The new notes have been sold with a 3.15% coupon for $500 million. Maturity date in 2031. The outstanding baby bonds fell today by a couple percent but still very over valued–it is a roll of the dice as to what happens here. If the company desired they could call all 3 issues of baby bonds.
The pricing term sheet can be read here.
Bond insurer Assured Guaranty US Holdings (AGO) will be selling a new $1,000 note.
The company may use the proceeds to redeem some of their baby bonds due in the next century.
The company has 3 issues outstanding with maturity dates in 2101, 2102 and 2103 with coupons of 6.875%, 6.25% and 5.60% respectively. These issues can be seen here.
These 3 issues have been callable since 2006, 2007, 2008 and the company is rated Baa2 by Moody’s and A by Standard and Poor’s. The company can garner a sub 5% if they desire (based on the maturity date).
Holders should be very cautious as I believe it is highly likely at least 1 issue will be called and very likely 2 issues. All of the issues are trading way above liquidation preference ($25)–with one issue 10% above–pain is potentially ahead.
The preliminary prospectus can be read here.
Bob-in-DE was on top of this one.
The elephant in the room regarding AGO is potential muni bond defaults. AGO is going to take a beating on Puerto Rico muni’s they had insured, including the general obligation ones backed by the “full faith and credit” of PR. Congress changed the rules with the PROMESA act that essentially allowed PR to declare Chapter 9 bankruptcy. (When a municipality goes BK, it is through Chapter 9 which is different from business/individual BK’s.)
There is an active debate how AGO comes out of the PR mess. It was interesting to read 2WR’s comments about MBIA. Long story short, Moody’s downgraded the rating on MBIA and 100% killed them writing any new business. Let’s say a municipality would be rated A today but wanted to get a higher rating so they could go to market with a lower rate. When Moody’s downgraded MBIA insurance to Baa2, it was LOWER than the native rating most municipalities had, hence there was NO reason to buy MBIA insurance. MBIA/National is now in “runoff” meaning they will stay in business to pay any new claims while not writing any new business.
Ignoring what insurers pay out on Puerto Rico , you can argue the larger risk is whether other laws will be passed that would let states go BK. Particularly Illinois which is the walking dead from a budgetary standpoint. Also under current law City of Chicago and Chicago Schools cannot go BK.
Bottom line is that the further you go out in time, the more political uncertainty is which MIGHT impact AGO. It is possible through laws and/or rating actions that AGO is also put in runoff and will not be writing any new policies.
We have substantial bets that AGO will be money good on muni bonds through 2024. Beyond that we assume that AGO will NOT be money good.
Re AGO’s largest Reinsurer and the Fed Put.
Caution: can not be read with rose colored glasses in place:
http://www.fmgwebsites.com/104efd93-1b45-4fbe-82c2-8295d7663517/blog/market-news-commentary-from-the-desk-of-david-loesch-05-20-2021
The final 424 is out and still shows a listing on the NYSE, which I think is just wrong. But if you’re in the market for a 3.15% A-rates senior note, it can be bought. Vanguard has it on their platform (others do, too, I’m sure) and FINRA shows it trading very heavy volume.
http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=FAGO5188097&symbol=AGO5188097
I own none and won’t be buying.
Something to apply your own Common Sense to re: AGO: This is a GINORMOUS topic.
If you believe that the insurance security of AGO deserves its rating, then follow the thread. The paragraph below is from their website. A larger workout is a myriad pile of debt on a guarantee trust on their debt on legal workouts? I posted a comment that did not make the cut, but the first ones who default at some point MAY be in the best position. Consider just WHY CA has such high taxes (read: Model of Orange County). The template for workouts will soon be cut by those in power and courts (re: GM, Fed Mandate).
Lower for longer? Rates can NEVER go up with out a large reciprocal wave throughout the system exposing the fault lines. Ultimately, the work out time, by paying ONLY interest and principal that matures, gives taxing jurisdictions time time to digest their real duties and pass it through to the real tax targets in so many precarious jurisdictions. This is further confused by States Rights to manage Insurance and Bond issue. Guess who will pay?
Please do not be naive with the babel-stack of American debt. It is impossible for a rating agency to accurately define the risk in this bloated system. Just smile today and collect your paycheck.
Just one view into the guts:
“Additionally, AGC and AGM have entered into committed capital securities agreements with certain special purpose trusts that issued committed capital securities. The Sutton Capital Trusts granted AGM and the Woodbourne Capital Trusts granted AGC put options that, if exercised, would require each trust to liquidate a portion of its assets in order to purchase (at what price?, open market?) preferred stock of AGM or AGC, respectively. Neither of these transactions is guaranteed by Assured Guaranty Ltd. Instead, each preferred stock issue that might be issued under these securities would be the specific obligation of AGM or AGC.”
