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Assured Guaranty Ltd. Message Board

  • peristentone peristentone Nov 2, 2009 3:56 PM Flag

    Comparing FSA Bonds to AGO Bonds

    AGO trades a junior subordinated bond CUSIP 04622DAA9 and a senior note CUSIP 04621WAA8. The junior note trades about 65 cents on the dollar and the senior note is around 90 cents. How do others perceive the FSA notes relative to these two?

    I see the FSA notes as being a little less risky than the subordinated AGO bonds, because they are not subordinated, and because the guarantee is potentially from the muni division instead of just AGO. On the other hand, the FSA bonds are perpetual forever effectively, so they have greater interest rate risk.


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    • Thank you once more for your insight.

      I just viewed an interview of Gary Shilling in which he stated that his favorite investment is 30 yr. zero coupon Treasury bonds that, within a few years, will yield 40%, his numbers not mine. In fact, I believe he said that this would occur in 2 or 3 years and I assume he meant cumulatively, not per annum.

      My question is, how can he arrive at such a yield ?

      By the way, what is your preferred online source for information on such investments, please ?



    • I'm not in AGO equity so I didn't make anything from today's move. I would like to buy AGO at a lower price point, and if I don't I'll live.

      Regarding bonds, it's really a tough and time consuming game. Basically whenever I research a stock now I also check to see if it trades bonds. If the equity looks flaky to me, I try to do some thinking about whether the bonds are safer, and if I think they are interesting I start asking questions.

      In terms of my own risk and reward, I invest fixed income for relatives more than for my own portfolio, so I am looking for situations where there is an 80% or better chance that the bond will pay out, and if there is a bankruptcy I want to get at least 50% of the par value back. As distressed debt investing goes, that is pretty conservative.

      An example of a very high risk and very high reward would have been Sirius XM Radio's bonds that expired after 2010. I think those traded down to about 14 cents on the dollar during the crisis. That's a case where if they go bankrupt I was pretty sure the bondholders would end up with common stock in something that was going to become profitable quickly without the debt load, and if they paid out as a bond the return on investment was huge. The CEO was an absolute fanatic about saying he wasn't going to let them go Chapter 11, and he was forcing 2009 bondholders to convert to equity pretty successfully.

      So you look at the company's cashflows, prospects, management, and evaluate the risk and reward of different scenarios. No great magic there.

      And I will say I need more ideas for fixed income to evaluate. The current market looks more and more like a bubble driven by easy fed money. Everything I come across looks expensive to me!

    • Thank you for replying to my previous post(s).

      In my inept attempt to grasp your investing, I surmise, perhaps wrongly :-) that you buy bonds whose probability of default is far from clear and should such an event occur, less than 10% of the investment would probably be recouped, unless you were lucky enough to be "taken out", as was Wachovia, etc... .

      Assuming this to be a proper synopsis, do you decide what to buy given the vast choices of this type investment, and more importantly, given the relative transparency of alternatives, with in many cases, I surmise, less risk, how have you arrived at choosing this to be one of your major investments ? Are the returns that remarkable, even in the current environment vis-a-vis others, such as REITs for example ?

      Is it that when you recently bought, it was a unique risk:reward ratio that in your judgment was, "worth it", but that now it's back to 'normal' and not nearly as attractive ?

      Further, without spending lots to get information and advice, how'd you prepare for this unique buying opportunity, for apparently you were prepared and have capitalized on the recent rout ?

      Pardon my ignorance, but I still don't see that this investment venue, competing with all others, is more worthy than alternatives, but if it is, I'd like to understand how, and why and... "get in on it" :-)

      By the way, AGO which precipitated my original query is up 15% today ! Too bad I couldn't have been prepared as were you :-)

      Again, appreciatively,


    • Prophet, since you had some interest in studying distressed situations, please join in on a discussion I started over here on the CQP group regarding their bonds:

      CQP is a MLP that owns the Sabine Pass liquid natural gas terminal in Louisiana. It's parent company LNG owns another terminal and acts as general partner to the CQP partnership. CQP has about $250M/year in guaranteed cash flows from major oil companies like Total and Chevron. Unfortunately, they have an additional $250M/year from LNG, and I think LNG isn't going to make it. So it's an interesting study whether the CQP bonds will survive an LNG bankruptcy, and then trying to figure out the price at which those bonds are worth buying.

    • Persistentone said:

      "In the case of WaMu, I believe JP Morgan did *not* pick up any of the liabilities. See this Bloomberg story"

      Probably true...I thought I had remember seeing some WAMU bonds trading but my memory is not always correct.

      By the way, I think the idea of trying to estimate the potential bankruptcy recovery value of a bond is a valuable exercise. When I get time I'm going to try to put together a simplified example to stimulate discussion. Earlier I tried to make an EXTREMELY simplified statement regarding financial bankruptcies. Shortly after I enter the post, I realized that the point I tried to make was wrong. That happens sometimes when posting without fully thinking.

