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.

Disclaimer: This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase and sale of any security. Although the information contained in this report has been obtained from sources we deem reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. Investors should obtain and read the official statements related to the securities discussed.  All opinions are only valid as of the report date and are subject to change without notice. Axios Advisors, LLC (or one of its affiliates), or its employees or clients may have positions in the securities described herein and may, as a principal or agent, buy and sell such securities.

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About Triet M. Nguyen

Triet Nguyen is a veteran of the fixed-income markets and a high yield/distressed municipal bond expert. Over his 32 year career, Triet has designed, marketed and managed every type of buy side investment products, from mutual funds (open and closed-end) to managed accounts and hedge funds. He is currently the managing partner of Axios Advisors LLC, an independent municipal research and investment advisory boutique specializing in high income strategies. Triet is the author of “Investing In The High Yield Municipal Market”, to be published in July 2012 by John Wiley/Bloomberg Press. He also moderates the Municipal Credit Research Forum on LinkedIn. His Twitter handle is @HighYieldPro. Before rejoining Axios (which he founded in 2002), Mr. Nguyen was a Senior Vice President at B.C. Ziegler, where he traded tax-exempt high yield and taxable municipal bonds (including Build America Bonds). From January 2004 to January 2008, he was a Managing Director of Saybrook Capital, LLC, managing one of the first ever municipal hedge funds dedicated to a credit strategy. As Director of Information Services at ebondUSA.com between 2000 and 2001, Triet contributed to the development of a pioneering online muni bond evaluation system. Prior to 2000, he was a Vice President/Portfolio Manager of the John Hancock Funds and a Senior Portfolio Manager of the Putnam Funds. Triet received a B.A. in Economics and an M.B.A. in Finance and Accounting from the University of Chicago.

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