A guarantee, on a trust, on the holdings of that trust, on put demand via some liquidation, at some market condition, on legal rendering, on…
So Joel – After reading your comment, I can’t quite figure out – thumbs up? Thumbs down on Assured? Maybe it’s just me…. lol
I agree with you 2whiteroses on not knowing thumbs or thumbs down. I have read Joel’s post several times and I still do not know what to think. I don’t hold anything by AGO anyhow…..
Jusr saying don’t believe the rating agency’s omniscience and number voodoo. I would say the RISK is higher than current perception.
Compared to a CAD Lifeco at a better rate?
The risk is ALOT lower in my view.
A am speaking to the TOWER of cross and re-insured stew mixed with alot of very suspect insured entities. There are about 3100 counties in the US, then cities both rotting and new, then infrastrux, then inflation risk, etc.
If something breaks ir will be a cascade like the Bonneville flood, maybe short but…
NVCC in Canada looks like an honest, transparent and forthright public admission by the regulators of real risk; distasteful as it is; compared to waiting for judges and the Keystone Cops to read the contracts in America while everything is bid down for the vultures.
Risk is only backed by the actions of Fed rescues, state congresses, municipal aldermen and loss of services/payment cascade. What just happened in CA with a few days of fire? Texas freeze out? I know people there and they are getting their retirements impinged right now. They will pay up. Maybe that gives AGO security?
AGO rated wrong. At 3.15% there are other options.
Maybe I just do not understand something?
I was not familiar with AGO, so I spent some time reading up on them. (I also don’t do municipal bonds either, but pretty familiar with what they are. ) After spending some time I think what you are saying IF there is a really big event (Think another situation like the /great /depression, which a lot of folks say is impossible these days, then there will begin a cascade of defaults on the bonds AGO insures that will eventually destroy them. Who knows how far the FED or any government can cover cascading defaults before the whole system crashes? No rating agency can really predict what will happen and therefore cannot accurately rate AGO and similar companies. IF we have that big event kiss your money goodbye, but until then collect that money and party on dude! Is that what you are saying Joel?
dj – Your comments brought back some memories for me… I’m old enough to have worked in the muni business with a couple of guys by the names of Dick Locke and Jim Lopp who essentially created the idea of muni bond insurance in the early 70′. At separate times, they founded MBIA in 1973 and later Financial Security Association in the 80’s… As a 27 year old relatively rookie institutional bond trader back then, not an investment banker, I struggled to understand the point of bond insurance for the same reasons you point out…. The more I understood, the more I realized that at that time, bond insurers were like bankers. Bankers always get accused of only lending money to those who don’t need a loan – bond insurers back then only insured issuers that didn’t need insurance. However, in my mind the concept seemed more flawed than even that in the sense of its redundancy, but with bond insurance, if the circumstances ever came up (read subprime mortgage crisis) where the insurance turned out to be needed across the universe of insured entities, the insurance would turn out to be near worthless anyway because of their leverage. Obviously the concept thrived anyway to this day… In the early days, it was great fun finding old unrated muni bond issues that had the financials to be ratable but weren’t, and taking them to MBIA or AMBAC and getting them insured and thus rated AAA… Lots of spread left for big profits after paying their fees to insure.. I’m not really proving much with this post, but thanks for the memories..
