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  • Puerto Rico And Municipal Credit Default Swap Trading Volume 2010-2013 [View article]
    PR can always default, and may very well do so at some point in the future. But unlike Detroit et. al., they can't seek bankruptcy protection via Ch. 9. That makes the potential costs of a default much higher for PR than for Detroit, Vallejo, Stockton, etc. Defaulting gains them absolutely nothing for the time being (they still owe all the debt), costs them precious access to capital markets, and so they'll continue to pay usurious rates as long as they are able, even if it means squeezing every last nickel from their shrinking economy. As far as political will, at least I give PR credit for being willing--unlike most sovs and munis--to tighten their belt buckles and balance the budget.

    To say that every bond is a risk is a truism. That's like saying every stock could go to zero like Lehman. The question for bonds is what is the downside. PR debt at 100 cents on the $ is a disaster waiting to happen. At .40-.50 on the $ there is limited downside, especially for debt secured by dedicated revenue streams. Could it go all the way to zero? Sure, but the asymmetric risk/reward still makes it attractive for some buyers.

    The bottom line is no one knows what's going to happen next. This is the closest thing you'll find to pure Knightian uncertainty. In situations like this I like to step back and look at things behaviorally. Who are the "sellers" at this point? Aunt Jenny who just got around to looking at her Oppenheimer funds statement from 2013, soon-to-be unemployed institutional PMs with career risk, and Reuters bloggers who get paid by the click. Who are the buyers? Distressed debt hedge funds who live for opps like this. Of these two constituencies, which one is putting up real money and thinks they have an edge?
    Feb 11, 2014. 01:30 PM | Likes Like |Link to Comment
  • Puerto Rico And Municipal Credit Default Swap Trading Volume 2010-2013 [View article]
    Thanks for this, Donald, which sheds light into what's become a cloud of misinformation about this alleged "impending" PR default. It's not clear what those trafficking these rumors really mean by a "default." Default to me is non-payment of interest and principal when due. This can either mean that the issuer can't pay (insolvent), or (as in the case of many of the headline muni bankruptcies) simply chooses not to pay because some other alternative (like Ch. 9) looks more attractive.

    PR can't do a Ch. 9, so that option is off the table. The question, then, is whether or when it's in the interest of the PR govt to stop paying some of all of its obligations. I could very easily see a time down the road when they switch gears and play hardball with the GO bondholders to negotiate some kind of restructuring of the debt, exchanging the old GO debts coming due for new notes payable in the future. But with GOs trading at .50-.60 on the $, that leaves a pretty big margin of safety for haircuts. At this stage of the game, PR has absolutely no incentive to stiff their creditors. They can still access capital--albeit at extortionary rates--and will suck it up and pay the gig until this all blows over and they can refi into something in the 7-8% range where the junky credit should have been all along. COFINA's should be fine, and although the coverage on the revenue bonds is thin, they've been given control over rate increases and should be able to squeeze out their debt service.

    They've got some big structural probs. So do Spain and Italy, and look at where their sov debt is trading now... But they don't want to default (people underestimate the significance of this...)--and thus won't--until it becomes in their advantage to do so. And even then, we're talking about a fraction of the $70 Bill headline number. Regardless of whether they default momentarily or manage to kick the can down the road a couple more years (my own prediction), the risk/reward on the debt looks attractive at these prices. "Heads" (they stabilize the markets and balance the budget) and you make 50-75% upside, "tails" (they stop paying debt service and negotiate a 50% haircut), you lose nothing. At a tax free 8-8.5%, I'd rather own the 2nd lien COFINA's than any junk corporate in the market right now.

    My 2 cents, FWIW. Only time will tell.
    Feb 11, 2014. 10:18 AM | 1 Like Like |Link to Comment
  • RadioShack: Forget The Stock, Shack Up With The Bond! [View article]
    Haha, you give us too much credit for our intelligence!

    Something's def going down with the capital structure at RSH, though. First, you've got the new financing (hugely detrimental to the unsecured bondholders, who'd be better off with a quick plunge into Ch.11 and would emerge with a share in the new equity). As it is, the longer the company burns cash, the lower the potential recovery. Second, you've got this hedge fund coming in and taking a big interest in the equity. That can't be because they really think the equity is money good; no one is that dumb. It can only be a chess move to potentially head the equity committee as an impaired class to put pressure from below against the 2019s and other unsecured creditors. "Changing hands" always implies a buyer and a seller, so the significant fact about the 2019s is that they're changing hands at much lower prices. Someone sees the writing on the wall.

    I own some of the 2019s, but as part of a capital structure arb trade, and I'm increasingly pessimistic about recoveries. Rather than them leading anything (they can't force a Ch. 11 unless or until a payment is missed), my guess is the forces are aligning to squeeze them out.

