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PRHTA bonds (745190TD0, 745190TR9 and a few others)


muscleman
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Note: this thesis is in an application that I submitted to VIC.

 

Note:

1. I normally invest in stocks, but this one is a municipal bond idea. I have never invested in municipal bonds before.

2. The liquidity of these bonds are very low, so anyone interested will have to look at the bond ladder from 2015 expiration to 2030 expiration. CUSIP: 745190TR9 is the 2030 expiration and relatively liquid.

 

Now here we begin:

 

Summary:

The recent passage of  Puerto Rico Public Corporation Debt Enforcement and Recovery Act (http://www.gdb-pur.com/documents/FactsAboutDebtEnforcementAndRecoveryAct.pdf) truly shed blood onto the PR municipal market. Although this act only enables debt restructuring for PRHTA, PREPA and PRASA, all PR bonds are on fire sale, but PRHTA and PREPA's bonds experienced the biggest drop. Has Mr. Market rationally priced in the risks for these bonds, or is he totally maniac right now? My research below will show you why I believe PRHTA's bonds should be worth 60 to 100 cents on the dollar, reflecting an upside of 100-300% over the next 2 years.

 

Details:

1. Background

Puerto Rico debt has been a hot topic amoung the media since last year. The total debt is 70bn and they have a deficit since decades ago. Due to the triple tax exempt status, PR government and its agencies can keep selling more bonds and include selling of these bonds as part of their annual "balanced" budget proposal. Eventually, the debt load has become so high that it is much harder to find lenders. The new governor Alejandro García Padilla has enacted an impressive number of Acts in order to turn around this situation. While there are signs of improvement, the market did not seem to believe the story. As the market remained temporarily closed, Puerto Rico Development Bank (GDB) had to provide liquidity to various government agencies and carry the entire PR onto its back since last November.

The market relieved this April as a successful $3.5 bn General Obligation bonds were issued and GDB got $1.9 bn to restore its liquidity position. The GO bonds jumped from over 60 cents on the dollar to 73 and everything seem to be peaceful again.

However, in late June, the announcement of Puerto Rico Public Corporation Debt Enforcement and Recovery Act totally shocked the market and caused panic selling. These three agencies' bonds were consider safe and had investment grade just 12 months ago, as they use their revenue as the collateral to pay the bonds first, and any remaining money will pay the operating expenses and worker's payroll, and also PR does not allow debt restructuring. But the passage of this effectively bankruptcy law reminds people that PR's willingness to pay its debt has limits, and perhaps these three agencies will just be the tip of the iceberg and pave the way for additional restructuring of other PR bonds in the future.

 

2. Brief analysis of the three involved agencies.

Right now PREPA has the worst shape of  the three. Its  672 Million line of credit from two commercial banks are due now, but it is unable to get them renew the lines of credit. It also has ran out of cash to purchase fuel. In addition, its charges customers 3 times the price of electricity per kilowatt compared to mainland US utilities, as it is using oil instead of natural gas to generate electricity. It needs to spend 8-9 bn in order to upgrade its facilities to use natural gas, but it neither has the money nor can find more lenders to get this money for upgrades.

PRASA and PRHTA are in a better shape. Their interest coverage ratio on the debt is about 1.13x and 1.45x separately. PRASA needs to upgrade its facilities to meet new environmental regulations, but it does not seem to have the urgent need to do so now. Also PRASA's president just talked to journalists and said it has no need to restructure right now. (http://www.reuters.com/article/2014/06/27/puertorico-debt-prasa-idUSL2N0P81ME20140627)

PRHTA is on the suspicion of the restructuring candidate according to some jounarlists "because it is facing large operating losses every year". However, I believe this concern is overblown, given the following aspects:

    A. PR GDB has a 2 bn loan lent to PRHTA, which amounts to 14% of its total assets and 85% of its equity. Given the role GDB plays so far in the crisis, if PRHTA gets restructured, there is a good chance to cause a domino chain effects on the entire PR financial system.

