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Subject:  Re: Private Placement Date:  3/11/2006  11:51 PM
Author:  markr33 Number:  15764 of 37083

<<Question 1 - Why would they do this (renew a 15 month 8% with a new 15 month 8% repeatedly every 3 months)?>>

Per FAQ they intend to do this to give the client added liquidity. I assume if their credit rating dropped they would extend beyond 3mo as capital would be more expensive to borrow.

But if they are concerned about cost, why aren't they selling 3 months at 7.5% (instead of 15 month at 8%)? [unless 15 month money costs the same as 3 month money, but at this risk level, there must be some premium for an extra year of money]

<<Question 2 - If the interest rate they can get rises to 8.25% at some point, why would they do this?>>

Not sure I understand your point, why would they want to pay out a higher rate of return of 8.25%, this would cost them more money ?

No, I am saying if prevailing interest rates go up, they may opt not to payoff after 3 months and rather wait the 15 months.

<<Question 3 - Why does the S&P rate them at BBB- if they have such consistent ability to pay their debt? What do they know that we do not?>>

They do not have much debt vs. assets. but I think there trading firm is higher risk than most traditional businesses.

per S&P
􀂃 Business concentration in options market trading
􀂃 Earnings are highly volatile
􀂃 Low equity market volatility can significantly reduce earnings

To determine safety, it would be instructive to understand how the money is being used. If they are using the extra $50M for capital to invest, then the question is - why do they need an extra $50M to trade if they already have $2B in capital? If they have yields better than 8% on their $2B, let's say 18% yield in total, and they use this additional $50B to "juice" the yield, then they are only adding 0.25% in total yield overall. Doesn't quite seem worth it to me. So the question is - why are they doing this? what profit does it gain?

<<Question 4 - Why does your brokerage have to "sell" this to you? If it is so good, wouldn't it already be snapped up by their best customers? (Are you one of their best customers?)>>

The offer is limited to a select pool, and yes I do quite a bit of business with them. I know historically owner shuns working with traditional bankers. Also the faq claims they do not want to spend extra fees on investment banking and the offer helps builds relationship with their retail clients. (obviously if they default the outcome will be very different..)

That's true. If they default, there are no more clients anyway, so it doesn't matter who is a good client and who is a bad one.

<<Question 5 - What is the priority of this debt?>>

"senior unsecured obligations and will rank equally with all other unsectured indebtedness"

And in what form is the other $120M of debt (6% of $2B consolidated capital)? And what does "consolidated" mean in this case - how much of the capital is really theirs and is there any other debt in an external construct that may have claim?

<<Question 6 - When they reissue every 3 months, are the amounts increasing or remaining about the same? If they are increasing, can you be sure that they aren't using this ever increasing debt to remain afloat?>>

no it has consistently been 50 mill ea offering.

Before I invest, I would want to know why they do this when they already have $2B in capital.

Commission is low (1 dollar per 1000 invested.)

By the way, I've never paid a commission for a private placement in my life. All the ones I have done were equity, and perhaps it is different with debt, but it still doesn't seem quite "fair" to me.
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