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  • Is the mortgage REIT business going out of business?  [View news story]
    Anyone with easy access to a Bloomy who can comment on what's going on in the underlying credit sensitive parts of their portfolios? E.g. the new agency risk-sharing mbs, cmbs 2.0, multifamily mez paper, etc. That's where the real danger will emerge--in the HYBRIDS who've migrated into this illiquid, credit-sensitive paper to amplify spreads and avoid that dreaded "interest rate risk."

    My sense is that the pure agencies will be fine regardless, but the canaries in the coal mine to watch are the credit sensitive mreits who've put some leverage on illiquid and risky instruments. With even 2-3 turns of leverage, some modest volatility, and short term repo financing, it doesn't take much to blow a big hole in someone's balance sheet...
    Jan 20, 2016. 09:47 PM | Likes Like |Link to Comment
  • Five Oaks Investment Corp Set To Rebound In 2016  [View article]
    Robin,

    Thanks, I'll dig deeper and hope you're right, obviously ;)

    My skepticism above about the buyout/ acquisition scenario was premised on the fact that they seem to be digging in their heels with this securitization/ origination biz. Also, insider ownership (save the XL sponsor warrants, which I assume is what you're referring to) seems to be pretty puny. If the end game is to be acquired or bought out, why isn't mgmt loading up the truck at these prices?

    Happy to earn 13.5% or whatever while waiting!
    Jan 2, 2016. 09:20 AM | Likes Like |Link to Comment
  • Five Oaks Investment Corp Set To Rebound In 2016  [View article]
    This is an interesting situation. Not sure I could endorse the author's rationale that because a couple of years ago this stock was at X, and thus if it only bounces halfway back to X, you can make Y%. That seems to be what this thesis amounts to.

    But digging deeper beneath the surface, you've gotta ask what the market sees here such that the common is selling for close to a 50% discount to NAV, and even the preferreds are getting a haircut. Broadly speaking, two possibilities. Either the market is wrong/ inefficient and this is a screaming bargain and a play for mean reversion, OR the market is pricing in something that the bargain hunters aren't seeing yet.

    Let's assume the latter for a second. WHY would this mreit deserve to sell for a ridiculous discount to NAV with *even the prefs* pricing in a poss of default?

    (a) this is a melting ice cube, a 3rd string mreit that launched at exactly the wrong moment and never grew into a size that would allow them to justify the fees to an external manager. When even the "good" mreits are pricing in 20-30% discounts to NAV based on a flattening yield curve, a 50% haircut on these guys doesn't seem so outrageous. If this is *all* that the market is seeing, then maybe--in an environment where things tend to revert to the mean--these guys will bounce in 2016 along with their peers, perhaps even more so given how beaten up they've been. Or, best case, they decide like Zais to call it quits (extremely unlikely here, I think, given their inroads into the securitization biz), or some activist comes along and makes them pony up to close the discount. Anyone notice that Bulldog has a small position here?

    I'm not ruling out (a) as the explanation, but let's tell another story (b) that accounts for why the prefs are also getting hammered.

    (b) these guys are less a plain vanilla mreit playing the IR spreads on agency mbs and more of a pure play on mortgage finance. Notice what they're doing--buying up bundles of whole loans (jumbo alt-As, mainly, with a heavy emphasis on pricey zip codes in CA, TX, WA, and MA). After assembling a portfolio of these (which they're buying from 3rd party brokers and originators, none of which are exactly household names) they're securitizing them in deals sold to investors while keeping the lower slices of the deals for themselves. They're also buying the mez and B pieces of some of the new agency risk-sharing securities and some seasoned agency multifamily mbs.

