New York Mets’ Citi Field Bond Rating Outlook Cut by S&P - Businessweek

New York Mets’ Citi Field Bond Rating Outlook Cut by S&P - Businessweek:

A few days ago I posted on the NY Mets' Financial difficulties. Now the Mets' difficulties are dragging down the rating of the bonds that were used to finance Citi Field as well. The bonds, which are in theory separate from the Mets, were given a negative outlook and a BB+ rating by S&P based on the fact that the Bonds are heavily dependent on individual game ticket sales and these are highly dependent on the team's winning, which seems to be unlikely this year.

From Bloomberg:

“The key issue looking forward is that any unfavorable change in team financial operations may hurt team performance and reduce turnstile volumes and revenue,” S&P said....Season tickets, which make up about 40 percent of Citi Field’s total revenue, declined 22 percent, S&P said. Merchandise and food and beverage receipts, which make up 1 percent and 7 percent of revenue, respectively, fell 20 percent, the rating company said....

"A $20,000 block of Mets stadium bonds backed by payments in lieu of taxes with a 5 percent coupon and maturing in 2046 traded yesterday at 83.3 cents on the dollar to yield 6.2 percent."

HT to MetsBlog

Related articles

• Citi Field Debt Downgraded to Negative (metsreport.com)
• Bats: S.&.P. Outlook on Citi Field Bonds Sours (bats.blogs.nytimes.com)
• Another day, another depressing financial story (randombaseballstuff.com)
• The perks of being a Mets minority owner... (randombaseballstuff.com)

Maybe the talk of run away inflation is just that, talk.

Martin Wolf responds to the fears that we are doomed by future inflation due to the large government expenditures and deficits.

His arguments are essentially that bond price drops are a reduction of the fear of DEFLATION and not necessarily a signal of high inflation. Additionally, to the degree that we see we are seeing is risk aversion levels drop (which is a another good thing!) and the safety premium that comes with Treasuries is reducing.

Evidence of this reduced premium can be seen looking at the VIX and in this this chart showing Treasuries vs corporates. Notice how the relative value of treasuries peaked during the worse of the uncertainty.


This flight to quality in bad times is normal and seeing it now ebb might well be a signal that the economy is returning to some semblance of normalcy and not a signal of higher inflation.

FT.com / Columnists / Martin Wolf - Rising government bond rates prove policy works:

"Is the US (and a number of other high-income countries) on the road to fiscal Armageddon? Are recent jumps in government bond rates proof that investors are worried about fiscal prospects? My answers to these questions are: No and No. This does not mean there is no reason for worry. It is rather that there are powerful arguments against fiscal retrenchment right now and strong reasons for welcoming recent moves in the bond markets."

And later

"What has happened is a sudden return to normality: after some turmoil, the yield on conventional US government bonds closed at 3.5 per cent last week, while the yield on Tips fell to 1.9 per cent. So expected inflation went to a level in keeping with Federal Reserve objectives, at close to 1.6 per cent"

and still later:

...the fear of inflation....is essentially the question of how to exit from current extreme policies. People need to believe that the extraordinarily aggressive monetary and fiscal policies of today will be reversed. If they do not believe this, there could well be a big upsurge in inflationary expectations long before the world economy has recovered....The exceptional policies used to deal with extreme circumstances are working....policymakers are walking a tightrope: on one side are premature withdrawal and a return to deep recession; on the other side are soaring inflationary expectations and stagflation. It is irresponsible to insist either on immediate tightening or on persistently loose policies"

Well said.

Thanks to RortyBomb at SeekingAlpha for pointing this article out

BTW does anyone know how to embed a Yahoo Finance graph, I can link to it, but not embed it. Any advice would be appreciated. :) thanks..

GM's proposal would give bondholders next to nothing - USATODAY.com

GM's proposal would give bondholders next to nothing - USATODAY.com:

"General Motors' (GM) bond-exchange proposal Monday will play out as high drama this month. It's a showdown between unhappy bondholders and the company's willing-to-file-for-bankruptcy new CEO. And it could get bumpy.

