Author Topic: SallieMae bonds earning 8-9%... opinions?  (Read 3362 times)

ChpBstrd

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SallieMae bonds earning 8-9%... opinions?
« on: January 29, 2017, 09:28:35 AM »
I'm looking at bonds from SallieMae, the student lending outfit. The Moody's rating is Ba3 non-investment grade. However, this seems to be driven more by the inherent leverage of the business model - which they have maintained long-term - rather than a decline in the quality of their assets. The bonds have the following yield to maturity at the following maturities:

Maturity    YTM
3/15/30 - 9.231%
6/15/29 - 9.131%
12/15/26 - 8.181%

There's nothing apparently wrong with this business except, per the Moody's report "refinancing risk" and "uncertainty in deploying excess cash flow effectively."

To me, this seems like a rather low-risk junk bond with returns that will likely rival or exceed the stock market. Am I missing something?
« Last Edit: January 29, 2017, 06:31:21 PM by ChpBstrd »

DavidAnnArbor

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #1 on: January 29, 2017, 07:39:05 PM »
I would definitely look at the financial statements underpinning these bonds, is it Sallie Mae statements?

I wouldn't put all your eggs in one basket, no more than 10% of your portfolio at most.

I'm also worried about the sustainability of so much student debt. What if there was a massive default?

Metric Mouse

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #2 on: January 29, 2017, 08:33:14 PM »
Could be one place to diversify. I don't see student loan debt governmental action being on the immediate horizon, but it could impact it over time.

seventytimes7

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #3 on: January 29, 2017, 08:36:03 PM »
I'd also see if you can see who is betting against these. I think one of the hedge fund managers who made a killing on Mortgage backed securities is betting against the student loan market.

Interest Compound

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #4 on: February 01, 2017, 07:44:37 AM »
I'm looking at bonds from SallieMae, the student lending outfit. The Moody's rating is Ba3 non-investment grade. However, this seems to be driven more by the inherent leverage of the business model - which they have maintained long-term - rather than a decline in the quality of their assets. The bonds have the following yield to maturity at the following maturities:

Maturity    YTM
3/15/30 - 9.231%
6/15/29 - 9.131%
12/15/26 - 8.181%

There's nothing apparently wrong with this business except, per the Moody's report "refinancing risk" and "uncertainty in deploying excess cash flow effectively."

To me, this seems like a rather low-risk junk bond with returns that will likely rival or exceed the stock market. Am I missing something?

Let's ignore the Ba3 rating for a moment, and take a step back.

The market knows about SallieMae. The market knows their bonds are currently yielding 8-9%. If other investors also believed this is a low-risk bond, they would take advantage by buying the bonds! In fact, they'd keep buying the bonds until the yield dropped to a point where they no longer considered it a good deal, maybe 3-4%.

So the question is, why don't other investors, people with significantly more money (billions of $), resources (multi-billion $ corporations behind them, with super computers), time (they're working on this 80 hours a week, it's literally all they do), and experience...why don't they agree with you?

Why is no one else taking advantage of this FREE MONEY opportunity? Why are the bonds currently yielding 8-9% instead of 3-4%? Do you think you know more, or can otherwise make better decisions than everyone else out there? To the point where you can have a non-related full-time job, come home, read a few pages of text on the internet while relaxing after work, and literally take money from people who are (frankly) much smarter than you?

Please, don't take this as a personal attack. These are the questions everyone should ask themselves before they consider making a move like this. Especially when dealing with bonds, as the bond market is twice as big as the stock market, and much more efficient.

ChpBstrd

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #5 on: February 01, 2017, 12:05:09 PM »
I'm looking at bonds from SallieMae, the student lending outfit. The Moody's rating is Ba3 non-investment grade. However, this seems to be driven more by the inherent leverage of the business model - which they have maintained long-term - rather than a decline in the quality of their assets. The bonds have the following yield to maturity at the following maturities:

Maturity    YTM
3/15/30 - 9.231%
6/15/29 - 9.131%
12/15/26 - 8.181%

There's nothing apparently wrong with this business except, per the Moody's report "refinancing risk" and "uncertainty in deploying excess cash flow effectively."