    What does this all mean? I've only spent a couple of hours looking them over, so take this with a grain of salt, but they strike me as one of the most credit-sensitive of the mreits. Unlike AGNC, NLY, etc. which are taking only IR risk, these guys have dived head on into credit risk. Unlike AGNC, NLY et. al. they actually DO have large exposure to housing prices. So if, say, you were trying to find a way to express a skeptical position on the sustainability of a housing bubble in CA, Seattle WA, Boston, or Texas, this might be an instrument you'd be attracted to, no? We shouldn't forget that of the mreits that blew up in 2008 and 2009, the ones that really got vaporized (Thornburg, Bimini, etc) were those that had branched out into origination, bundling of whole loans, and securitization. It's an inherently riskier biz than just levering up a bunch of agencies.

    Let me be clear: the deals they've done so far (the JPMMT 2014 and the CSMC 2014) look solid, at least based on 15 minutes of cursory due diligence and the ratings sheets by DBRS. These are high credit score/ low LTV/ full doc verified jumbos to highly qualified borrowers. The upper tiers of these 2014 securitizations ought to be bullet proof assuming everyone has done their homework and we're not sitting on the edge of the next Financial Crisis. But by retaining the lower ends of these securitizations, they're most exposed to any losses that might materialize. They're also going to be warehousing on their books at any given moment lots of unsecuritized whole loans whose originators prob aren't in the position to be buying them back should push come to shove.

    I've actually started a small position in the preferreds, and may add as we gain further clarity on their future, but I also think the market is probably fairly pricing in the risks associated with their business and credit sensitivity, and that people dumpster diving here based on "mean reversion" or the notion that they're just weaker (and cheaper) clones of AGNC or NLY may be getting themselves in for more than they bargained.

    Disclosure: long OAKS prefs
    Dec 31, 2015. 10:34 AM | 2 Likes Like |Link to Comment
  • Asset Class Weekly: Preferred Stock Collateral Damage  [View article]
    "owning preferred stocks in their various structures rank lower on the capital structure than the offerings in the high-yield bond space... Moreover, a vast majority of the preferred stock universe at more than 80% is made up of companies in the financial sector."

    This quote captures precisely my own rationale for buying deep OTM puts on PGF and PFF as drop insurance against a financial crisis. Any time things heat up, these puppies melt down/ flash crash. It's worked thrice now like clockwork, and yet there are still endless sellers of puts for stupidly low implied vols.
    Dec 16, 2015. 08:44 AM | 2 Likes Like |Link to Comment
  • Why I Will Likely Be A Buyer Of High Yield In 2016  [View article]
    Appreciate the thoughtful, reasoned exchange. One way in which I agree with you is that they do look really attractive relative to US equities.

    Won't repeat my arguments from above, but I still maintain that this particular universe of junk we're looking at now is qualitatively worse--with a much lower coupon than comparable pools of junk in the past--such that while there are starting to be some select bargains, I could easily tell a story of 25% defaults and negligible recoveries on senior unsecureds. You're right that HYG (and JNK, too) probably benefit from a positive selection bias versus the whole universe (though don't forget, earlier in the cycle, they owned more coal, energy, and mining, and have already cut the losses).
    Dec 15, 2015. 06:25 PM | Likes Like |Link to Comment
  • Why I Will Likely Be A Buyer Of High Yield In 2016  [View article]
    Pumpkins,

    I really appreciate that you're looking at this quantitatively, rather than the usual SA anchoring bias/ "it's fallen a lot and thus looks cheap" logic.

    But I think your projections are too rosy as a worst case.

    On credit quality: look at what's currently BB, and ask yourself if the CHKs and RIGs and Allegheny's of the world are likely to remain there for long, or aren't on the cusp of a slide into the CCC range once the ratings agencies get their acts together?

    Even granting that HYG is underweight industrials, commodities, etc. you're also ignoring the rolling disasters unfolding in retail, tech, healthcare, etc.

    So you break even versus TSY5 after a year assuming nothing really bad happens. But isn't the point in high yield that you be paid a non-trivial premium to adjust for the additional risk and volatility versus a risk-free TSY? Even loss-adjusted (assuming your modest projections of losses), a spread of 2.73% seems pretty woeful to me, given that we've seen HYG move 1.75% in a single day of ugly trading.