    We'll know more about the only thing that matters--rate of cash burn--when earnings come out.
    Feb 4, 2014. 04:19 PM | 2 Likes Like |Link to Comment
  • Report: RadioShack to close 500 stores soon [View news story]
    Closing the worst 500 stores is a great plus...unless you have to keep paying the leases on the shuttered stores.
    Feb 4, 2014. 03:26 PM | Likes Like |Link to Comment
  • RadioShack: Forget The Stock, Shack Up With The Bond! [View article]
    Meh, I don't know about this investment thesis. If they filed a prepack Ch. 11 tomorrow, yes, it's likely that the 2019s would be the fulcrum security and stand to have a decent recovery in bk (while being equitized at the expense of, or to the dilution of, the current equity holders...). So in that sense you're right that it's better to own the bonds than the equity. If I were running the 'Shack, that's what I'd do--try to take a major controlling position in the equity and use that leverage to cram down a restructuring on the unsecured bondholders, and then use Ch. 11 to cancel all the executory contracts and leases on the underperforming stores. Otherwise, outside of Ch. 11 they're going to have to eat a big chunk of the leases on the 400 stores they're closing.

    However, people rarely do what's rational, and it's likely they'll lurch onward for another 6-9 months before burning through all their remaining cash (and any hopes for recovery on the unsecured 2019s). I would only buy the unsecured debt if you plan to hedge it by shorting the common. Otherwise, you may clip a few coupons but still find yourself with negligible recoveries in a bk as all the inventory is pledged to the senior secured bank loans.

    Big jump yesterday could just have been short covering--on days of major vol, longs typically sell and shorts cover. You see this behavior often in heavily shorted stocks on big down days.
    Feb 4, 2014. 03:24 PM | Likes Like |Link to Comment
  • Assessing The Q4 2013 Dividend Of Western Asset Mortgage Capital [View article]
    Hey Scott,

    We agree 100% on the trade-offs involved. Hedging book is costly, and that has to come at the expense of NIM. For better or worse, WMC has chosen to go a different, more aggressive route than AGNC and MTGE, who (IMHO) made exactly the wrong move of closing out losing positions at the bottom and putting on hedges when they were most costly.

    In the interest of generating conversation, rather than picking nits, you seem to make two inferences that I think are arguable. One is strategic and conjectural, the other empirical.

    With respect to WMC's strategy in the coming year, if they were going to take the pedal off the floor and lighten up on leverage or add swaps, the time to do so is long past. Their strategy is aggressive as heck, no dispute there, but I think their view is that we've seen the worst of the vol, and that the best path through the mreit malaise is to hold the high divvy at any cost to NAV, betting that after a few quarters investors will come back in at a premium. Paying out all the gains on swaps at once--with a headline number--also has the attraction of scaring the shorts into covering. Issue some new shares, hold the cash, and be willing to accept some serious turbulence with NAV if rates begin to back up again. Love it or hate it, that seems to be the gameplan.

    The second quibble regards your point about WAC (weighted average coupon) and the conclusions you draw from it about the dangers of cutting the divvy. You say "These two factors, WMC's higher proportion of 30-year fixed-rate agency MBS but basically the same WAC, lead me to believe WMC should have dividend distributions that are equal to (or at the most slightly above) what AGNC and MTGE have distributed over the past few quarters (generally speaking)." Your point, in a nutshell, is that because WMC's WAC isn't *that much* greater than AGNC's, that the dividend is too high and will need to be trimmed.

    Here's the problem with that reasoning. Relying on WAC here is misleading, if not wrong, and while it can tell you some very broad things about earnings power, it's important to keep in mind that WAC<>realizeable YIELD. You can have a pool of lower coupon 3s or 3.5s specials purchased at a discount to par and prepaying at 3-5% (WMC's bread and butter) that might have a higher expected YIELD than a generic pool of 4s and 4.5s purchased at a premium and prepaying at 25-30% (the space where AGNC and MTGE have migrated). Put differently, yield isn't linear to coupon. You can see this by looking at a stack chart of prices on 3s, 3.5s, 4s, 4.5s, 5s, etc. (insofar as the off the run coupons still trade). The price tends to increase a little as you move above the current coupon and then begins to level out very quickly, That reflects the fact that people aren't willing to pay significant premia for higher coupons because they know they'll get their money back sooner. Otherwise, if you think about it, if yield were perfectly linear to coupon, people would always buy the highest coupon they could find.

    So the move you've observed on AGNC's part to shift into higher coupon 30s isn't to increase yield, it's strictly to lower duration. They're accepting a LOWER expected yield on those 4s and 5s (as well as the 15s) in exchange for a lower duration (and less price vol).

    Sorry to bore everyone to tears with the details, but it's just to say that your inference from WAC is problematic. The real story comes from NIM.