On Monday, GM told bondholders they're about to get next to nothing — about 10% equity in the company — for the about $27 billion they lent GM.

By contrast, the U.S. Treasury would get a 50% stake and a GM promise to pay back half of the $20 billion in loan"

and from Business Week:

"GM /style>wants its bondholders to take 225 new shares of the company for every $1,000 in bond value. GM will also pay the interest. That adds up to at most 5¢ on the dollar for the debt, says Barclays (BCS) analyst Brian Johnson. That's what could make it a tough sell...

If bondholders refuse the offer, they will be betting that they can get more than 5¢ on the dollar in cash from a bankruptcy judge....

There is one other catch. Some bondholders own credit default swaps, which amount to an insurance policy on GM bonds that pay in full if the company goes bankrupt. Tim Backshall of Credit Derivatives Research says that there are contracts backing an estimated $2.7 billion in bonds on the market. If those contract holders all hold bonds, it won't take too many more bondholders to refuse the deal and send GM to bankruptcy.

A note to all of my classes: be prepared to talk about this one! At the bare minimum I will ask you if you were a bondholder, would you accept the offer or would you force bankruptcy and why.

SSRN-Chinese Bond Markets - An Introduction by Index and Portfolio Services, Standard & Poor's

Standard and Poor's has a very short but informative primer out on the Chinese Bond market. It is full of things I sure did not know about the bond market.

SSRN-Chinese Bond Markets - An Introduction by Index and Portfolio Services, Standard & Poor's:

"While foreign investors have flocked to Chinese equities because of performance and correlation considerations, there is relatively less awareness of Chinese bond markets. This paper serves as an introduction to structure, trading venues, investor base and performance of Chinese bond markets for outside investors.

After more than a quarter century of development, Chinese bond markets have evolved into a RMB 15 trillion (more than USD 2 trillion) market across a broad variety of credit, maturity and investor profiles.

The market has a multi-layered structure, comprised of the national interbank market, the exchange market and bank counters, with the interbank market being the dominant trading venue.

Foreign institutional investors can invest in Chinese bonds by seeking regulator approval for QFII quota or access to the interbank market....

Over the five years ending 2008, the Chinese bonds in aggregate returned 8.1% annually in USD terms as measured by S&P/CITIC Composite Bond Index, a rate higher than those of U.S. and European bonds. RMB appreciation was a key return"

Cite:
Standard & Poor's, Index and Portfolio Services, ,Chinese Bond Markets - An Introduction(March 31, 2009). Available at SSRN: http://ssrn.com/abstract=1371129

For first time in 50 years, stocks yielding more than bonds - MarketWatch

For first time in 50 years, stocks yielding more than bonds - MarketWatch:

"As of Tuesday's close, for example, the S&P's dividend yield was 3.3%, while the 10-year T-Note was yielding 2.7% -- a spread of 0.6 percentage points in favor of stocks. To put this in historical context, the spread since 1958 has averaged 3.7 percentage points in favor of bonds."

Before 1958 what now seems an inversion was the norm. The MarketWatch article quotes Peter Bernstein on when dividend yields first became lower than t-bond yields:

"This ... was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back."

Why? It is difficult to say but risk aversion is the likely culprit. The time prior to 1958 was close enough to the Great Depression that many investors still feared stocks and needed to be persuaded to buy ("can I get you to buy the riskier asset?") stocks. Again from the same article (citing Cliff Asness' work) that looks at the longer term relationship of T-Bond yields and dividend yields (from 1871 to present time)

"...the key element of this bet is investors' expectations....The memory of the Great Depression lingered for years after it ended...which is one reason why stocks' dividend yields remained so high.

In contrast, the Baby Boom generation (at least possibly until now) had no traumatic memory similar to their parents' memory of the Great Depression. That in turn helps to explain why stocks' dividend yield slipped in the 1960s and beyond, relative to bonds' yields.

The bottom line? If enough investors become sufficiently traumatized by what's going on right now, and as a result more or less permanently expect stocks' volatility to remain a lot higher than bonds' volatility, then stocks' dividend yield is likely to remain above bond yields.

