provide for a several year right of deferraal so I don't agree that DRU is an odd duck because it also contains such a right or that is why it is referred to as "enhanced". When you get to third party trusts like KNO you are dealing in most instances with either junior or senior denentures with no such right as in KNO. RRW

    • No question FSA bonds better protected at least in theory. But D just can't stop paying with no consequences. The first thing they have to do is stop paying common dividends which will cause a shareholder revolt.The second thing they have to do is watch their credit rating drop from BBB to D which shuts them out of the credit markets.In such circumstances all their junior securities would probably be worthless not just DRU.
      As to most junior indentures I don't know if you can generalize. AEG and ING flooded the US with junior subordinated debentures giving them a right to defer w/o limit on time. I own a UNUM issue that is based on a junior debenture which gives them a five year right of deferral. In regulated industries they are required to carry a certain amount of regulatory capital. Thus you see banks, insurance companies etc issue preferreds or even debentures with a five year or longer right of deferral which is seldom exercised by big institutions. W/O this in their covenants the regulators will count it as straight debt instead of equity which is what they want. To say that there are no severe penalties for deferral is to ignore reality- that is why so many companies pay these through thick and thin until they become insolvent and either have to reorganize or just crash and burn. To me they were "enhanced" by increasing the yield to above market. This issue just came last month and the credit markets are still a bit tight so they juiced the yield to above market so the underwriters could sell these quickly which they did. If all this makes you nervous stick with the straight PET bonds like FSA's. If you want a senior public utility investment grade debenture expect 6% or less.I like something other than monoline insurers in my portfolio despite my attraction to AGO. And yes these securities are rated BBB meaning the raters believe there is little likelihood of the doomsday scenario which would wipe them out- bankruptcy. They do have nuclear plants and maybe if one of them did a China Syndrome they might be off to bankruptcy but it did not happen after Three Mile Island and I doubt it will happen here.RRW

    • After rooting around on the DRU message board earlier today, IT FINALLY OCCURRED TO ME what "Enhanced" subordinated debt means.

      Normally debt, even junior debt, has gotta pay, unless your are under chap 11 protection, then you don't.

      In case of DRU, its junior debt that doesn't have to. Period. Up to 10 years worth if need be. It really is "Heads we win, tails we don't have to"...!

      No such terms with AGO...

    • "they didn't have a suspension of interest payments like DRU"- if you are talking about ISG,ISP,IND,INZ or IGK- all give the company the option to defer interest payments w/o limitation as to time.Quantumonline does a poor job on this because this is not displayed on some in their summaries but you have to dig it out of the prospectus as to some issues. If this is a real worry to you - take a look. It does not concern me. If you are talking about other ING debt issues please give me their symbols so I can buy a few. Thanks. RRW

    • Rusty,

      You are correct about the ING retail bonds as being subordinated in nature. I took on the risk in part because they didn't have a suspension of interest payments as stated in DRU or FGC. Additionally, it was a positive that the dividends on the ING common would not be paid so long as the interest payments were deferred. Lastly, I also took into account that the Dutch government would probably not allow ING to fail and which they didn't subsequently through capital injections. ING is also a global bank with assets around the world and it is now in the process of selling some of their Asian investments to improve their capital ratios. Lastly, they would likely issue more stock like HSBC did before deferring interest payments.

      I'd like to add only that I'm at the point that adding new retail bond issues isn't going to change my income stream that it would be significant. What I will be focusing on it to lighten up on some so that I have greater safety from default in any one issue and for that reason I'll be looking to invest in other issues that I don't have. Best of luck to you.

    • Tony said....

      "What happened this year to the FSA bond prices is equivalent to a 100 year flood. It's probably not going to happen again in the lifetime of any one reading this post."

      I hope you are correct. I don't mind if the bonds don't appreciate in value from this point forward. I would simply be happy with a stable share price from here forward. I don't need the capital appreciation...I'm looking forward to the interest payments from now to well past my time above ground.

      I'm a small time holder of the FSA bonds. I only grabbed a total of 1000 FSF and 400 FSB. When the best prices were available, I unfortunately continued to exercise caution. Just the same, I am currently sitting on sizable (by percentage) capital gain but best of all I can expect $2,087.50/year in interest. A nice small piece in a larger overall portfolio. I considered buying more but I was not (and I'm still not) completely comfortable with the risk in FSA's (or AGO's) portfolio. Combine my lack of comfort of FSA/AGO's exposure with the uncertain liquidity of the pink sheets and I simply was not willing to committ more funds. In general, when an investments liquidity is reduced, I always limit my investment size. And since bonds are almost always much less liquid than stocks, all my bond positions tend to be relatively small.

