[riskneutral]

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.

[fnordpiglet]

Still referencing LIBOR eh?

Im not sure your perpetuity model fully applies. It’s not a fixed rate perpetuity but adjusts with positive correlation to, presumably, inflation + growth + idiosyncratic brand value movement.

[riskneutral]

New loans have moved to SOFR as of Jan 1, 2022. There are still a lot of LIBOR linked loans outstanding. It will take some time for references to LIBOR to disappear from the market.

[kolbe]

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]

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]

BB bonds are several years max, LISTERINE is forever.

[riskneutral]

Having a finite maturity date is generally preferable over a perpetuity ("forever"). I explained above that the value of a perpetuity declines rapidly when interest rates rise (and interest rates will be rising in the near future). For example, the government of Austria recently issued a 100 year bond, which then fell nearly 50% in value as interest rates increased. A perpetuity is even worse than a 100 year bond.

With a finite maturity, you invest (let's say) $2 million, earn your yield for 5 years (let's say LIBOR + 7%) and then you get your $2 million back and you can decide then how to best re-invest your money at that time given the situation. There is a reinvestment risk here, where after 5 years you might not be able to find similarly attractive investments but unless you an insurance company or a pension fund trying to meet very specific long-term obligations you don't really need to worry about super long-term reinvestment risk. On the flip side, if you get your money back after 5 years you might be able to find an even better investment, and that kind of optionality is very valuable.

[kolbe]

> earn your yield for 5 years (let's say LIBOR + 7%) and then you get your $2 million back and you can decide then how to best re-invest your money at that time given the situation

You have an 80% chance of getting your money back with BBs.

Also, I didn't read the specs on the Listerine contract, but I assume that if they raise the price of Listerine, then royalties scale with it. While in short term consumer staple prices are sticky, they scale with inflation over the long haul.

[bombcar]

LISTERINE lives on, LIBOR is dead.

https://en.wikipedia.org/wiki/Libor#LIBOR_cessation_and_alte...

[howeyc]

Where can one buy these bonds?

[riskneutral]

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]

You seem to need a couple million if you want to buy a Listerine royalty as well so there's that.