Thanks Jon S for the link!

TIPS Strips, Redux - Seeking Alpha

SeekingAlpha has an interesting "interview" with a Barclay's expert (Mike Pond) on Treasury Inflation Protected securities. It covers many topics (from deflation to why TIPS Strips never caught on. Two things for class perspective that my students should definitely be aware of is the relationship between reinvestment rate risk and duration and the impact of liquidity on returns (and why if you are a long term investor, you may want to hold an illiquid security).

TIPS Strips, Redux - Seeking Alpha:

"TIPS are what Pond calls 'very backended': Their coupon is low, relative to the principal amount, and it's the big final principal payment which provides a large chunk of their total yield. So the reinvestment risk on TIPS is already lower than it is on most bonds....[currently] real yields on TIPS are ridiculously high. You'd be better off buying TIPS all the way out to 8 or 9 years than you would be buying Treasury bonds, just so long as inflation is greater than zero. And the higher that inflation gets, of course, the better off you'll be in TIPS.

Do investors really believe that the US will see deflation over most of the coming decade? Probably not: .... TIPS are much less liquid than Treasuries, and therefore trade at a significantly higher yield, despite the fact that their credit risk is identical."

Court Upholds Tax Exemptions for Municipal Bonds - New York Times

Court Upholds Tax Exemptions for Municipal Bonds - New York Times:

"The Supreme Court on Monday upheld the preferential tax break that nearly all states give their residents who invest in bonds issued by the state and its municipalities. By a vote of 7 to 2, the justices rejected the argument that a state engages in unconstitutional discrimination against interstate commerce by exempting the interest on its bonds from residents’ taxable income while taxing the interest earned on the bonds of other state"

Junk Bonds, Mortgages and Milken - New York Times

There is almost no chance of me not posting an article on Milken. While far from perfect, the US economy still owes him a large debt for his role in the creation of active public debt markets for low and unrated firms. What it did was to help force management to look out for shareholders, else face the consequences of a possible takeover.

Junk Bonds, Mortgages and Milken - New York Times:

"Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits."

Yeah I know, insider trading changed the way history will look at him, but we should not forget his contributions. (no one is all good or all bad.)

MBIA Criticizes Bond-Insurer Plan - WSJ.com

One of the more interesting uses of restucturing (or possible restructuring). We discussed this in class today. Intereting application of different stakeholders having different incentives.

A couple of looks:

From Reuters:

"Bond insurer Ambac Financial Group Inc is in discussions to split itself up in a move aimed at ensuring that municipal bonds backed by the company retain high credit ratings...A deal could fall apart because of the complexities in such a move, said the report, quoting a source familiar with the situation.

A halving of Ambac would create one unit to insure municipal debt and one that would cover rapidly diminishing securities tied to mortgages in a structure that effectively would create a so-called "good bank" and "bad bank", the report said."

MBIA Criticizes Bond-Insurer Plan - WSJ.com:

"The nation's largest bond insurer said it agrees with a spokesman for the New York insurance department who said Mr. Ackman's proposal would split the company and likely lead to a substantial downgrade for the structured side.

Splitting bond insurers into two sectors -- one focused on lower-risk municipal bonds and another to handle higher-risk collateralized debt obligations -- allows shareholders of the lower-risk holding company to benefit while holders of the CDOs suffer.

'Our preference, like the regulators, continues to be finding a solution that would be in the best interest of all policyholders,' MBIA said."

NY professor sees junk bond defaults at 4.64 percent: report | Reuters

It is not every day that the Altman Z score is in the news, so when I saw that it was today I figured it had to be mentioned.

NY professor sees junk bond defaults at 4.64 percent: report | Reuters:

"A New York University professor is projecting that high-yield 'junk' bonds will default at a rate of 4.64 percent this year, the highest since 2003, The Wall Street Journal reported on Wednesday. "

Don't remember what the Altman Z score is? You have much company. If past classes are to be a guide, it is one of the most easily forgotten ratios that we cover.

