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531127AC2 - Liberty NY Dev Corprev Goldman HQ 05.25% 10/01/2035


thepupil
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https://emma.msrb.org/Security/Details/?id=531127AC2#

 

If you live outside the US and are not a US taxpayer, do not read further.

If you don't make a lot of money and pay a high tax rate, do not read further.

If you think owning any bonds is a terrible idea, do not read further.

 

Like many an idea curated and implemented by yours truly, this one starts with a "hey I read an old VIC pitch on this, stored it in the memory bank, and occasionally check in on it"

 

https://valueinvestorsclub.com/idea/Liberty_Dev_Corp-_GS/4329033560

 

During the most recent turmoil in the municipal market this security has bounced around, it gotten as low as $100 / 5.15% and is now around $120 / 3.5%; I have been a buyer throughout, as I believe the security is attractive.

 

3.5% tax-free yield guaranteed by Goldman Sachs and backed by their global headquarters building works for part of the fixed income portfolio.

 

These are municipal bonds, triple tax free for NYC residents and federal tax free for folks who live elsewhere (my "clients" (aka parents) are florida residents). Importantly, a lot of very rich people live in NYC and I think that will continue to be the case, creating strong demand for tax advantaged paper, potentially even moreso if tax rates go up.

 

So what are these bonds?

 

After the September 11th attacks, there was a program to create a bunch of triple tax free bonds to help rebuild lower Manhattan. Partaking in this program was the storied US investment bank, henceforth known as Vampire Squid, Goldman Sachs. Vampire Squid was tired of sucking blood from its clients and society from a rather shitty 30 story building at 85 Broad. They needed a new shiny HQ from which to troll the ocean for prey.

 

So they borrowed $1.65 billion using the Liberty Bond program to build 200 West.

https://en.wikipedia.org/wiki/200_West_Street

 

In 2005, they issued 30 year bonds at $110.7 with a 5.25% coupon.

 

They are now 15 year bonds and rates are more than touch lower than in 2005, but the bonds are only a smidge higher in price (and even traded to par in mid-march!)

 

That's all...you make 3.5% for 15 years lending to Goldman Sachs the corporation and the $2 billion HQ building.

 

I think it offers excellent relative value, but do not size it up because you are

 

a) writing a depression put (even Goldman may fail in a depression). in 95% of scenarios I think Goldman survives, but the bond portion is for the tail, so it is a bit incongruous to lend to an investment bank for your tail protection/bond portfolio. But given that this yields far more than alternatives, I can buy this and hold more cash in the cash/fixed income bucket (barbell approach).

 

b) it is kind of related to NYC real estate (but not really) which I own a bit of 

 

I think they should trade at $150 / 2% or higher.

 

 

 

 

 

 

 

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https://emma.msrb.org/Security/Details/?id=531127AC2#

 

If you live outside the US and are not a US taxpayer, do not read further.

If you don't make a lot of money and pay a high tax rate, do not read further.

If you think owning any bonds is a terrible idea, do not read further.

 

Like many an idea curated and implemented by yours truly, this one starts with a "hey I read an old VIC pitch on this, stored it in the memory bank, and occasionally check in on it"

 

https://valueinvestorsclub.com/idea/Liberty_Dev_Corp-_GS/4329033560

 

During the most recent turmoil in the municipal market this security has bounced around, it gotten as low as $100 / 5.15% and is now around $120 / 3.5%; I have been a buyer throughout, as I believe the security is attractive.

 

3.5% tax-free yield guaranteed by Goldman Sachs and backed by their global headquarters building works for part of the fixed income portfolio.

 

These are municipal bonds, triple tax free for NYC residents and federal tax free for folks who live elsewhere (my "clients" (aka parents) are florida residents). Importantly, a lot of very rich people live in NYC and I think that will continue to be the case, creating strong demand for tax advantaged paper, potentially even moreso if tax rates go up.

 

So what are these bonds?

 

After the September 11th attacks, there was a program to create a bunch of triple tax free bonds to help rebuild lower Manhattan. Partaking in this program was the storied US investment bank, henceforth known as Vampire Squid, Goldman Sachs. Vampire Squid was tired of sucking blood from its clients and society from a rather shitty 30 story building at 85 Broad. They needed a new shiny HQ from which to troll the ocean for prey.

 

So they borrowed $1.65 billion using the Liberty Bond program to build 200 West.

https://en.wikipedia.org/wiki/200_West_Street

 

In 2005, they issued 30 year bonds at $110.7 with a 5.25% coupon.

 

They are now 15 year bonds and rates are more than touch lower than in 2005, but the bonds are only a smidge higher in price (and even traded to par in mid-march!)

 

That's all...you make 3.5% for 15 years lending to Goldman Sachs the corporation and the $2 billion HQ building.

 

I think it offers excellent relative value, but do not size it up because you are

 

a) writing a depression put (even Goldman may fail in a depression). in 95% of scenarios I think Goldman survives, but the bond portion is for the tail, so it is a bit incongruous to lend to an investment bank for your tail protection/bond portfolio. But given that this yields far more than alternatives, I can buy this and hold more cash in the cash/fixed income bucket (barbell approach).

 

b) it is kind of related to NYC real estate (but not really) which I own a bit of 

 

I think they should trade at $150 / 2% or higher.

 

very interesting idea for this nyc resident.

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  • 1 year later...

High quality munis are getting CRUSHED.  This tends to happen every 5-7 years.  This is an interesting piece of paper.  @thepupil thank you for the idea ... I have some research to do ... what other NY munis are on your radar list??

