Raghu writes: >> I am afraid I have far less faith in the wisdom of the capital markets >> than you do. I'll have to see the post-securitization actions of Sears >> rather than the bond yields themselves - because to me the bond >> markets are open to manipulation.
This is why I think you are still confused. The entire point of securitization is that the post-transaction conduct of the original parent company is irrelevant. The entire point is that a specific collateral package has been isolated from the parent, so the parent's post-transaction defaults/bankruptcy will have no material effect on the ability of (i) the subsidiary to pay interest on the bonds, or (ii) the ability of the bondholders to be paid off from the collateral if the subsidiary defaults. As to the Sears example. since the marks are not income-generating, the securitization only works if the capital markets are comfortable that if the subsidiiary defaults (because Sears stops making the royalty payments), the bondholders will be able to sell the marks for a value that will cover the bonds. You are convinced that it is impossible for bondholders to rationally come to that conclusion. You may be right, you may be wrong. Where I think you go off the cliff is that you are convinced that if the bond market disagrees with your conclusion and concludes that is is possible, the only reason is that they were snookered by bond salesmen. There are simply too many people with too much at stake for that to happen except as a man bites dog story. The bonds have to get rated by a ratings agency like Standard & Poors. The purchasers of the bonds are just as greedy capitalist pigs as the sellers of the bonds, why do you think the sellers are smarter than the buyers? David Shemano