The Altman-Z score is a ratio, or more correctly a model based off of several ratios each being given different weights, that is used to predict bankruptcy.

For a better description see this article from Exceluser.com about predicting bankruptcies.
One look-in:

"In 1966 Altman selected a sample of 66 corporations....Altman calculated 22 common financial ratios for all 66 corporations. (For the bankrupt firms, he used the financial statements issued one year prior to bankruptcy.) His goal was to choose a small number of those ratios that could best distinguish between a bankrupt firm and a healthy one.

To make his selection Altman used the statistical technique of multiple discriminant analysis. This approach shows which characteristics in which proportions can best be used for determining to which of several categories a subject belongs: bankrupt versus nonbankrupt, rich versus poor, young versus old, and so on.""

What does the Z-score look like? There are different versions out there, but essentially they based the score off of a combination of profitability (EBIT/Total Assets), revenue (Sales/Total assets), Liquidity (Working capital/Total assets), leverage (either Times interest earned or other similar measure). Some versions also include volatility of earnings as well.

Both the Exceluser article and this article from Value Based Management list the formula.

Of course any model has its limitations as this article from Business Week on credit scores (which are similar to Z scores in spirit) mentions.

The Thinkers: He brings higher mathematics to bear on high finance

The Thinkers: He brings higher mathematics to bear on high finance: "

"It's called stochastic calculus, a branch of mathematics that measures what happens in any system that is beset by random fluctuations.

Dr. Shreve, the Orion Hoch Professor of Mathematics at Carnegie Mellon University, does research into both the convertible bond and YouTube problems."

How could any pass up an article that has bogth convertible bonds and YouTube references?

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton

Yield curves (the graph of yield on a class of bonds to their time to matuiry) are usually upwards sloping. That is, you generally get a higher rate the longer you go out in time.

However, that is not always the case. Indeed, if you watch the living yield curve, you see that occasionally the yield curve is flat, and at other times (such as now) it is inverted with longer term rates being lower than short term rates.

Economists, and others, have a difficult time determining what this means. One common reading as the yield curve becomes inverted, it is a signal that in the future demand for money will be lower and since this happens in a recession, it suggests a possible recession ahead. Unfortunately (or fortunately as the case may be), this is a very noisy indicator.

Wharton's Knowledge looks at this issue this week. It is well worth a quick read!

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton:

"The Treasury bond yield curve inverted December 27 for the first time in five years. That gave shudders to those who see the phenomenon as a harbinger of recession. And yet, the U.S. economy is strong, and surveys show most forecasters think it will stay that way. So what does the inverted yield curve really mean?

'I think it sometimes portends a recession, sometimes not,"

The Bonds That Fight the Monster Called Inflation - New York Times

Another interesting article NY Times article that is useful for introductory investment (or money and banking) classes.

The Bonds That Fight the Monster Called Inflation - New York Times:

"The I Bonds offer a two-part interest-rate mechanism. The first is a fixed rate for the life of the bond. That rate is now 1 percent, applying to all I Bonds issued in the six months that started Nov. 1. The second rate is linked to the Consumer Price Index for urban consumers. This rate is reset twice a year - on Nov. 1 and May 1 - according to changes in the C.P.I.-U. It is this feature that has made the I Bond especially attractive to many fixed-income investors....On Nov. 1, the Treasury Department increased the variable I Bond rate to 5.70 percent - based on the climb in the inflation index from March to September - giving it a total annualized earnings rate of 6.73 percent.

"....And the rate looks even better when you consider that many observers...think that the C.P.I. overstates the real level of inflation in the economy."

Don't Let Your Portfolio Get Caught Speeding [Fool.com: Commentary] September 28, 2005

What great timing! We just covered bonds this week in class. So if you are in my class, you better read this one. It reviews the types of bonds and what bonds add to your portfolio.