    B. The willingness to pay remains strong, as implied from the following (Open the pdf, the first two paragraphs of page 19. ) "http://emma.msrb.org/EP810215-EP627537-EP1029317.pdf". Note  that these actions will likely bring $250 mn additional revenue to PRHTA.

    C. PRHTA's interest coverage ratio remains strong at 1.45x.

    D. PRHTA will not have cash flow problems even without government grants support every year, as I will show you in the next section.

 

3. Detailed analysis of PRHTA's financial reports.

This is the financial report for the year end 6/30/2013.

http://emma.msrb.org/EP810215-EP627537-EP1029317.pdf

 

I would like to point out some important accounting rules in this report (page 27).

    A. Maintanence capex is expensed, and these items are included in its operating expenses section.

    B. Roads and highways depreciate over 40 years and bridges and transporation systems depreciate over 50 years.

These two items tell us that the D&A figure running at $500 mn per year can all be added back to the cash flow, because it will be unrealistic to say that after a road is built and Maintanence capex is spent every year, the road will still be useless after 40 years. One limitation is that I do not know if the Maintanence capex is sufficient at current levels, without a visit to all the PR roads and highways.

 

Let's look at page 22, which is the financial report for 2013 and 2012. Assuming the additional actions mentioned in 2.B can successfully bring in 250 mn extra revenue, and assuming that the government will no longer be willing to give grants to PRHTA, then its adjusted annual loss will be 318 mn. This is sustainable if we add back the $438 mn D&A figure. This gives us a positive cash flow of 120 mn per year, which provides a nice buffer if the current maintenance capex is insufficient as I pointed out in the above paragraph.

Therefore, I believe PRHTA's current debt level is sustainable.

 

4.  Worst case analysis.

Assuming that Assuming the additional actions mentioned in 2.B cannot bring in 250 mn extra revenue, due to various factors. Maybe the austerity measure in PR caused too much economic contraction and causing the overall revenue to drop, I assume a 20% haircut on the  total revenues for PRHTA. Then its total revenue will be (250+476) * 80% = 580 mn. I also assume that the current maintenance capex is too low and it actually needs 200 mn more per year. This brings the cash flow from a positive 120mn to a negative 225 mn. In this case, a haircut of 20% of the bonds with a interest cut from 5% coupon to 3% coupon will make the debt sustainable again. In this case, I expect the bonds to trade at the 60 cents level prior to the debt restructure, which implies a good MoS if purchased at 36 cents now.

 

5. Additional notes.

A .Moody's downgrade comments:

    https://www.moodys.com/research/Moodys-downgrades-Puerto-Rico-Aqueduct-Sewer-Highway-Transportation-authorities-to--PR_302949

"Moody's acknowledges that PRHTA and PRASA have taken steps toward self-sufficiency by raising revenues, and that while their internal liquidity is weak, they do not face immediate liquidity needs that would force them to seek near-term debt restructuring."

 

B. Right now the senior transportation bonds of PRHTA (745190TR9 and others) trade at the same price level as the subordinated bonds, a sign that Mr. Market is totally maniac depressive right now.

 

C. http://www.bloomberg.com/news/2014-06-27/bulk-of-puerto-rico-electric-debt-without-lifeline-for-investors.html

  "With its liquidity problems and electricity costs that are double that on the U.S. mainland, Prepa may offer repayment below 10 cents on the dollar, Fabian said. At least 75 percent of investors would need to approve any restructuring, which would be difficult, he said."

 

  (I view this as a cheap way to become famous for an analyst, just like Meredith Whiteney's Trillion dollar muni market default comment.)

 

  D. 40% of PRHTA  bonds are insured by AGO, MBI, AMBC etc, so there is substantial interest for these companies to fight for you for free.

 

  E. Given the worst case scenario outlined here, I think MBI shareholders may consider to switch to PRHTA bonds, because the outcome of these PRHTA, PREPA and PRASA bonds will directly affect MBI's future.

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http://www.bloomberg.com/news/2014-07-24/puerto-rico-borrowing-measure-would-repay-2-billion-owed-to-gdb.html

 

Since no one else seems interested in this situation, I'll bite.  I've had a fair amount of success with some of the municipal insurers as well as Puerto Rico bonds.

