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Comment by latchkey | Hacker News Reader

At the current highest bid of $1.51m, it would be 13.2 years before breaking even (not counting taxes).

For that amount of money, I can think of better investments.

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!

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.

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.

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.

Where can one buy these bonds?

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.

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

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.

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.

BB bonds are several years max, LISTERINE is forever.

LISTERINE lives on, LIBOR is dead.

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

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.

> 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.

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.

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.

The last auction for Listerine royalties ended with a winning bid of $561,000 on $32,040 revenue over past 12 months... or 17.5 year pay back!

that's not bad, considering if you want to pass something to your offspring.

If you had a $700k or so house, you could have mortgaged the house and used the Listerine to pay the mortgage!

Probably causes you to become insufferable about other brands, tho.

Yeah, a mouthwash royalty has a side effect of brainwash.

Imagine explaining that to a banker.... scratch that, I'm sure they've heard crazier reasons for taking out a line of credit on a house.

>> For that amount of money, I can think of better investments.

The group buying this contract can, too. But that's not the point of owning a diversified portfolio of assets that are of varying correlation.

EG is not the same as EV.

Well, after 13.2 years you'd have broken even and be up one Listerine royalty. I don't know of any investments that have dividend yields that high.

What are the better investments?

Property.

Cap rates in my city are like 2.5%. Where are these juicy yields?

That's why most real estate investors get mortgages. Then your ROI depends on the money down. Real estate investments benefit from leverage.

And then instead of risking the value of the investment, you risk 5x it? That's a completely different risk profile from the listerine royalties. What's the listerine yield if you lever it 5:1?

No, your risk is the mortgage, but it's paid by the lesee. Most people I know do it by putting down 10%, getting a 30-year mortgage for the rest, then rent it out. Eventually the property pays for itself. Let's take an example: a 100k fixer upper. You put down 10k, finance the rest. You spend 25k on remodeling it, so you can rent it out. The house brings in say 850 a month, making cca. 10k a year. So you make 10k a year on a 35k investment, which is a 28% ROI. Obviously before taxes, and any mainteneance etc. But this is how most retail real estate investment work.

10k/year on a property with a market value of 125K is a far higher cap rate than I see to begin with, but I live in a nicer area where a room in a house is the only thing you can get for less than $1000. I know there are much higher yields in Section 8 and slumlording, but that's more of a business than an investment because of the extra work involved, and one where I hear success requires a moral compass that I don't align with.

I agree with the jist of your comment, however providing section 8 housing is as good as one can do to help low income families (in my opinion).

Stock index?

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