    • In the case of WaMu, I believe JP Morgan did *not* pick up any of the liabilities. See this Bloomberg story:

      which says "The bank won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said."

    • After thinking about the simplistic analysis and math I typed above, I realized the math in my example is far from correct...but the conclusion should still be correct.

    • CCThomas asked....

      "Any comments on your technique for:

      "2-determining the probable % recovery of bonds value [in bankruptcy workout]"

      I don't have hard data, but my belief is that in a bankruptcy workout most bondholders of financials (banks, insurance companies, etc) will get signficantly less than 10 cents on the dollar. My belief is based upon the fact that banks and insurance companies use lots of leverage. For example, consider a bank that uses a moderate 10X leverage. If the bank's assets were not impaired, the best a bondholder could hope for would be 10 cents on the dollar. But if the assets weren't impaired then the bank would not be in Bankruptcy/FDIC hands.

      I realize that we are currently in severe somewhat unique times but consider the fact that the FDIC is regularly closing banks and selling the assets to another bank or private investors and even after the sale the FDIC is taking significant hits to its reserves.

      As a bondholder, your only hope for distressed
      bank or insurance company is that another bank or insurance company will acquire the assets and liabilities of the bank before bankruptcy (i.e. Washington Mutual and Bear Sterns via JP Morgan, Countrywide and Merrill via BofA).

      I think a deeper analysis of a financial institutions by an individual investors is probably out of reach. However, there are industries with hard assets and much less leverage that are relatively easy to take a reasonable guess at. One example....REIT's.

    • I don't have any technique for that. You either subscribe to an analyst service that gives you that information or you don't. The analysts who do that work are really digging into the details of the debt and making very difficult calls about how much assets are worth in bankruptcy (very large margin of error).

      I don't currently have a reliable data source. Moodys, S&P, Fitch, and other debt rating services touch on these issues on rare occasion, and their entry level services typically cost $5K to $15K/year.

    • I have a real life example in my own portfolio. Back in the October through March time frame, I bought Goldman Sachs senior debt on the serious cheap. Back during early September, I noticed some Goldman Sachs junior debt still trading way below par and yielding approximately 2.5% more. Given that Goldman Sachs is really nothing more than an investment bank utilizing leverage to its maximum allowable regulatory threshold, I deem the risk of the junior and senior debt to be essentially identical, and therefore IMHO, the junior debt offers a much better risk adjusted return.

      I’ll go one step further, each quarter I review the financials of the companies I invest in, if I sense a problem developing with a financial company I’ll sell and take a loss immediately but yet I bet I’ll capture 50 cents on the dollar of my original investment or better (plus the interest I collected) rather than risking slowly drifting into bankruptcy.

      The situation may be different if I sense a problem with a company that has hard marketable assets with much less leverage. For example, if I held senior debt in a REIT that has little or no mortgage debt (which would be senior to my senior bonds with respect to the assets securing their mortgage), I may choose to hold though bankruptcy with the educated opinion that I may fair better in the bankruptcy settlement than selling into the bond market at a huge loss. I think it is important to understand that there are tons of debts investors that focus solely on buying distressed debt issues and profit handsomely by recovering more in the bankruptcy workout that their debt purchase cost basis. Of course, GM, the unions, and the Obama administration travesty probably hurt some of these types of debt investors when the Obama administration decided to disregard debt covenants, corporate and bankruptcy law.

      Enough said for now. I hope I offered something of value.

      • 1 Reply to prophet43m
      • That was a great discussion, thanks.

        I cannot estimate yield to maturity for one of the two AGO bonds because it is a floating rate instrument that just starts out at 6.4% and resets sometime in the next few years.

        Thanks for pointing out that the FSA financial guarantees rank above the debt. You are right the recovery in this case would probably not be great.

        Do you believe that the FSA subsidiary is responsible to make good on the FSA baby bonds? If AGO is chapter 11, and decides to sell FSA in pieces to satisfy credit claims for AGO, does the FSA subsidiary have to satisfy all of its creditors before any funds become available to AGO?

        Do you know of any newsletters that discuss distressed debt? I've been looking for a good one for a long time and have so far not turned up much. I think even if you don't want the investments such a newsletter recommends, thinking about things in the framework of default and recovery is a useful thing for any fixed income investor.

        As for differences between junior and senior debt, I think there are more than just those divisions. You have to worry about whether there is security (usually there is not). Then you have to worry about seniority. I have seen debt be labeled as senior, unsubordinated, and subordinated. I generally avoid the explicitly subordinated debt. I often see such debt accompanied by provisions that - for example - let the company stop payments up to 10 years at any time for any reason. Such debt strikes me as pretty worthless. The unsubordinated debt is very common (particularly for exchange traded debts) and - for reasons I don't understand well - appears to be much harder for a company to default on.

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