 

It seems likely to me that the credit quality for agency bonds in Puerto Rico will be continually siphoned to increase the quality of the commonwealth general obligation bonds.  The lawsuit yesterday by Blue Mountain seems to think they will not get away with this, but I'm not sure about that.

 

Investing in these agency bonds will be tough to analyze because it is difficult to understand the margin of safety.  In addition the repayment of the GDP will probably put a kink in a large part of your thesis.

 

I am interested in the 2035 8% PR GO that was issued this year.  CUSIP 74514LE86.  Since these were issued under NY law and have such a high coupon, the de minims tax on a drop in value to say 80 will mean a 9.5% tax-free yield.  Because of the actions towards the other agencies, I suspect they will do what it takes to protect those bonds or some minimal haircut (such as 20-30%).  A price of 70-80 on those will be attractive but they trade for about 90 versus the 93 issue price.

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I just wanted to make it known to Muscleman that I like this idea. It was clear you were fishing for responses on this thread across the forum  ;)

 

I just don't have enough capital at my disposal at 25 for distressed bonds to be a part of my portfolio which is why you haven't seen me more involved in this. $10,000 increments is a lot for me and I've only just gotten to a size to feel comfortable enough having my two largest positions that size. I wouldn't sleep well at night with this being one of my largest positions but I've been following it and appreciate the work you're putting into it.

 

In a two or three years I'll probably have enough to begin giving distressed debt situations a look.

 

**Edit**

I've just researched and saw that the increments for corporate bonds has now fallen to $5,000 in the last 4 years. Maybe it's something I'll begin looking into sooner but a $5,000 position would still be relatively large for my current portfolio until I understand them a little better.

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http://www.bloomberg.com/news/2014-07-24/puerto-rico-borrowing-measure-would-repay-2-billion-owed-to-gdb.html

 

Since no one else seems interested in this situation, I'll bite.  I've had a fair amount of success with some of the municipal insurers as well as Puerto Rico bonds.

 

It seems likely to me that the credit quality for agency bonds in Puerto Rico will be continually siphoned to increase the quality of the commonwealth general obligation bonds.  The lawsuit yesterday by Blue Mountain seems to think they will not get away with this, but I'm not sure about that.

 

Investing in these agency bonds will be tough to analyze because it is difficult to understand the margin of safety.  In addition the repayment of the GDP will probably put a kink in a large part of your thesis.

 

I am interested in the 2035 8% PR GO that was issued this year.  CUSIP 74514LE86.  Since these were issued under NY law and have such a high coupon, the de minims tax on a drop in value to say 80 will mean a 9.5% tax-free yield.  Because of the actions towards the other agencies, I suspect they will do what it takes to protect those bonds or some minimal haircut (such as 20-30%).  A price of 70-80 on those will be attractive but they trade for about 90 versus the 93 issue price.

 

Thank you for the comment and the news about the new 2.2 bn loan.

My understanding is that PRHTA currently have 4 bn bonds plus 2 bn GDB loan. To ensure repayment of these loans, in 2013, they moved more revenues including petroleum tax increase to PRHTA so GDB loans could be repaid.

Now that they want to take away the increase in petroleum tax increase and use it to back the issuance of 2.2bn bond by PRIFA, it isn't actually as bad as I initially understood. The reason is that now PRHTA only has the 4 bn bonds in debt, not the 2 bn GDB loan anymore. So even though the petroeum tax increase revenue is taken away, there is also less debt to service. So instead of 250 mn revenue increase, it will only be 90 mn. Last year, PRHTA pays 400mn interest expense. Now with this new proposal, it will only pay about 280 mn interest expense. Therefore it is still sustainable.

 

My thesis lies in two parts. First is the GDB part, which has been weakened. The second part is that PRHTA itself is sustainable and the willingness to pay remains strong, which has not be undermined.