    A rash prediction: if vol remains low (at no point does TSY10 break above 3.15% in the next quarter), they raise the divvy to $.85 next qtr...

    Happy holidays and GLTA :)
    Dec 26, 2013. 10:35 AM | 3 Likes Like |Link to Comment
  • Assessing The Q4 2013 Dividend Of Western Asset Mortgage Capital [View article]
    I’m sure many people appreciate the clear, detailed analysis you present. Thanks for this. But your own analysis of WMC’s earnings power answers the question of why it can trade at a premium to the rest of the space. Regardless of how its WAC looks relative to AGNC and MTGE, it is running a more aggressive portfolio with a larger duration gap. The story behind the diff is in the NIM. If you look at WMC versus its peers in terms of EARNINGS POWER, it’s easy to see why it deserves to trade at a premium to the others. It is raking in the spread income.

    Why "unsustainable"? Spit-balling NIM of 2.28% (3.42% average portfolio yield-1.14% cost of funds) * 9 times leverage=20.52% + 2.28% on the portfolio itself=22.8% earnings on a going forward basis. **Assuming no changes to portfolio from 9/30**, I see no problem whatsoever for them to easily cover the current regular dividend of .80 per share in spread income. By way of contrast, both AGNC and MTGE have reduced leverage, migrated down into 15s, and put on the brakes through additional hedges, and thus the successive divvy cuts. They’ve sacrificed NIM to stabilize book.

    The flip-side of this, which is the *real* danger of WMC that you barely touch on, is that this makes WMC’s NAV much more volatile. If rates begin to back up again aggressively, they’re going to be slammed much harder than AGNC or MTGE with all those low coupon 30s.
    Pick your poison. The $1.55 or whatever special is an accounting gimmick—no argument there. But if you want raw earnings power at the cost of running a bigger duration gap (this used to be AGNC’s game, for which everyone loved them…), then WMC is best in class and, IMO, deserves to trade tighter than AGNC, NLY, etc.

    My 2 cents...

    Disclosure: long WMC and MTGE
    Dec 24, 2013. 04:22 PM | 6 Likes Like |Link to Comment
  • Gundlach: Time to buy interest rate risk [View news story]
    When, exactly, was he wrong about mreits? In early 2013 when he was calling them toppy and warning everyone that dividend cuts were inevitable? Or fall 2013 to the present day (after they tanked) when his position has flipped 180 degrees to the view that they're cheap at these current discounts to NAV?

    Like anyone else, he doesn't bat 100%. But he's made some amazing calls over the past five or six years on IR moves, understands when things are expensive and cheap, and manages risk as well as anyone in the business.
    Nov 30, 2013. 02:07 PM | 15 Likes Like |Link to Comment
  • Understanding The Implications Of Debt Guarantees For Caesars Entertainment [View article]
    " there is the chance that CZR investors who are arguably irrational, could get excited about some positive development involving something like online gambling or the AC convention center, that would allow CZR to sell the shares in a quantity that could keep the company alive."

    "Irrational" is a fantastic euphemism. That is a heck of a bull thesis--maybe the dumb money is *so* dumb that it will rush in to buy even more of the worthless equity, thus bailing out the bondholders.

    Ordinarily, I'd dismiss a proposition like that out of hand. But after witnessing the trading in STP--or the fact that OSH had to issue a press release this summer telling the brainless equity holders that their stock was worthless--I'm prepared to concede nothing is impossible when it comes to the retarded (sorry, is "impaired" better?) tail end of the capital structure...
    Nov 2, 2013. 08:21 PM | Likes Like |Link to Comment
  • The 'Catch 22' Of The mREIT Sector [View article]
    Yo, Dividends#1, good to hear from you, too! Best wishes, hope all's well with you, and good luck with the mreits. Alas, my return(s) to SA are seulement pour un moment, but I'll chime in when appropriate, mainly these days on distressed debt and bankruptcies. I tend to think the mreits are out of the worst of it, but there are also lots of even better trades risk/reward in CEFs and munis. So my enthusiasm for MTGE and AGNC is muted.

    Oct 24, 2013. 08:56 PM | Likes Like |Link to Comment
  • The 'Catch 22' Of The mREIT Sector [View article]
    Hey RS,

    Good points. These things rely on a goldilocks bond market that is probably untenable over the long term. I agree with the overall thrust of your argument, and good for you for repeating these warnings just as people's wounds from this summer have stopped stinging and the recency bias of mreits being up 15% off the bottom starts to kick in. Your caution would have been more apposite, of course, last Nov or Jan when these things were so self-evidently toppy--and certain other SA authors who shall remain nameless were touting all things mreits--but that's a whole nother story...

