5 ms·

Is that the right way to view it? If you believe Listerine isn't going anywhere, at that price you're making a reliable 7.5% return that should track with infla

Is that the right way to view it? If you believe Listerine isn't going anywhere, at that price you're making a reliable 7.5% return that should track with inflation. On something you presumably could sell just as easily as you bought. Doesn't sound that bad!

ghaff 4y ago
Depending on which numbers you plug in, the bidders seem to be evaluating it about where you'd expect. It's presumably pretty low risk but not risk free, it's presumably fairly liquid but it's a rather unusual asset, and it presumably tracks inflation pretty well. Add all that together and I certainly expect better than essentially risk free, highly liquid investments but not outrageously so.
latchkey 4y ago
I view time as money, so yes. I'm not convinced you could flip it for a profit quickly (taking in capital gains) and like property... there is a history of sales. You'd have to wait a period of time (>1 years) before selling it again, you'd never really realize that 7.5%. As a safe counter example, for less money, I bought a condo in a popular beach community with low inventory and a lot of short term rentals. In the last year the property value has increased by a solid 23%. I could have also rented it out for revenue.
riskneutral 4y ago
This is not a great investment. You can earn LIBOR + 7% on a BB rated CLO (Collateralized Loan Obligation) bond. Since you earning a floating rate (LIBOR) plus 7%, you would be far better protected against interest rate increases. The Listerine royalty is a perpetuity, which means that its value declines very rapidly when interest rates increase. The value of the Listerine royalty has some natural immunity to inflation because the price of Listerine would increase with inflation, but it is difficult for manufacturers to pass on costs when it comes to retail consumer products like Listerine. The CLO bond is floating rate, so it is also protected somewhat against inflation. You would need to dig into all the details of the Listerine mouthwash business before investing, and those granular details are unlikely to be available from the owner (Johnson & Johnson). The CLO bond will be backed by underwritten loans to 100+ large, private American companies across all different industries, so the commercial risk is far lower due to the diversification benefit of a CLO. The CLO structure itself also ensures that chances of the CLO BB bond defaulting are very low. The default risk can be reduced further by investing in multiple CLOs. You could also diversify beyond CLOs through other kinds of floating rate securities that have a similar LIBOR + 7% yield, for example Mortgage Backed Securities. With $1.5 million, you could construct a very nice structured credit securities portfolio for any target yield and risk level that you're looking for. By the looks of this auction, the Listerine royalty is not easy at all to buy or sell. A BB rated CLO bond would be more liquid than this, and if you can afford to invest $1.5 million in a mouthwash royalty then you can also get an investment broker who can help you buy and sell structured credit bonds and perhaps even lend you money to increase your leverage if you want to. The Listerine royalty belongs in a huge investment portfolio, such as a pension plan or hedge fund, where they have so much capital that needs to be deployed that they are forced to invest in highly obscure things like mouthwash royalties.
- howeyc 4y ago
  Where can one buy these bonds?
  - riskneutral 4y ago
    You need a broker and a couple million dollars to invest for them to take you seriously. The bonds typically sell in minimum $100,000 pieces.
    - pc86 4y ago
      You seem to need a couple million if you want to buy a Listerine royalty as well so there's that.
- kolbe 4y ago
  Why are you comparing a BB rated bond to a cash flow from an American staple of consumption for a hundred years? Everyone knows more risk comes with higher yield. That fact doesn't make one or the other inherently better: just a different position on the risk/yield curve.
  - riskneutral 4y ago
    Because the BB bonds are currently yielding LIBOR + 7%. A royalty stream is similar to a bond in the sense that you pay a price today to own an asset that will pay an uncertain stream of future cashflows over time.
    - Giorgi 4y ago
      BB bonds are several years max, LISTERINE is forever.
      - bombcar 4y ago
        LISTERINE lives on, LIBOR is dead. https://en.wikipedia.org/wiki/Libor#LIBOR_cessation_and_alternatives_available https://en.wikipedia.org/wiki/Libor#LIBOR_cessation_and_alte...

ghaff 4y ago

Depending on which numbers you plug in, the bidders seem to be evaluating it about where you'd expect. It's presumably pretty low risk but not risk free, it's presumably fairly liquid but it's a rather unusual asset, and it presumably tracks inflation pretty well. Add all that together and I certainly expect better than essentially risk free, highly liquid investments but not outrageously so.

latchkey 4y ago

I view time as money, so yes. I'm not convinced you could flip it for a profit quickly (taking in capital gains) and like property... there is a history of sales. You'd have to wait a period of time (>1 years) before selling it again, you'd never really realize that 7.5%. As a safe counter example, for less money, I bought a condo in a popular beach community with low inventory and a lot of short term rentals. In the last year the property value has increased by a solid 23%. I could have also rented it out for revenue.

riskneutral 4y ago

This is not a great investment. You can earn LIBOR + 7% on a BB rated CLO (Collateralized Loan Obligation) bond. Since you earning a floating rate (LIBOR) plus 7%, you would be far better protected against interest rate increases. The Listerine royalty is a perpetuity, which means that its value declines very rapidly when interest rates increase. The value of the Listerine royalty has some natural immunity to inflation because the price of Listerine would increase with inflation, but it is difficult for manufacturers to pass on costs when it comes to retail consumer products like Listerine. The CLO bond is floating rate, so it is also protected somewhat against inflation. You would need to dig into all the details of the Listerine mouthwash business before investing, and those granular details are unlikely to be available from the owner (Johnson & Johnson). The CLO bond will be backed by underwritten loans to 100+ large, private American companies across all different industries, so the commercial risk is far lower due to the diversification benefit of a CLO. The CLO structure itself also ensures that chances of the CLO BB bond defaulting are very low. The default risk can be reduced further by investing in multiple CLOs. You could also diversify beyond CLOs through other kinds of floating rate securities that have a similar LIBOR + 7% yield, for example Mortgage Backed Securities. With $1.5 million, you could construct a very nice structured credit securities portfolio for any target yield and risk level that you're looking for. By the looks of this auction, the Listerine royalty is not easy at all to buy or sell. A BB rated CLO bond would be more liquid than this, and if you can afford to invest $1.5 million in a mouthwash royalty then you can also get an investment broker who can help you buy and sell structured credit bonds and perhaps even lend you money to increase your leverage if you want to. The Listerine royalty belongs in a huge investment portfolio, such as a pension plan or hedge fund, where they have so much capital that needs to be deployed that they are forced to invest in highly obscure things like mouthwash royalties.

howeyc 4y ago
Where can one buy these bonds?
- riskneutral 4y ago
  You need a broker and a couple million dollars to invest for them to take you seriously. The bonds typically sell in minimum $100,000 pieces.
  - pc86 4y ago
    You seem to need a couple million if you want to buy a Listerine royalty as well so there's that.
kolbe 4y ago
Why are you comparing a BB rated bond to a cash flow from an American staple of consumption for a hundred years? Everyone knows more risk comes with higher yield. That fact doesn't make one or the other inherently better: just a different position on the risk/yield curve.
- riskneutral 4y ago
  Because the BB bonds are currently yielding LIBOR + 7%. A royalty stream is similar to a bond in the sense that you pay a price today to own an asset that will pay an uncertain stream of future cashflows over time.
  - Giorgi 4y ago
    BB bonds are several years max, LISTERINE is forever.
    - bombcar 4y ago
      LISTERINE lives on, LIBOR is dead. https://en.wikipedia.org/wiki/Libor#LIBOR_cessation_and_alternatives_available https://en.wikipedia.org/wiki/Libor#LIBOR_cessation_and_alte...