 

During last week's PR conference call,

It was disclosed that Governor Garcia Padilla had asked the PRHTA for a plan for reforming its operations “without using the Recovery Act,”

 

Read more: http://www.btigresearch.com/2014/07/18/assured-guaranty-ago-mbia-mbi-ambac-financial-group-ambc-takeaways-from-puerto-ricos-fiscal-and-economic-update-webcast/#ixzz38R3oV5PP

 

 

 

Essentially, I believe the second part of my thesis is more important than the first part. It is the financial situation of itself that decides whether it could be saved or not.

Look at Greece bonds for example, they only haircut the private sector and protected ECB from getting any cut. I have already considered a similar situation here.

 

 

BTW, this thesis got rejected as the application to VIC.  :(

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I just wanted to make it known to Muscleman that I like this idea. It was clear you were fishing for responses on this thread across the forum  ;)

 

I just don't have enough capital at my disposal at 25 for distressed bonds to be a part of my portfolio which is why you haven't seen me more involved in this. $10,000 increments is a lot for me and I've only just gotten to a size to feel comfortable enough having my two largest positions that size. I wouldn't sleep well at night with this being one of my largest positions but I've been following it and appreciate the work you're putting into it.

 

In a two or three years I'll probably have enough to begin giving distressed debt situations a look.

 

**Edit**

I've just researched and saw that the increments for corporate bonds has now fallen to $5,000 in the last 4 years. Maybe it's something I'll begin looking into sooner but a $5,000 position would still be relatively large for my current portfolio until I understand them a little better.

 

Which broker are you using? I use IB and 5k is the par value as the minimum lot size. Since it was trading at 36 cents on the dollar last week, 5k bond would only cost you $1900.

 

Anyway, I believe PR related securities like this one and BPOP will be my primary focus this year.

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muscleman - Puerto Rico an interesting idea that I've done some work on. My concern with PRHTA is that eventually, Puerto Rico is probably going to need to restructure some debt and it seems clear now that the first debt to be targeted will be the corporation debt. Then, if they've decided to go after corporation debt, why not throw PRHTA in the mix? Why keep paying interest to investors that could go to preserve the PR economy ... I feel like your analysis focuses on the idea PRHTA will be allowed to act as an independent entity with its own cash flows and balance sheet. But in practice I think PR might choose to just cast it in with the rest of the dirty laundry. Once they pull the trigger on restructuring debt, they know that the impact on their economy will be severe, so they are forced to eliminate as much debt as possible in the first cut. (Unless they get the Greece scenario of getting a bailout from the US, but that seems unlikely right now.)

 

Picasso - what are your thoughts on the lower dollar price GOs compared to the 8s, the ones already trading in the 60s? Do you believe the previous GO issues will face steeper haircuts?

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I think the 8% bonds look more attractive from a margin of safety and tax standpoint.

 

First, the bonds were issued under NY law versus the other GO bonds which will have to be restructured in court as a sovereign entity.  The bonds were structured this way to make it unlikely to default on the NY bonds at the same time as the other GO bonds.  This happened with Greece when the non-Athens related debt kept paying.

 

The second is, the yield is only tax-free on the original issue yield.  So it was issued at 93% to yield 8%+ which is the true tax-free yield.  Not bad.  The high coupon rate will also reduce some interest rate risk.  Although I'm not worried about rates moving up in general it's extra protection which seems free right now.

 

The deeply discounted GO bonds will be taxable above those OID or yield levels at issue.  So if it was issued at 5% but yields 9%, you have 4% of taxable yield and 5% tax-free with some de minimus rules which is negligible. 

 

If the 8% coupon trades at 80, you have NY law a massive tax-free yield which will be equivalent to maybe 13-14% on the other GO paper but minimal haircut risk.  And it seems more likely that PR will haircut the other corporations as you said to save face on the NY law GO bonds and such.

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http://www.bloomberg.com/news/2014-07-24/puerto-rico-borrowing-measure-would-repay-2-billion-owed-to-gdb.html

 

Since no one else seems interested in this situation, I'll bite.  I've had a fair amount of success with some of the municipal insurers as well as Puerto Rico bonds.

 

It seems likely to me that the credit quality for agency bonds in Puerto Rico will be continually siphoned to increase the quality of the commonwealth general obligation bonds.  The lawsuit yesterday by Blue Mountain seems to think they will not get away with this, but I'm not sure about that.

