Sorry about all this sub-prime stuff in a blog that usually sticks pretty close to its knitting, but this is a lot of fun!
Global Diversified Investment Grade Income Trust (TSX: DG.UN) (“Global DIGIT”) has announced:
that, considering the liquidity problems of MMAI-I Trust (“MMAI”) due to its inability to roll its maturing commercial paper in the present state of the Canadian asset-backed commercial paper market, it will not have sufficient financial resources to allow for the payment of the redemption price for the redemption of Units and consequently must announce the suspension, until further notice, of the August 31st, 2007 annual and quarterly redemptions of Units.
This is a fascinating investment scheme. What they have done, according to their financials is (with lots of rounding by me):
– taken $89-million of unitholders equity
– borrowed about $1,400-million, mostly as commercial paper
– put all this money into term deposits in banks, at the Bankers’ Acceptance rate plus a spread.
– written Credit Default Swaps against a portfolio of mainly mortgage backed securities and pledged the term deposits as security (note that writing a CDS gives you exposure and, hopefully, yield basically equivalent to what you wrote the CDS on)
The point? It’s discussed:
The Trust’s objective (save for any loss exceeding the first loss amount) is to provide a return on investment of 5.94% per annum to Unitholders up to September 7, 2009 and thereafter a floating distribution equal to the rate of bankers acceptance plus 2%.
Units cost $10.00 at issue in September 2004, of which sixty-five cents went to start-up costs. The provide a handy computation of their returns since inception, using a starting point of $9.35 net … they’ve made about 5.5% annualized.
It seems to me like a helluva complicated & (term-mismatch-) risky & very highly-leveraged way to go after BAs+200, but I should have said that three years ago if I wanted to be taken seriously.
And now they’re having a little difficulty rolling their CP, have suspended redemptions and I see that DG.UN is now quoted at $2.90-99 on the TSX, compared with a NAVPU of $9.17 reported as of 2007-6-30.
Y’know, the underlying doesn’t look all that terrible to me … having looked at it very, very briefly and with no intent of investing or recommending. The big question is how much of the lolly the CP holders are going to grab and, frankly, I’m not going to rip apart the prospectuses trying to find out. I’m not going to pay for any expensive legal opinions, either! But it does seem to me that this very, very distressed security that has enormous liquidity problems would be worth looking at … although, until we know more about what the CP guys are going to take, it’s a wild speculation and, what’s worse, blind.
Too bad the damn thing’s $1.4-billion … that’s getting into serious money that will be hard to finance in this environment … which, I imagine, is part of the problem. If it were smaller, it would be (I think) attractive to the hedge fund crowd. If any of my readers has $1.4-billion they want to put into a nice floating rate note with a term of nine years, call me and maybe we can help these guys out a little … after looking at this stuff a whole lot more closely, of course!
Hat tip : Financial Webring Forum.
[…] With all respect to Mr. Devlin, I’ll repeat my tired old refrain of “I wanna see more detail”! Readers will remember the sad story of Global DIGIT’s suspension of redemptions, which fits his story quite well – they’re leveraged to hell and gone on credit-default-swaps on the dreaded sub-prime (senior tranches only, so they claim). Global Digit issued a press release on August 28, stating: The Trustee has now received from the Bank the indicative price which will be used to calculate the NAV as at August 31, 2007. If that indicative price, which was based on market conditions known on August 28, 2007, had been used to calculate the NAV as at July 31, 2007, the NAV would be $7.92, representing a reduction of about 12.5% from the NAV calculated based on the July 16, 2007 market conditions. […]
[…] There’s entirely too much speculation that the credit crunch is over. Accrued Interest is concerned that the pendulum, having swung too far one way, will promply over-correct in the other direction. Panic, ecstasy … just another day in the markets. Those who wish to profit from panic without having access to institutional markets might wish to take a look at DG.UN, which was mentioned here on August 28 when it suspended redemptions (ABCP financing dried up). According to their September 26 Press Release: its net asset value (”NAV”) per unit as at August 31, 2007 was $7.92 based on an indicative price received from a large international bank (the “Bank”) as of August 28, 2007. … The NAV on a particular date is equal to the aggregate value of the assets of the Trust, less the aggregate value of its liabilities (calculated in conformity with Generally Accepted Accounting Principles (GAAP)). The NAV does not reflect any eventual write-down resulting from the interruption of payments that MMAI is required to make to Global DIGIT under the swaps, nor does it reflect any potential impairment in the value of the assets of Global DIGIT from any eventual restructuring of MMAI debts, as it not possible at present to determine if, when and to what extent such payments to Global DIGIT under the swaps will resume or the effect of any eventual restructuring of any such MMAI debts. […]
[…] Holders of, for instance, DG.UN, will know all about the fourth risk! […]
[…] As an example of how this might work, and to get a ballpark idea of the numbers, let’s look at Global DIGIT (DG.UN) again. This is cheating, because DG.UN has sub-prime exposure through derivatives, but let’s look anyway. There are about 9.75-million units outstanding, supporting $1.4-billion in ABCP via the net asset value (NAV). The NAV is most recently estimated as $7.92; the units are trading on the TSX at a little less than $3.00. […]