As a follow on to last week’s high drama regarding the Darryl Strawberry payments up for auction, an astute reader sent me the following article (quoted below) this morning. The article was published just after the auction sale yesterday in Chicago.
The winning bidder agreed to pay $1,300,000 for this payment stream- more than twice what I thought made sense.
Wow- basically, this bidder bought an unsecured general obligation of the baseball team, for a yield of a hair over 5%…
Hopefully the buyer has some inside knowledge of the transaction to make this make sense…. because I sure don’t see the logic!
We deal in guaranteed payment streams here at Annuity Straight Talk so while most people are focused on the star value of baseball player, we were focused on the underlying credit quality to determine the bid. How safe are the Mets? That’s the rub.
Probably they will be fine, but the deferred compensation agreement underlying this deal made it quite clear that there was no guarantee, no set-aside funds, and no ‘asset’ there…. just a promise to pay in the future. That demanded a far higher rate of return than 5.1% for the credit risk.
Here’s the illustration:
Here’s the article from ESPN as well-
Mets pay winning bidder OF’s checks
The Internal Revenue Service on Tuesday auctioned off the money owed to Darryl Strawberry from the New York Mets contract he signed in 1985.
A man, who did not want to be identified, agreed to pay $1.3 million to receive a check from the Mets of $8,891.82 a month for the next 18½ years. Assuming a realistic timeline for the court to approve the sale, the value of the deferred payments will equal close to $2 million.
USA TODAY SportsMets money owed to Darryl Strawberry that was seized by the IRS as payment for back taxes was won at auction Tuesday.
Strawberry was forced to give a portion of the deferred money from the contract to his ex-wife, Charisse, as part of their divorce settlement in 2006, but the payments were never made.
In 2010, Charisse filed for Chapter 7 bankruptcy protection and, as part of the proceedings, asked for what was owed. But in September, a judge in the Northern District of Florida ruled that the annuity was the property of the IRS, not Charisse, because Darryl still had not settled his tax debt owed for 1989, 1990, 2003 and 2004.
A person in the room at Tuesday’s auction in Fairview Heights, Illinois, said that the IRS momentarily held up the auction as Charisse tried to file an injunction to halt the sale, which required a minimum bid of $550,000.
Anuj Kumar, an investor from Austin, Texas, said he usually invests in stocks and bonds, but the unique nature of the property was intriguing enough to fly in for. Due to mail-in bids, bidding started at more than $900,000, Kumar said, which was close to the number he was looking for. Kumar said there were roughly 25 people in the room, but the winning bidder showed the most interest all along.
“You could tell he wanted it no matter what,” Kumar said.
Given the present value of the deferred money on the $1.3 million sale price, the rate of return for the winning bidder is about 5 percent.
The total value of the contract, which covered his 1985 through 1990 seasons, was $7.1 million, but nearly 40 percent of his $1.8 million team option in 1990 ($700,000) was deferred and put into an annuity with a 5.1 percent interest rate.
From 1987 to 1990, Strawberry failed to pay $542,572 in taxes, according to court documents. As of November 2013, Strawberry owed at least $80,000 from his tax liability from missed payments in 2003 and 2004.
The Mets famously bought out the final year of Bobby Bonilla’s contract in January 2000 and deferred the $5.9 million deal into 25 payments of $1,193,248.20 that began in 2011 and end in 2035. By deferring, Bonilla turned the $5.9 million into $29.8 million after negotiating an 8 percent interest rate on the deferral.