 

Investing in these agency bonds will be tough to analyze because it is difficult to understand the margin of safety.  In addition the repayment of the GDP will probably put a kink in a large part of your thesis.

 

I am interested in the 2035 8% PR GO that was issued this year.  CUSIP 74514LE86.  Since these were issued under NY law and have such a high coupon, the de minims tax on a drop in value to say 80 will mean a 9.5% tax-free yield.  Because of the actions towards the other agencies, I suspect they will do what it takes to protect those bonds or some minimal haircut (such as 20-30%).  A price of 70-80 on those will be attractive but they trade for about 90 versus the 93 issue price.

 

Thank you for the comment and the news about the new 2.2 bn loan.

My understanding is that PRHTA currently have 4 bn bonds plus 2 bn GDB loan. To ensure repayment of these loans, in 2013, they moved more revenues including petroleum tax increase to PRHTA so GDB loans could be repaid.

Now that they want to take away the increase in petroleum tax increase and use it to back the issuance of 2.2bn bond by PRIFA, it isn't actually as bad as I initially understood. The reason is that now PRHTA only has the 4 bn bonds in debt, not the 2 bn GDB loan anymore. So even though the petroeum tax increase revenue is taken away, there is also less debt to service. So instead of 250 mn revenue increase, it will only be 90 mn. Last year, PRHTA pays 400mn interest expense. Now with this new proposal, it will only pay about 280 mn interest expense. Therefore it is still sustainable.

 

My thesis lies in two parts. First is the GDB part, which has been weakened. The second part is that PRHTA itself is sustainable and the willingness to pay remains strong, which has not be undermined.

 

During last week's PR conference call,

It was disclosed that Governor Garcia Padilla had asked the PRHTA for a plan for reforming its operations “without using the Recovery Act,”

 

Read more: http://www.btigresearch.com/2014/07/18/assured-guaranty-ago-mbia-mbi-ambac-financial-group-ambc-takeaways-from-puerto-ricos-fiscal-and-economic-update-webcast/#ixzz38R3oV5PP

 

 

 

Essentially, I believe the second part of my thesis is more important than the first part. It is the financial situation of itself that decides whether it could be saved or not.

Look at Greece bonds for example, they only haircut the private sector and protected ECB from getting any cut. I have already considered a similar situation here.

 

 

BTW, this thesis got rejected as the application to VIC.  :(

 

muscleman, I think you have the right idea looking at PR bonds but maybe should dig deeper.  There are some interesting aspects to the debt there.  Sorry to hear about the VIC rejection :/

 

Here are a few examples I ran across:

 

Berkshire Hathaway insures several PR issuers.  There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it.  Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield.

 

Lower parts of Assured Guaranty capital structure such as preferred are yielding less than PR bonds they insure.  That is crazy.  You can get 7% tax-free in AA PR GO bonds with AGO behind it versus 6.5% in taxable BBB preferred with 70 or 80 year duration.

 

Keep looking around, you'll be surprised what you find...

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muscleman - Puerto Rico an interesting idea that I've done some work on. My concern with PRHTA is that eventually, Puerto Rico is probably going to need to restructure some debt and it seems clear now that the first debt to be targeted will be the corporation debt. Then, if they've decided to go after corporation debt, why not throw PRHTA in the mix? Why keep paying interest to investors that could go to preserve the PR economy ... I feel like your analysis focuses on the idea PRHTA will be allowed to act as an independent entity with its own cash flows and balance sheet. But in practice I think PR might choose to just cast it in with the rest of the dirty laundry. Once they pull the trigger on restructuring debt, they know that the impact on their economy will be severe, so they are forced to eliminate as much debt as possible in the first cut. (Unless they get the Greece scenario of getting a bailout from the US, but that seems unlikely right now.)

 

Picasso - what are your thoughts on the lower dollar price GOs compared to the 8s, the ones already trading in the 60s? Do you believe the previous GO issues will face steeper haircuts?