Ah… Your references of MBIA and AMBAC triggered my memory banks too! One of the many things I love about this site is the wealth of knowledge and experience, often derived first hand, about the world of finance and investing from the folks who post such as you. What mention of those two companies triggered was the leadup to when they cratered that was the start of my investment education. All through the 80s, 90,s and early 2000s 100% of my retirement was in the Vanguard S&P 500 index fund. I was introduced to Vanguard in the early 80s when I worked for a Fortune 500 company that moved all of our retirement to self directed Vanguard accounts. We could pick among several and I chose the index fund managed by a Peter Lynch. His philosophy seemed to match mine. I became self employed in 1992 and everything was transferred to me. I continued to stay with Vanguard (still there!) and was a good little boy in that I made decent contributions every year to my retirement, still the index fund. I built a beautiful home in 1997. I became alarmed around 2005 or so that the value of my home for property taxes was skyrocketing and began to read about what was going on in housing. Think Countrywide, Washington Mutual, and all those other guys, securitization of mortgages, etc. My attention was really directed first by the crash of the Bear Sterns hedge funds followed by the credit crunch that August. I determined that we were going to be paid a visit by hell in the near future and resolved to go “hide” my retirement funds somewhere very safe. I agonized over this for a couple of months and finally resolved to do it. By pure luck I chose to move 100% of the funds to Vanguard’s GINMAE fund that fall on the day the S&P hit the record high!!! So there I sat for what seemed an eternity on the mountaintop waiting for the Big One. Began to feel a little foolish, but then it hit. Oh boy did it hit, I followed MBIA and AMBAC with morbid fascination along with all the other crash and burns. After the infamous Senate committee with the GSA head where the accounting rules changed from “Mark to Market” to Mark to Whatever you think it is worth” AND the FED stepped in and started buying everything at 90% of Par? the stock market started to recover. I resolved to try my hand at buying individual equities to build a livable income stream rather than rely on capital gains and began my journey to today. My first buy was for $500 and I did not sleep for three days in anxiety over it.. Well, today I am 75% preferred stock and a few baby bonds, with the rest in utility stocks mostly. Do own a very few REIT and BDC common stocks that I have been whittling down. I have created a great retirement income stream. I learned a few expensive lessons on the way, but made up for them elsewhere. It looks like there will be no cat or dog food on the menu for us. I owe a lot of this to following this site and the one Tim had before it. That said I now see my house value has zoomed again to frightful levels. Just read an article that home prices where I live have increased 10% in the last year! I am wondering where the next “Big Event” is will start, and more importantly, when. I don’t think anything from the previous one has been solved, just papered over with Band-Aids. It is scary to think about, but as one of the CEOs on Wall Street said back in the previous one “When the music starts you gotta get up and dance!” I don’t dance very well personally. I think Joel may have a point.. The rot in certain municipal bonds and also in pension plans may be the next trigger. There are also a lot of very over leveraged companies. Enough of memory lane!!!!!! Thanks 2whiteroses for the insight and memories!
Think the 2103 are safe for now.
Not mentioned in use section.
3.15% $500 million
Enough to call all the baby bonds.
Ouch!
Sold the E too..had bought low in the swoon in April 20.. ..Only 200 shares, but a v. nice 13 month return. If it doesn’t get called, may try and get back in or may try and get some of the new 1000 par issue
AGO has a 2034 senior note institutional issue yielding 3.727%.
Gives you an idea as to what rate we might be looking at here.
http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C187990&symbol=AGO.GA
How about 3.15% Bob.
https://www.sec.gov/Archives/edgar/data/1273813/000127381321000028/ago-termsheet2021xv14.htm
I guess when you’re A rate and selling 10 year bonds you can get 3.15!
Check out Domtar like Yuriy said elsewhere. It should not be selling at a 6% yld.
Yeah, I always thought that the yield was very atractive relative to the credit rating. It was fun while it lasted.
If not for the call risk I would have bought almost endless amounts of AGO baby bonds. Have to closely monitor the call risk these days.
I guess when you’re A rated and selling 10 year bonds you can get 3.15!
Check out Domtar like Yuriy said elsewhere. It should not be selling at a 6% yld.
Tim.. Please,, show new us ,new symbol for AGO $1000 bond
I sold the E took the long term capital gains and had another position in my IRA. I really hated to turn this one loose. If it doesn’t get redeemed maybe there will be a chance to buy it back lower.
Thanks Tim and Bob!
I dumped the B holding I had held for years now, and kept the F series. I guess its number might come up before long too, but I figure if it survives some of the people holding the other issues will move over to it and drive it up a bit.
Hate to see B go though. I made decent money on it over the years.
Thanks for the heads-up Bob-in-DE! I like the company (former client long ago) and had some shares of the 6.875% 2101 issue that was the first one mentioned to be possibly fully or partially called in the use of proceeds section…. with this new news the call risk was too much for me so I bailed but still made money on the trade.
While I generally don’t like sub 5% paper I might make an exception for the new issue if it is available to retail investors.
Strange …..
This appears to be an institutional issue. For one, it’s a senior note, not just a note. Two, it’s a $1,000 denomination, and three, it will also trade on the European markets.
Yet the 424 indicates it will list on the NY stock exchange, not bond exchange. I’m not sure they really mean the stock exchange. Potentially the inverse of the ATCO issue.
Looks like a good company but just another “No Thanks”. Iam not going to buy anything under 5%. I would rather roll the dice and add to my large position of EPD.