Don't Let Your Portfolio Get Caught Speeding [Fool.com: Commentary] September 28, 2005:

"we tend to focus most of our time and energy on stocks, believing that equities are the best way to stay ahead of the erosive effects of inflation and build wealth over time. The staid fixed-income sector, on the other hand, is seldom mentioned with any enthusiasm. It's not that we don't appreciate what bonds have to offer. We discuss their merits from time to time and have even devoted a section of our Investing Basics center to a comprehensive profile of their ins and outs. For many, though, bonds are ...deependable, polite, never reckless ... in a word, boring."

Public offer vs private placement

Have you ever wondered why some firms issue convertible debt privately whereas other firms choose to issue their debt publicly? Well wonder no more! Devrim Yaman has answered at least the majority of our questions in her Bquest article. Information story explains public vs private choice

and the answer? Where information asymmetry problems are great, firms choose private placements. Which is what I think we would have suspected, but now we also have some empirical evidence.

The main finding:

"Our sample consists of 78 private and 229 public placements of convertible bonds issued by industrial firms between 1983 and 2002. The results show that the primary determinant of the placement choice for convertible debt is a firmÂ’s information asymmetry problems. We find that firms with higher levels of information asymmetry are more likely to choose private placements. This result is consistent with the argument that investors in private placements establish closer relations with the issuing firm and can, therefore, value the firm more accurately. This result also indicates that the commitment of better informed investors in private placements signal favorable information to the market."

Link to paper.

SSRN-Municipal Bond Liquidity by Lawrence Harris, Michael Piwowar

SSRN-Municipal Bond Liquidity by Lawrence Harris, Michael Piwowar:

Harris and Piwowar look at the liquidity of Municipal Bonds. Not surprisingly they find that the bonds are not as liquid as stocks and that transaction costs are MUCH higher.

While much of this illiquidty may be a function of the market itself, at least some may be blamed on the issuers (and more importantly their investment bankers). How? The authors report that transactions costs increase with the complexity of the bonds. Why? If people do not understand what the bond is offering, they are less likely to buy it. As more people do not understand the bond, liquidity drops, and the investors who are willing to trade the security demand a higher premium. So it appears that simple plain vanilla bonds may be a better option afterall.

In the authors' words:

"Unlike in equities, municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Municipal bond trades are also substantially more expensive than similar sized equity trades. We attribute these results to the general lack of price transparency in the bond markets. Additional cross-sectional analyses show that bond liquidity increases with credit quality and decreases with instrument complexity, time to maturity, and time since issuance. The results suggest that investors, and perhaps ultimately issuers, could benefit if issuers issued simpler bonds. "

Interestingly this topic and, indirectly, this study was recently (2/17/05) mentioned in the Houston Chronicle. Why? Because new changes (Undoubtedly brought about in part by this study) have increased the transparency (and hopefully will bring down the transactions costs for the muni-bond market.

The rule change?

With the real-time pricing, which began Jan. 31, dealers are required to report all trades within 15 minutes to the Municipal Securities Rulemaking Board, which oversees the muni market. The board posts the information on its Web site, www.investinginbonds.com.

The Houston Chronicle reports that the new rule is working:

"Things have gotten better with next-day price transparency," Olson says. "There aren't as many rogue practices. Brokers and traders know they're being watched."

So it appears that Harris and Piwowar have helped to make a difference! Good job!

Suggested Citation

Harris, Lawrence and Piwowar, Michael S., "Municipal Bond Liquidity" (February 13, 2004). AFA 2005 Philadelphia Meetings. http://ssrn.com/abstract=503062

SSRN-Corporate Bond Market Transparency and Transaction Costs by Amy Edwards, Lawrence Harris, Michael Piwowar

SSRN-Corporate Bond Market Transparency and Transaction Costs by Amy Edwards, Lawrence Harris, Michael Piwowar

YES! If you love it when theory is found to be true as much as I do, then Edwards, Harris, and Piwowar have given us a reason to celebrate!

Not only do they show that transaction costs for corporate bonds are higher than for equities (a finding which helps explain the preference for firms to have less leverage than other models would suggest), but they also show that transaction costs of corporate bonds decrease when transparency increases! Yeah!!!