After reviewing the POS and the preliminary price talk released this morning, we have the following observations:
1. The POS does a reasonably good job of listing all the potential risk scenarios, although we didn’t see anything that hasn’t been discussed at length before, by either ourselves or others. The GDB’s liquidity position is as dire as we expected and much of the liquidity they do show is restricted.
2. The fact that the Commonwealth will allow itself to be sued in New York without really giving up its sovereign immunity may not be such a great advantage after all. As disclosed in the POS, many legal and administrative hurdles have to be cleared before that clause can be enforced. Much less here than meets the eyes (or the media hype).
3. The non-acceleration clause in the event of default is, to us, the most significant negative factor in the deal. Do bondholders have to sue on every single coupon payment date? No one really knows.
4. The preliminary price talk is an 8.00% coupon in 2035 to yield 8 5/8- 8 7/8%, with an average life of only 16.76 years. This should work out to about a 6-7 point OID, thus ensuring there will be a lot of “flipper” activity when the bonds are free to trade.
5. The bonds are also callable at 100 in 2020. If the credit story does work out, you won’t enjoy that 8% coupon for very long. In other words, still a fair amount of downside with a limited upside. Longer call protection would have maximized potential refunding potential if PR does make a comeback.
6. The minimum order size of only $100,000 compared to the initial talk of $50 million means a lot of bonds will end up in “retail” accounts, not a desirable outcome in our view.
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