Edited by ValueMaven
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hey, i don't canvas NYC / NY muni bond market and only follow these because they are knid of unique in that it's a corporate credit (and backed by RE) and it is a bullet bond and therefore more convex than typical munis (which often feature callability)...so this has a lot of duration upside....I don't live in NY/NYC so don't follow closely. sorry. 

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Posted (edited)

so that's quite interesting....i've looked into these a few times and always get a little scared of the idea of levering high duration securities with floating rate and redeemable/callable debt. I find TOB / VRDP language a little dense, but i think the short of it is "cheap mark to market floating rate leverage" not unlike what mREITs do with mortgage backed securities. 

 

managed with position size, this may be an acceptable risk/reward and the muni's now yield WELL above the cost of financing even pro forma for a few hikes. One thing to look out for is there seems to be some kind of teaser period with the bulk of the leverage that expires in 4/2023 after which it becomes floating...

 

I also don't love the idea of paying about 1% / year of equity to own bonds. 1% is a substantial amount of the return...in some ways you're levering up to earn a spread and then paying that to the blackrock. 

 

i'll also say that muni CEF and bond mutual funds of all kinds will often manipulate the aggregate yield figures by owning a sliver of very high risk stuff that jacks up the portfolio wgt average YTM...bond averages always make me suspicious...like this says portfolio YTW is 4.66% and YTM is a 6 handle...try to go find a few well rated NY munis that have that...if you can, I'd probably just buy the individual issues. I actually find those stats hard to beleive or maybe they include the benefit of leverage. For example, Puerto Rico bonds (post restructuring) yield 4.5% and those are on the high end (because its PR)...so I don't understand how this whole portfolio would yield 4-6% unless that is an already levered number

 

here's everything they own

https://www.blackrock.com/us/individual/literature/investor-education/selected-cefs-holdings.pdf

 

obviously the ETF has benefits of portoflio scale/diversity/ease of tradeability. 

 

 

 

 

 

 

 

Quote

Municipal Bonds Transferred to TOB Trusts: Certain Trusts leverage their assets through the use of “TOB Trust” transactions. The funds transfer municipal bonds into a special purpose trust (a “TOB Trust”). A TOB Trust issues two classes of beneficial interests: short-term floating rate interests (“TOB Trust Certificates”), which are sold to third-party investors, and residual inverse floating rate interests (“TOB Residuals”), which are issued to the participating funds that contributed the municipal bonds to the TOB Trust. The TOB Trust Certificates have interest rates that reset weekly and their holders have the option to tender such certificates to the TOB Trust for redemption at par and any accrued interest at each reset date. The TOB Residuals held by a fund provide the fund with the right to cause the holders of a proportional share of the TOB Trust Certificates to tender their certificates to the TOB Trust at par plus accrued interest. The funds may withdraw a corresponding share of the municipal bonds from the TOB Trust. Other funds managed by the investment adviser may also contribute municipal bonds to a TOB Trust into which a fund has contributed bonds. If multiple BlackRock-advised funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residuals will be shared among the funds ratably in proportion to their participation in the TOB Trust. TOB Trusts are supported by a liquidity facility provided by a third-party bank or other financial institution (the “Liquidity Provider”) that allows the holders of the TOB Trust Certificates to tender their certificates in exchange for payment of par plus accrued interest on any business day. The tendered TOB Trust Certificates are remarketed by a Remarketing Agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the Liquidity Provider to purchase the tendered TOB Trust Certificates. Any loans made by the Liquidity Provider will be secured by the purchased TOB Trust Certificates held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding. The TOB Trust may be collapsed without the consent of a fund, upon the occurrence of a termination event as defined in the TOB Trust agreement. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the Remarketing Agent and the Liquidity Provider. Upon certain termination events, TOB Trust Certificates holders will be paid before the TOB Residuals holders (i.e., the Trusts) whereas in other termination events, TOB Trust Certificates holders and TOB Residuals holders will be paid pro rata. While a fund’s investment policies and restrictions expressly permit investments in inverse floating rate securities, such as TOB Residuals, they restrict the ability of a fund to borrow money for purposes of making investments. Each Fund’s transfer of the municipal bonds to a TOB Trust is considered a secured borrowing for financial reporting purposes. The cash received by the TOB Trust from the sale of the TOB Trust Certificates, less certain transaction expenses, is paid to a Fund. A Fund typically invests the cash received in additional municipal bonds.

image.png.1ae695a2be0ced78f4b22e65a31e94ca.png

 

 

Edited by thepupil
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  • 3 weeks later...
Posted (edited)

Fidelity has $2.7mm ($100K minimum face / $68K at markt value ) offered of the Stanford University 2.25%'s of 2051 at $68 / 4.15%. These were issued @ $96.8 / 2.4% in 2021, nice 28 point loss in year.. They are callable at par after 2031. Some portion of the return will be taxable because of the steep discount (google de minimis rule, OID, etc), but nevertheless this represents an after tax yield in the high 3% (3.8%) range and a TEY for wealthy californian of 6.5%. 

 

At high tax rates, the bonds offer a return equivalent to 320 - 740 bps above the treasury rate (depending on when called). I'd assume the 2.25% coupon will be below market for the life of the bond and they'll extend to 2051. Nevertheless a healthy spread of 320 bps to take on the illiquidity/credit risk. 

 

Stanford University is a strategic asset of the United States and is a AAA credit sporting a $38 billion endowment, global brand, etc. Won't default. 

CALIFORNIA EDL FACS AUTH REV BDS 130179TM6

02.25000% 04/01/2051STANFORD UNIV SER. V2

Edited by thepupil
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