    Not saying you're wrong, and appreciate the serious, quantitative analysis, but doesn't seem like an attractive risk-reward to me yet. With the universe of junk as ugly as it currently is, and the waning of a credit cycle, I want a serious margin of safety before getting back in the water. This particular articulation of HYG, in light of the credit binge we've just been through, ought to carry a high single digit or low double-digit coupon.
    Dec 15, 2015. 10:35 AM | Likes Like |Link to Comment
  • Why I Will Likely Be A Buyer Of High Yield In 2016  [View article]
    Is this the end of the world? Probably not. But it's way too early to think about bottom-fishing, IMO.

    a) We've yet to see the follow-on effects of forced selling. If you're a PM, you're dumping the relatively liquid parts of your portfolio (the Sprints and Dells). If you think the carnage is bad so far, wait until people are compelled to start unloading the really ugly stuff to face margin calls/ bank credit lines being yanked/ wholesale investor redemptions/ CEF margin regulations. Folks are spooked, and junk is now an ugly word. There are no buyers.

    b) Past statistics on historical default rates are irrelevant. They're backward looking, and ignore the fact that today's junk market isn't like yesterday's junk. Forget about the CCC crap, scanning the universe of BBish rated senior unsecured energy/ materials/ mining debt, I'm struck by the possibility that if things don't turn in the commodities market, and turn rapidly, NONE of this unsecured debt is going to be worth anything. And it's not just commodities. There's a crapload of dodgy retailers, telecom, various private equity led buyout financings/ recaps, etc. also floating around, and it isn't improbable that vast swaths of this will also go to zero. In sum, after 6 years of ZIRP the universe of junk now is a swamp. Any historical comparables don't capture the full magnitude of the dangers.

    c) Contagion pathways are more complicated to track than you can imagine ex ante. Recall that subprime was contained to housing, until Lehman went down (a financial), which broke the buck in the money markets, which spilled over into a general credit seizure for commercial paper, which even the likes of GE had come to rely upon for weekly payrolls. We have no idea how much lending the big financials have outstanding to hedge funds, or what might happen when they yank it. Or whether a lot of this stuff isn't financed by short-term repo. Or who's written CDS on individual names (probably a small fraction) or broader credit indices (a big number). Or what happens when this spills next door (as has already happened) into leveraged bank loans or ABS (one neighborhood over).

    Buyers beware...
    Dec 15, 2015. 09:40 AM | 3 Likes Like |Link to Comment
  • Gundlach: If Fed met today, it wouldn't hike  [View news story]
    Yep, I also read this as a pair trade: long the beaten-down HY Cefs, and short the S&P, which hasn't adequately priced in credit contagion yet.

    This is just starting to get interesting...
    Dec 13, 2015. 11:47 AM | Likes Like |Link to Comment
  • Energy Junk Bonds: The Next Subprime?  [View article]
    Tack and Rico,

    Pretty much agree with all you've said. Not sure how much "play" there is left in the system--either through Fed policies or implied bailouts. And like Rico says, these things have ways of playing themselves out that no one can fully anticipate (the "known unknowns" are never what get you!)

    Gut tells me that we've yet to see the bottom in terms of pricing for JNK/ HYG/ BKLN, but there's also not an obvious bleed yet into IG, ABS, CMBS, or other immediate neighbors.

    Random observations:

    I was watching BB-BBBish non-energy paper (the best junk you'll find) trading down 2-4 points on Friday alone, and in some cases down 6-10 points in the matter of a couple weeks. There's *nothing* wrong with these credits, but they're being driven down by (a) pressured selling, and (b) the ETFs getting beaten up. If there's a transmission mechanism, ETFs are the likely suspects. One of two things must be true. Either the ETFs will trade below the cash market (if the creation/ redemption mechanisms get broken), or, more likely than not, the ETFs will drag the cash market down with them.