    Still, for the sake of argument (and setting aside the proverbial retiree on a fixed income who can't afford even a nickel of principal loss), there's a case to be made for the mreits (and much of the HY FI universe) as still relatively cheap. Not cheap like six weeks ago cheap--when people literally wouldn't touch rock-solid HY mbs CEFs like PDI, PKO, DBL, DSL, or HNW with a ten foot pole, and mreits were trading at 15-20% discounts to book--but still cheap relative to average historical discounts and the benign earnings reports that are coming down the pike. I've stopped accumulating HY FI and MBS after this recent run, and am starting to think of banking some profits, but I don't think mreits are ridiculously priced here for those who can afford to stomach a little vol.

    As far as catalysts go, you're going to have decent earnings and NAV preservation if not rebound; the economy is slowing and so no tapering in sight; technicals on mbs and TSY10 are as good as they've been all summer; and after the savage divvy cuts, what's being paid out now should be sustainable. Wouldn't go in big here, but there's more upside to be a buyer than a seller of MTGE, WMC, AGNC, NLY, etc.

    No tomatoes, but I'd be on the other side of your trade.
    Oct 24, 2013. 11:44 AM | 3 Likes Like |Link to Comment
  • Puerto Rico munis plummet 6.6% in October [View news story]
    Today's official investor webcast:

    The "party line," no doubt, but casts a *very* diff light on the situation than the histrionic media. With the 60% rate increase, PRASA is now self funding (no need for funds from govt), and after debt refunding in August, PREPA's capital investment needs are funded for the next two years.
    Oct 15, 2013. 04:57 PM | 1 Like Like |Link to Comment
  • Puerto Rico munis plummet 6.6% in October [View news story]
    Before all's said and done, I think we'll prob see .30 cents on the $ for some of the crappier stuff, which in a negotiated restructuring (say, a 25-30% haircut) translates into a pretty nice risk/ reward. But yes, things are likely to go lower before they start bouncing back. I'm just now starting to dip toes in the water. Haven't run all the #'s yet, but going long the debt and short the monolines or PR banks looks like a way to hedge away some of the downside and still have positive carry.

    The GM example is apposite, and why if you're a hedgie buying this stuff up, the last thing you want is a US-funded bailout. Once the fed govt gets involved--especially in a one-off situation like this--all the usual rules go out the window (FNMA, GM, etc) and calculable risk becomes total uncertainty.

    One other observation: unsure whether the #s being thrown around about total PR debt load relative to US state debt load are apples to apples. I think the $70B # is counting all PR issuers, including revenue, electric, sewer, university, etc., which to my mind would be as if some of the private issuers in NY or CA (universities, utilities,corporations, etc) were considered as public debt for which state residents were responsible. Also ignores the share of federal debt allocable to all state residents (which PR residents arguably don't share, at least under current tax structure).
    Oct 15, 2013. 05:32 AM | Likes Like |Link to Comment
  • Puerto Rico munis plummet 6.6% in October [View news story]
    Sorry, one further observation, in support of the other view:

    Sifting through the stuff being puked up by the market the last few days, you can't help but sense the insanity...

    Hundreds of millions of A+ (cough, right, cough) rated COFINA deals in 2011 and 2012 structured as 20 year zero coupons... Cuz' if they can't afford to pay a coupon now, they'll certainly be able to repay all the cash in 20 years. Detroit loved those zeros, too, LOL! Junior subordinated pieces of ca. 2012 sewer and infra refunding deals pricing at 110 (!?!) at issue for a 5 coupon. Who was buying this crap at these prices?

    Some of this garbage looks *almost* as bad as recent HY issuances here in the US. This story isn't just about PR but also about the Fed-driven, totally insane, mal-investment producing quest for yield that's going to come back and bite us in the rear for decades to come. PR is symptom as much as cause.

    How fitting that as the full story comes out, we discover that the binge was being funded (unwittingly) by....wait for it...retail investors stretching for yield.
    Oct 14, 2013. 04:00 PM | 2 Likes Like |Link to Comment
  • Puerto Rico munis plummet 6.6% in October [View news story]
    And we'll see how that rate increase--all of 4 months old--pans out, no?

    No quarrels whatsoever that the island is in a serious debt spiral, and that the GO and other discretionary bonds are facing pressures. But the bonds with strong covenants backed by inelastic revenue streams (water, sewer, certain taxation districts) have the advantage of being bankruptcy proof and their coupons will be sucked--one way or another--from the island's economy.

    Do I love PR's balance sheet or think its debt should trade inside of IBM? Of course not. But at .50-.60 on the dollar, and 10+% tax-free yields, and forced selling, it's one of the most interesting DD situations out there in terms of asymmetric risk/reward. I would buy this stuff all day long and on Sundays before I would touch the drek from RSH, CZR, etc.
    Oct 14, 2013. 03:26 PM | 1 Like Like |Link to Comment