 

Thank you. I am aware but forgot to point out that according to PR constitution, the revenue secured bonds rank below GO bonds, so if GO bonds could not pay, they can divert the revenue to pay GO bonds first, except the toll revenue, which is about 27% of PRHTA revenue.

 

So it is possible that eventually if PR economy goes like Greece, and GO bonds could not pay, then my PRHTA position will be undermined.

 

What do you think about the 2014 budget? I am impressed with the amount of work that the current governor has done. I think an 380 mn annual deficit is sustainable.

 

PR's situation is not as bad as Greece, if you look at it from angle of unemployment rate and debt/GDP ratio.

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muscleman, I think you have the right idea looking at PR bonds but maybe should dig deeper.  There are some interesting aspects to the debt there.  Sorry to hear about the VIC rejection :/

 

Here are a few examples I ran across:

 

Berkshire Hathaway insures several PR issuers.  There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it.  Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield.

 

Lower parts of Assured Guaranty capital structure such as preferred are yielding less than PR bonds they insure.  That is crazy.  You can get 7% tax-free in AA PR GO bonds with AGO behind it versus 6.5% in taxable BBB preferred with 70 or 80 year duration.

 

Keep looking around, you'll be surprised what you find...

 

4.25% yield would not be interesting to me. Pabrai is my role model and I have a 26% return goal like he does. I would not invest in securites that I believe has a lower return than that.  :)

 

If you talk about arbitrage, there are abundant oppurtunities around the PR bonds. For example, the PRHTA 2018 senior bond traded at a lower price than the subordinated bond, the last time I checked. This is a sign that the market is quite irrational about these bonds right now.

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I have about a 23 percent return since November from price appreciation on the insured PR bonds plus the yield which was 6.8% cash yield.

 

I manage bonds for other investors so 4.5 tax free on Berkshire paper is good when Treasury rates are 2.5. 

 

I think 26 percent returns in PR are possible if things get worse, which they probably will. But that's not likely to happen from the current pricing unless you catch an illiquid bid. 

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Good discussion.  I think Muscleman is looking for a bigger hit than more staid bond returns, but I appreciate the lower return / safer ideas.

 

There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it.  Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield.

 

Great to know, I'd been looking for BHAC PR issues (can you share the 10 yr CUSIP?  I'm only seeing '41 issue), I hadn't seen them... thanks.

 

By the way, you may know this, but BHAC != Berkshire.  BHAC could go under (I'm not saying it will or is even remotely likely, and I have bought BHAC issues before)... Berkshire won't.

 

Thanks,

 

Ben

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Good discussion.  I think Muscleman is looking for a bigger hit than more staid bond returns, but I appreciate the lower return / safer ideas.

 

There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it.  Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield.

 

By the way, you may know this, but BHAC != Berkshire.  BHAC could go under (I'm not saying it will or is even remotely likely, and I have bought BHAC issues before)... Berkshire won't.

 

 

Good point, sorry if I made it sound equivalent.

 

Here are the CUSIP's on different BHAC PR issues.  Only a few trade such as the zero coupon COFINA and the 2024 PREPA I mentioned.

 

