November 17, 2010 - 12:14pm EST by
2010 2011
Price: 21.81 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 22 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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This idea is short and simple. JBK is a synthetic version of Goldman Sachs 6.345% junior subordinated bonds due 2/15/2034. The underlying bonds last traded at 97, the mid-point of their 93-101 range over the past week. At 21.81, which includes 0.42 of accrued interest, JBK trades at a bond-equivalent price of 85.60, a current yield of 7.4% and a yield-to-maturity of 7.7%. Note that other Goldman bonds of 20+ year duration trade with yields from high-5s to mid-6s and Goldman recently floated 50 year bonds at 6.125%. JBK is junior to these other issues, but in the extremely unlikely event of a Goldman bankruptcy all of these issues will suffer near-total loss, so from a practical perspective seniority has very little value and certainly does not justify a large yield discrepancy.
Why does this mispricing exist? JBK is a retail instrument and secondary markets for securities like this are typically inefficient (in both directions). The official name for JBK is:
Lehman ABS Corp Bkd Trust Certs 2004-06, Floating Rate Goldman Sachs Cap I
Wow. The name Lehman alone stops most retail investors in their tracks. "Floating Rate" does not offer much encouragement either with Bernanke promising zero percent interest rates "for an extended period of time". The few investors who even bother to go beyond the name find scary things like "3 month LIBOR + 0.75%" or dire mentions of a missed 11/17/2008 distribution. Why waste time on such an obscure and seemingly hirsute security?
In truth, Lehman no longer has anything to do with JBK. They were the original sponsor, buying $25m of the Goldman bonds and packaging them in in a trust (administered by US Bank) along with a complex swap which morphed the fixed-rate, 6-month paying bonds into floating-rate, 3-month paying trust preferreds. But the swap went away when Lehman filed bankruptcy. At that point JBK converted to a simple pass-thru entity which holds the Goldman bonds and forwards the interest payments to holders every six months. That's why the 11/17/2008 quarterly payment was "missed", JBK owners simply got all six months worth of interest in February, 2009 instead of 3 months worth in November and 3 months in February. And since the fixed-to-floating swap has terminated, JBK owners now receive 6.345% fixed on each $25 par share.
JBK is too illiquid for large funds but it is possible to accumulate a $1m position over time and is quite suitable for personal accounts and smaller funds.
This investment has all the risks of any 20+ year bond such as inflation or a drastic change in the issuer's solvency. You can hedge by shorting Goldman bonds (including the underlying) and simply capturing the spread. I am personally OK with a straight long position that yields over 7.5% from Goldman Sachs and its subsidiary the United States Treasury. At least as a parking place until Mr. Market offers something better.


Although it's possible Goldman will call the underlying bonds or the trust will change its name to something more retail-palatable, neither catalyst is all that likely nor is  there any kind of timetable. In other words, there is no catalyst.
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