To me, this seems like a rather low-risk junk bond with returns that will likely rival or exceed the stock market. Am I missing something?

Let's ignore the Ba3 rating for a moment, and take a step back.

The market knows about SallieMae. The market knows their bonds are currently yielding 8-9%. If other investors also believed this is a low-risk bond, they would take advantage by buying the bonds! In fact, they'd keep buying the bonds until the yield dropped to a point where they no longer considered it a good deal, maybe 3-4%.

So the question is, why don't other investors, people with significantly more money (billions of $), resources (multi-billion $ corporations behind them, with super computers), time (they're working on this 80 hours a week, it's literally all they do), and experience...why don't they agree with you?

Why is no one else taking advantage of this FREE MONEY opportunity? Why are the bonds currently yielding 8-9% instead of 3-4%? Do you think you know more, or can otherwise make better decisions than everyone else out there? To the point where you can have a non-related full-time job, come home, read a few pages of text on the internet while relaxing after work, and literally take money from people who are (frankly) much smarter than you?

Please, don't take this as a personal attack. These are the questions everyone should ask themselves before they consider making a move like this. Especially when dealing with bonds, as the bond market is twice as big as the stock market, and much more efficient.

Oh, I agree. This is partly a thought experiment to teach myself to look for new things I cannot currently see. There's no free lunch.

One detail I initially missed: The bonds/assets originated with SallieMae (debt/equity = 6) but now appear to be owned by Navient (debt/equity = 40) (which autocorrect just tried to spell naiveté, an omen perhaps?). Markets apparently don't change the bond's name when they are spun off. So buyer beware.

http://finance.yahoo.com/quote/NAVI/key-statistics?p=NAVI

Of course, both SLM and NAVI are basically pass-through organizations - empty shells that do the legal, accounting, trading, and billing for the real assets which are student loans. You wouldn't want them to have much infrastructure anyway. But I wonder if Moody's rules and institutional rules say something like "we will never give better than a BBB rating to any company with 10x leverage" or "we will never buy bonds for companies with more than 15x leverage". Most pension or sovereign wealth funds are probably prohibited from owning these bonds, but leverage isn't the reason they will default - student loan default rates are the reason they would default.

https://www.navient.com/about/investors/debtasset/rating-agency-activity-discussion/

Still, if this organizational structure was not the optimal way to raise funds - as we usually assume when they have to borrow at 9% - you'd expect a better organizational structure to emerge and out-compete them, right? Maybe not. As an investor, I wouldn't necessarily prefer to pay for more administrative overhead to manage my loan portfolio. Navient's ROA is 0.53% - pretty lean. However, if the market for risk assets had a tantrum and they could only borrow at higher rates, then we have a problem, as their Moody's report pointed out - well, at least the stock would have a problem, existing bonds/trusts might survive a market-driven tantrum without defaulting.

Maybe another reason these bonds are cheap because Head Cheeto has vowed to abolish the Dept. of Education, their main customer!

acroy

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #6 on: February 01, 2017, 12:25:45 PM »
To me, this seems like a rather low-risk junk bond with returns that will likely rival or exceed the stock market. Am I missing something?
Agree these are relatively low-risk junk bonds. 'Relatively' since student debt has political sympathy and there is some chance Uncle Sam will step in if things go south. Not so with junk corporate debt. I'd not devote a significant portion of the portfolio to it, though.

NoStacheOhio

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Re: SallieMae bonds earning 8-9%... opinions?
« Reply #7 on: February 01, 2017, 01:19:20 PM »
Worth noting that Sallie Mae and Navient just got sued by Washington, Illinois and the Federal government for shenanigans regarding repayment. From personal experience, they're a horrible company to deal with, and I wouldn't go near their bonds on principle, but also because they're shady.