74529JEZ PR 07/31/2007 08/01/2041 PR S/TAX-CABS-A-BHAC

74529JFA PR 07/31/2007 08/01/2047 PR S/TAX-CABS-A-BHAC

74529JFB PR 07/31/2007 08/01/2054 PR S/TAX-CABS-BHAC-CR

745220LH PR 5.500 06/16/2005 07/01/2020 PR INFRA-A-BHAC-CR

745220LD PR 5.500 06/16/2005 07/01/2019 PR INFRA-REF-C-BHAC

745220LE PR 5.500 06/16/2005 07/01/2020 PR INFRA-REF-C-BHAC

745220LJ PR 5.500 06/16/2005 07/01/2022 PR INFRA-A-BHAC-CR

745220LF PR 5.500 06/16/2005 07/01/2021 PR INFRA-REF-C-BHAC

745220LG PR 5.500 06/16/2005 07/01/2022 PR INFRA-RF-C-BHAC-CR

745190W6 PR 5.250 10/04/2005 07/01/2021 PR HWY REF-SER L-BHAC

74526QVT PR 5.000 05/03/2007 07/01/2023 PR ELEC-SER UU-BHAC

74526QVU PR 5.000 05/03/2007 07/01/2024 PR ELEC-SER UU BHAC

74526QVV PR 5.250 05/30/2007 07/01/2024 REF-SER V V-BHAC-CR

74529JGA PR 07/31/2007 08/01/2054 PR S/TAX CAB-A-BHAC

74526QVW PR 5.250 05/30/2007 07/01/2025 PR ELEC-REF-SER-BHAC

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Good discussion.  I think Muscleman is looking for a bigger hit than more staid bond returns, but I appreciate the lower return / safer ideas.

 

There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it.  Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield.

 

By the way, you may know this, but BHAC != Berkshire.  BHAC could go under (I'm not saying it will or is even remotely likely, and I have bought BHAC issues before)... Berkshire won't.

 

 

Good point, sorry if I made it sound equivalent.

 

Here are the CUSIP's on different BHAC PR issues.  Only a few trade such as the zero coupon COFINA and the 2024 PREPA I mentioned.

 

74529JEZ PR 07/31/2007 08/01/2041 PR S/TAX-CABS-A-BHAC

74529JFA PR 07/31/2007 08/01/2047 PR S/TAX-CABS-A-BHAC

74529JFB PR 07/31/2007 08/01/2054 PR S/TAX-CABS-BHAC-CR

745220LH PR 5.500 06/16/2005 07/01/2020 PR INFRA-A-BHAC-CR

745220LD PR 5.500 06/16/2005 07/01/2019 PR INFRA-REF-C-BHAC

745220LE PR 5.500 06/16/2005 07/01/2020 PR INFRA-REF-C-BHAC

745220LJ PR 5.500 06/16/2005 07/01/2022 PR INFRA-A-BHAC-CR

745220LF PR 5.500 06/16/2005 07/01/2021 PR INFRA-REF-C-BHAC

745220LG PR 5.500 06/16/2005 07/01/2022 PR INFRA-RF-C-BHAC-CR

745190W6 PR 5.250 10/04/2005 07/01/2021 PR HWY REF-SER L-BHAC

74526QVT PR 5.000 05/03/2007 07/01/2023 PR ELEC-SER UU-BHAC

74526QVU PR 5.000 05/03/2007 07/01/2024 PR ELEC-SER UU BHAC

74526QVV PR 5.250 05/30/2007 07/01/2024 REF-SER V V-BHAC-CR

74529JGA PR 07/31/2007 08/01/2054 PR S/TAX CAB-A-BHAC

74526QVW PR 5.250 05/30/2007 07/01/2025 PR ELEC-REF-SER-BHAC

 

One side note: Please verify that it is indeed insured by BHAC from http://emma.msrb.org/

In IB, some data is wrong. One PRHTA bond that I bought has a PR INFRA-RF-C-MBIA title, but in http://emma.msrb.org/ it says it is uninsured.

Otherwise if it is insured by MBIA and trades at 36, I would put 50% of my portfolio in.  :D

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I have about a 23 percent return since November from price appreciation on the insured PR bonds plus the yield which was 6.8% cash yield.

 

I manage bonds for other investors so 4.5 tax free on Berkshire paper is good when Treasury rates are 2.5. 

 

I think 26 percent returns in PR are possible if things get worse, which they probably will. But that's not likely to happen from the current pricing unless you catch an illiquid bid.

 

Wow. What was your entry price for these insured bonds? I thought these insured bonds always trade around 100 cents on the dollar.

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Averaged 76 dollars with AGM behind it. They're trading at 95 right now.

 

Insured bonds trade all over the place. They insure par value and interest payments but the market doesn't always value it.

 

In fact when I purchased them, credit default swaps on the insurer were trading at half the yield of the bonds they insured. Pretty inefficient.

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

You know bid-offer and transparency is bad when the king of the illiquid microcap blogosphere himself is complaining  :)

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

You will have to put in a bid and be patient. Bond trades are still manual in the 21st century. :)

I asked the same question in this thread.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/does-anyone-buy-muni-bonds-the-liquidity-is-so-low

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Averaged 76 dollars with AGM behind it. They're trading at 95 right now.