    Not all junk funds are created equal. There's plenty of these bespoke hedge funds/ Third Ave type vehicles with ugly mismatches between open-ended structures and illiquid assets. More of these are going to blow up (a la Stone Lion). But I took a few minutes to look under the hood of Vanguard's VWEHX, and was pleasantly surprised to see how well-positioned they were (and this as of 7/31). They're like 10% in super-liquid TSY and agencies; 20% in ABS; and only 60% or so in B-ish corporates, most of which are in the Baa ranges and almost no energy. Absent a tsunami of redemptions, they'll do fine with liquidity. Vanguard may be the exception that proves the more general rule, but the point is that this fund looks *nothing* like the benchmark for ETFs such as JNK and HYG. There's "junk" and then there's "JUNK"! Will aunt Jenny and uncle Joe retail be able to discriminate before running for the exits?

    BKLN is a deer in the headlights. That's the one I'm betting on blowing up/ flash crashing.

    As you guys say, there's money to be made in the stampede, but wouldn't be in any hurry.

    Disclosure: hedged against tail risk via JNK and BKLN
    Dec 13, 2015. 10:44 AM | 1 Like Like |Link to Comment
  • Energy Junk Bonds: The Next Subprime?  [View article]
    On doing "ok." We must have very different definitions of doing "ok," LOL. We're well past worrying about whether the lousy 7.5% coupons people were stretching to buy B-ish junk are going to offset the capital losses from defaults. If you had your fingers into junk, they're already good and burned--esp. as most funds have had to puke things up already, and cut their losses. Smart money who could sell down the relatively liquid stuff at 15-25% losses is already out the door. By "do ok," I mean avoid blowing up the credit markets.

    Here's where we're at right now. Mom, pop, the Cleveland Pipefitters Local 101, and every other yield-starved naif who plowed into junk funds and bank loans because somehow they were "less risky" than treasuries when "rates rise," are going to get whacked. That's a given. The real structural problems I was talking about are all those Nuveen, Vanguard, and Fidelity junk fund PMs who are cowering in the can at this very minute trying to avoid calls from someone higher up in compliance who's telling them to be prepared to meet $250M-500M in redemption requests by EOB today. And once mom, pop, and the pipefitters see the mark to market NAVs on their junk mutual funds re-rack tonight around 7PM, down nearly 6 mos worth of interest, Monday AM is going to be an even bigger bloodbath.

    Which gets back to my point about liquidity--it's always there when you don't need it, but fleeting when you need it most. Plus, now the hedgies smell blood and they are going to punish the ETFs and others stuck inside the burning building by piling on the short positions. It will be UGLY, but I don't think 2009 ugly.
    Dec 11, 2015. 01:18 PM | 3 Likes Like |Link to Comment
  • Energy Junk Bonds: The Next Subprime?  [View article]
    Hard to tell whether, or how, this could all cascade like subprime in 2008-2009.

    One imp difference, as well said above, is that junk debt doesn't tend to have the same degree of leverage put on it as did all that allegedly AAA subprime and ABS paper in the crisis. Even an aggressive hedge fund loaded up with junk energy and other B-CCC credits isn't likely to put more than a turn or two of leverage on it. And this isn't typically done via repo financing, that needs to be rolled over continuously on a short term. Contrast that to what Bear, Lehman, Thornburg, the GSEs, etc. were doing with subprime ABS--8, 10, 20 turns of leverage and overnight financing. This likely means that the collateral damage will be less and the margin calls less severe. Assuming that the eventual defaults only end up being 10-25% of the junk market (pretty draconian estimates), those who can afford to hold to maturity will prob do ok.