      • 2 Replies to prophet43m
      • Prophet- all your points are valid. I expect the move to OTOTC will result in less liquidity. There is also no doubt AGO has some things in its risk portfolio that I wish were not there.I spent a lot of time on their financial condition and concluded that they will probably have some more losses to take, but I think they have the ability to handle it. I am not an expert but Ross is and so is Bill Miller and they love the company so that's good enough for me. I have never felt there was anything wrong with the monoline model- the AMBAC and MBIA losses were driven by management stupidity and lax underwriting. AGO corrected their underwriting in 2006 in time to keep most of the real junk off their books. Still they do have some problems but they also have 13 billion in claims paying ability. This is the most open monoline company I have ever seen- you can see all their portfolios at the website- unlike AIG, they have nothing to hide.I will be watching them but as of now I am impressed with their management, their backers and their balance sheet.
        As to appreciation, that will take care of itself if they are successful but like you I am more interested in the income since I am retired and I feel it is secure so long as they remain on the path they have chosen-but I will be watching too. Good Luck RRW

        Good Luck RRW

      • Hi prophet,

        I actually would like to see FSA prices improve so I can re-allocate with out a loss in income. For instance, if the FSA issues rose to a price level that resulted in a yield of say 11%. I would then see if another issue also was around the same yield. By switching into that one my income would stay the same and at the same time improve diversification in the portfolio. The nearest retail bond I see at this time is a 10% yielding ING bond, but unfortunately I'll be giving up on the safety of the bond. At this time it's hard to make any kind of switch where you can be kept whole on both income and safety. Hopefully, this will change in the future. Good luck to you.

    • I know what you mean; I remember seeing a show last September/October where one commentator said "two more weeks of these down days, and the S&P will be at zero." I was taking a gamble that it wouldn't go there, myself. So far, it has paid off well.

    • Hey Tony. I am a different story. I ran accross these earlier in the year when I still needed some short term cap gains to take advantage of last years tax loss (fortunately that is not an issue any more) Anyhow I booked a profit of right at $22,000.00 by selling my FSF shares after these had a good run. I would check back occassionally and was suprized to see these back in free fall. Well I am back in all three issues Feel like I was given a second bite at the apple.Will not tempt fate by selling again anytime soon.
      I found a nice ute new issue- DRU (Dominion Resources) which came at 8.37% with solid investment grade ratings. Has sold up a bit but I still got some at 8%- not as sexy as these but good portfolio ballast and a better yield than most utes these days.Thinking about harvesting some gains in Penney bonds and adding more DRU.I can live on the 8% and can quit worrying about JCP sales. Am fully loaded here. Good Luck RRW

      • 2 Replies to wilsonrusty2
      • Rusty,

        I agreed with your purchase of KNO and invested in it. I'm passing up on DRU because of one reason.The company has the right, at any time, to defer interest payments for up to 10 consecutive years. The bond is BBB, and if the company invoked the interest payment clause the price of DRU would plummet to who knows how far. This clause allows them to avoid deault at the expense of the investor. I decided not to invest in any bond that has this type of clause. I think someone had a post to avoid "enhanced" notes which this is.

      • Hi Rusty,

        I'm glad that you were able to offset losses with the gains from the FSF bonds. My situation is different from yours. At this time all of my investments are within an IRA so I can't take tax losses against gains. As you know, with an IRA all withdrawals are taxed as ordinary income. I am, however, contemplating opening a regular cash account because I need to make some withdrawals each year so I'm not pushed into a higher tax bracket when withdrawals become mandatory about 2 years from now. I've talked to Vanguard where I have my IRA and they've told me that my trading costs would be at the low rate I'm getting so long as I meet the definition of a Vanguard Select customer which won't be a problem. I envision investing a portion of my withdrawals very conservatively. I try to keep at least 2 years of cash in a money market account for living expenses so I'm never forced to sell at a loss to raise funds for living expenses.

        By the way my investment in KNO at 12.86 less than a week ago has been a winner. I'm glad you mentioned it in one of your posts. I plan to look into DRU.

        Good luck,


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