 

Insured bonds trade all over the place. They insure par value and interest payments but the market doesn't always value it.

 

In fact when I purchased them, credit default swaps on the insurer were trading at half the yield of the bonds they insured. Pretty inefficient.

 

Nice trade!

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

Good question about pricing.  Probably my favorite part of municipal bond investing with distressed issuers.

 

It goes something like this:

 

Customer: Hey can you sell my bond?  I read bad things in Barrons.

Broker 1: Sure, we got a bid back at 70.  This thing can go to 10 bucks so you should take it.

Customer: Okay

 

Meanwhile across another muni trading desk....

 

Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday.  If anyone is offering thse bonds, pull down your bids to the low 70's.  We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm).

 

The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling.

 

This is where you get good pricing.  You follow bonds you know are being sold in a poor fashion and try to take advantage of it.  Unfortunately you can't do this through IB or Schwab.  You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase.

 

To get good pricing on the sale is a different story.  I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93.  You have to be careful when selling any muni bond if you have never done it before.

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

Good question about pricing.  Probably my favorite part of municipal bond investing with distressed issuers.

 

It goes something like this:

 

Customer: Hey can you sell my bond?  I read bad things in Barrons.

Broker 1: Sure, we got a bid back at 70.  This thing can go to 10 bucks so you should take it.

Customer: Okay

 

Meanwhile across another muni trading desk....

 

Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday.  If anyone is offering thse bonds, pull down your bids to the low 70's.  We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm).

 

The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling.

 

This is where you get good pricing.  You follow bonds you know are being sold in a poor fashion and try to take advantage of it.  Unfortunately you can't do this through IB or Schwab.  You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase.

 

To get good pricing on the sale is a different story.  I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93.  You have to be careful when selling any muni bond if you have never done it before.

 

This is why I don't trade bonds, the market place just isn't transparent enough.  I kept digging on these things, the trade history is fascinating. 

 

I don't see how anyone can trade these as a retail investor.  The information I get from Fidelity is night and day different from what I'm seeing on Bloomberg.  Fidelity is showing no bids, Bloomberg has a bid and some liquidity.  Maybe a Fidelity trader could get this information if I called, I don't know.

 

While bonds are illiquid and non-transparent I don't feel like a retail investor can gain an advantage.  I see $170m in volume has traded for this bond in the last 90 days.  The only market participants who can move that type of money are institutional investors and funds, the ones who have their ear closest to the ground.

 

Now the pricing anomaly mentioned on this thread is interesting.  Seems like there's a solid arbitrage opportunity there for someone to buy the lower rated and short the higher rated.  Of course if this thing is going to zero, and it's Caa1 maybe the cap structure doesn't matter much.

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No way, retail has major advantages over institutional.  Small $50-250k sales are often done 5-15% away from the fair market value and an institutional investor is not interested in buying something that small.  Like I said you need to have relationships with the right traders at firms which are on the buy side of those trades.  It takes time to develop and if that is not your wheelhouse, then yes the advantage is taken away.

 

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I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

Good question about pricing.  Probably my favorite part of municipal bond investing with distressed issuers.

 

It goes something like this:

 

Customer: Hey can you sell my bond?  I read bad things in Barrons.

Broker 1: Sure, we got a bid back at 70.  This thing can go to 10 bucks so you should take it.

Customer: Okay

 

Meanwhile across another muni trading desk....

 

Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday.  If anyone is offering thse bonds, pull down your bids to the low 70's.  We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm).

 

The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling.

 

This is where you get good pricing.  You follow bonds you know are being sold in a poor fashion and try to take advantage of it.  Unfortunately you can't do this through IB or Schwab.  You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase.

 

To get good pricing on the sale is a different story.  I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93.  You have to be careful when selling any muni bond if you have never done it before.

 

 

Which broker do you use?

I use IB and all I can do is to just put in a limit order and wait. IB will manually execute the trade for me.

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