    All that said, the issue is liquidity, as always, and you're playing with fire when you stuff an illiquid, bespoke instrument like distressed 2L liens, bank loans, bankruptcy DIP financings, etc. into an open-ended fund or an exchange traded instrument like an ETF. Anything where you can be forced to liquidate into a bidless market is going to produce M2M mayhem well above and beyond the actual credit risk of the instrument itself. It'll also carry over inevitably into other sectors, as when you have to sell, you sell what you can. So there could be follow-on effects in other sectors. You already see this in bank loans, and the next suspect is prob ABS, CMBS, subordinated bank debt, etc if things actually go that far.

    Even if this isn't armageddon, the implied vols on puts for JNK, HYG, and BKLN still look modest compared to how vulnerable these things are to flashy-crashy, black swan events.
    Dec 11, 2015. 11:38 AM | 2 Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    Great--thanks, I'll sleep much better with your confirmation of what I already knew.

    Nuff said on the rest, especially because while this exchange has been absolutely fascinating, it has vanishingly little relationship to MBI or their ability to mitigate PR exposure.
    Nov 25, 2015. 10:37 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    It's both my broker's and my accountant's belief--and I recall years ago reading something official to this effect from a bond insurer. If you're curious, by all means feel free to slog through the IRS code and get back to me if we're all full of beans and I'm flirting with imprisonment.

    On the market discount: while I agree on your interp about the ineligibility for LT cap gains rate, upon accountant's advice, I've always treated distressed munis the same way as mbs or zeros, that is, you accrete discounts annually across the (expected) life of the bond and pay taxes on this as ordinary income. Maybe this isn't 100% kosher, but again, I'm not losing sleep over it.

    Most importantly, for our original discussion about MBI, I'm not sure the question of tax (in)eligibility is decisive in terms of whether it makes economic sense for them to mitigate their exposure by buying back distressed wrapped bonds should a sufficient discount materialize. I trust that if or when such a discount should materialize, they'll move to take advantage of it.
    Nov 24, 2015. 09:54 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    I own many defaulted bonds (Detroit, etc.) whose coupons are being paid--in part or whole--by the insurers, and the interest (whether paid by the issuer or insurer) remains tax deductible. If I'm wrong about this, then the IRS can come and take me away in handcuffs.

    What is NOT tax deductible are discounts to par (i.e. capital gains) for bonds purchased in the secondary market below face value. Insofar as a significant portion of the YTM from a potential buyback of distressed bonds comes via a purchase discount, this needs to be accreted as TAXABLE income throughout the life of the bond.
    Nov 23, 2015. 09:21 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    It's a conceptual point, and prob moot in any case, but YTM (a large component of which in a distressed case such as this one would be a function of the discount to par) is a rough (though not perfect) inverse of the net present value of the future liability.

    Take AMBAC, for example, where they insure a bunch of super long dated CABs (zero coupons, 2047 maturity, e.g. CUSIP 74529JAN5). These are currently changing hands at 10, for a YTM of 7.2%. Here the "yield to maturity" is 100% a function of the discount to par, and conversely, the current market price (i.e. .10 on the $) represents the market's approximation of the NPV of the future liability (the payout in 2047). If AMBAC bought up all of these today, they'd limit their exposure to .10 on the $ (representing a discount rate of 7.2%, which would otherwise be accreted to the owner throughout the term of the bond).

    It's slightly more complicated in the case of a coupon-paying bond, where the YTM is the accretable discount + the coupon, but still it's a spit-ball way of thinking about how one might model the future liability. This ONLY works, of course, if MBI or whoever actually takes advantage of the discount and BUYS THE BOND. Otherwise, as you say, it makes more sense to use the lower discount rate of whatever they're otherwise earning on their portfolio.

    Yes, payments from bond insurers in lieu of defaulted tax exempt issuers are also tax exempt (for anyone entitled to the tax exemption). The only question would be whether corporate holders such as MBI (if they bought the bonds) are entitled to the tax exemption in the first place. I don't know the answer to this, but in terms of the market pricing for existing holders, it shouldn't matter.
    Nov 20, 2015. 02:22 PM | Likes Like |Link to Comment
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