Due to requests for examples of my trading style, I am listing below actual arbitrage trading opportunities in which I have a position. Arbitrage 1 Long--MBNA (KRB) 8.278% Junior Sub Debenture Due 2026 Price 92 (trades on NYSE) Short --MBNA Capital 8.25% Preferred (KRB Pr C) Price--$25.50--this security is backed by a Junior Sub debenture or Short MBNA Preferred A 7.5% (KRB Pr A) Price $24.43 ____________________________________________ Arbitrage 2 Long MBNA Capital D 8.125% Preferred (backed by KRB Jr. Sub Debentures) Price $24.60 Short- MBNA 7.5 % Preferred Price $24.43 ________________________________________________ Except for the "D" preferred all the above are currently callable at par. ____________________________________________________ Arbitrage 3-- Long AT&T Capital 8.125% Public Income Notes (NYSE symbol "CIC"). Callable at par (25) on 11/15/2003. These are Sr. debt obligations of CIT Corp (S&P A, Moody's A2) and rank pari passu with all sr. debt of CIT. Short CIT 5.875% bond due 10/15/08 (traded on NYSE) at 97. This is not only an interest differential play, it's a bet that CIC will be called in 2003. After talking to CIT's treasury dept, I believe their intent is to call the high yielding debt next year. (CIT has access to the commercial paper market , rated P-1). I am extra long here, taking advantage of the interest paid by CIT v. the rate I pay the clearing firm. _____________________________________________ Arbitrage 3 Long AMR 9% bond due 9/15/16 at 68.50 Short AMR Public Income Notes (7.875 due in '39) at 16.45 (Nyse symbol AAR) The AAR has moved down since I shorted it, but there's still a yield differential. _________________________________________________ They ain't sexy.....but they make money. +++++++++++++++++++++++++++++++++++++++++ "Youz eitha a trada or a trada hata"
Are these all interest rate spreads looking for the spread between higher risk and lower risk bonds to narrow? Do you only take positions in paper that is publicly traded on an exchange? Where do you get your info to decide on trades to take? Do you do any equity arbitrage, M&A or pairs?
Well....at least somebody understood these and responded. On the MBNA, all the preferreds except the "A" are backed by jr. sub. debentures with equal priority in the capital structure. Although the MBNA Capital Preferreds are Trust Preferreds, the debentures backing them are those of the parent, MBNA. So, the weakest priority in the capital structure is the "A" preferred of the parent. The jr. sub that trades like a real bond on NYSE is the cheapest of all the securities. Also, with respect to shorting the "A" (7.5%)which is below par, I feel its unlikely it will be called since the "D" was issued 45 days ago at 8.125%. Using bullets is probably the easiest way to put the position on, but you won't find many people with the patience to trade stocks that don't have much volume. I have been 60-100% of the volume most days. It's OK with me if they don't have patience. The CIT's both have the same priority in the capital structure (They are called AT&T Capital because Newcourt bought AT&T Capital, CIT bought Newcourt, Tyco bough CIT, TYC spun-off CIT). I own quite a bit of CIC outright. Can you beat an 8.5% Yield to Call on an A rated security?
Potential risks. Well, no arb is guaranteed to work. There have to be enough players with enough capital. Other risks: 1) Short securities are called at par--unlikely 2)The arb spread doesn't narrow for a long time, tying up your capital 3) The arb spread widens because more institutions own the listed bonds than the preferreds, and the corporate bond market is in disarray (the bonds are rated investment grade by S&P, junk by Moody's). In fact, there is a big seller in the listed bond of MBNA, so the real issue is shorting the Preferreds. I can't imagine there's a hedge fund out there doing this as the amount of the preferreds you can trade is so small. Yes, I do some M&A and pair trading. I try to add my own flavor to it. Recently, I've been long REI and short RRI. REI is spinning off RRI (REI owns 83% of RRI) and I think RRI is not likely to have access to the capital markets once the spin is done.
A lot of times I find these by chance. A broker sold me the MBNA D and when it performed poorly I started looking at the other securites of MBNA . The CIT I've been following since they bought Newcourt. These things traded at a 43% Yield to the call before they escaped from Tyco. Tje AMR I statred looking at when I was looking for all Public Income Notes. I still haven't found a list, but if you can locate one it would be appreciated.
Bone, you are right. And my strategy only works if things come into line in a few weeks to a few months. That's because a 1/2% rate differential isn't too good for tying up your capital, and if you use margin, you are losing about 3.5%. (8.125-3.5-7.5). The strategy can get quite frustrating, like today. I lost $10k. The KRB listed's went down to 90. The preferred "A" went up $.56 and the D went up $.10. I've actually seen these trade up to $2 below the "A." So there IS some risk of short-term fluctuations. It sure looks like the dog days of summer in the bond market.
It is definitely the dog days of summer in the bond market. Liquidity is best found on the beach at this time of the year.