Continuing BN's series of articles from December 2014 when Hereford United were about to go out of business, today we look back at Andy Lonsdale's $9M bond which he said would save the club from going bust.
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The $9m JPMorgan Chase bond
presented as collateral for a £5m credit line by European Finance
Guarantee is virtually worthless, well placed sources have told Bulls
News.
The bond is a Commercial
Mortgage Backed Security - effectively a part of a bundle of mortgages
on commercial properties largely in the US - that were sold as
investments. These were one of the root causes of the global financial
collapse as they were over-rated by the ratings houses and subsequently
lost huge value.
The bond was issued in 2007
at possibly the worst time for such instruments when property values
were high and lending standards lax. Part of the issue,
originally given an "AA" rating, and considered unlikely to be
materially affected by defaults at the time of issuance was, by October
2013, beginning to experience problems (source) and lower quality portions of the issuance have been wiped out by defaults.
Credit Suisse noted around the same time that mortgage values were expected to fall for a further year, on the back of a 'continued sharp decline' in the market.
MetWest, a monitor of Commercial Mortgages, noted in July 2014 that
significant chunks of the bond portfolio was to be 'bulk liquidated' to
deal with 'long term delinquent loans'. One of those mortgages
liquidated in October 2012 still owed 97.2% of its loan value after the
sale (source).
Bulls News has been contacted by several traders regarding the guarantee letter. One noted:
"The $9m JPMorgan Chase
bond listed is of extremely poor quality and no-one I know would trade
it. It's worth a fraction of the original value, maybe a few thousand
dollars as a gamble, if you can find a buyer."
The bond has no repayment of the $9m face value at any stage - only paying interest dependent on the performance of the mortgages contained within the bond. Moody's class the bond currently as Ba3 - a sub-prime 'speculative' grade and a significant credit risk.
A JPMorgan Chase report for November 2014 shows the interest payment made to the entire $2.484bn class of the bond was just $777.07.
This means the $9m bond contained in the letter would have had an interest payment of just $2.13 for the month.
Even if this payment continued evenly, and it is expected to continue to fall, until the bond expired in 35 years time (February 12th, 2049) then the total income from the bond would be less than $900.