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Archive for December, 2015

High-Yield Bond Funds: Increasing Blood in the Water

As reported by Bloomberg on December 13, 2015 (“Investors See Third Avenue Fueling More Bond Market Carnage”), “top bond managers are predicting more carnage for high-yield investors amid a market rout that forced at least three credit funds in the past week to wind down.”

The three bond funds that suffered losses within the past week include the Third Avenue Focused Credit Fund (which has announced the suspension of investor redemptions from its $788.5 million mutual fund), Stone Lion Capital Partners (which has announced the similar suspension of investor redemptions from its $400 million fund) and Lucidus Capital Partners (which has announced the liquidation of its $900 million portfolio).

Some Wall Street experts, including Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross, are predicting that an increasing percentage of high-yield funds may face a high level of withdrawal requests as more and more investors become concerned about the ability to get their funds back.

The root of the problem facing many high-yield funds appears to be the valuations of the securities that are held in their portfolios – securities that are valued based on the estimates of their portfolio managers that have no basis in fact or reality when those securities are later attempted to be sold. This forces a fire-sale of the securities at prices that are significantly below what they are being carried on the books of the funds at which then leads to the inability of those funds to meet investor redemption requests.

If you are an individual or institutional investor who has any concerns about your investment in the high-yield bond funds, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

High-Yield Investors Suffer Bond Fund Losses

The U.S. High-Yield bond rout deepened Monday, with the bonds of dozens of low-rated companies falling anew and the shares of some large fund-management firms tumbling as well.

Investors are rushing out of junk bonds, spooked by last week’s closure of a mutual fund focused on some of the lowest-quality, highest-yielding bonds. The shutdown comes on top of fears that a spike in bond defaults is coming, and it’s led investors to rush for the exits in a corner of the market that generally doesn’t handle such things well.

The price drops are hitting many investors who are new to junk bonds and have little experience with the notoriously volatile market. Since the Federal Reserve slashed interest rates to a record low in 2008, investors have been creeping into ever-riskier options in search of more income.

In just two days, the central bank is widely expected to finally raise rates above their emergency low levels. The policy has helped avert a deeper downturn following the financial crisis, but critics say it’s also spread hidden risks throughout the financial system by making investors cavalier.

The declines reflected gathering concerns about risky companies’ access to financing, traders’ capacity to sell bonds without causing prices to fall, and ripple effects from the closure of a junk-bond mutual fund. Together, the concerns are feeding investor fears that the U.S. mutual-fund industry could face outflows that will test funds’ capacity to meet investor redemption requests.

The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, the largest junk-bond ETF by assets, was down about 1.5% Monday, after shedding 2% on Friday in its worst plunge since 2011, to trade at $78.34 a share.

Third Avenue CEO Leaves Firm After Collapse of Focused Credit Fund

Third Avenue Management LLC has parted ways with Chief Executive Officer David Barse after the collapse of the company’s Focused Credit bond fund last week. The collapse of Third Avenue’s Focused Credit Fund jolted Wall Street and renewed worries about the difficulty of trading securities on the U.S. bond market. New York-based Third Avenue is a relatively small investment manager with fund assets that totaled $10 billion at the beginning of the year.

Third Avenue’s Focused Credit Fund was overwhelmed with heavy losses and surging investor net withdrawals, forcing its CEO David Barse to abruptly liquidate the fund and block redemptions.

The redemptions and losses over the past year cut the size of the Third Avenue Focused Credit Fund to $789 million from nearly $3 billion. Run by Tom Lapointe, the fund bet on distressed situations, such as the bankruptcy-related claims of Lehman Brothers.

The blow-up of the Focused Credit Fund was the biggest mutual fund failure since the financial crisis.

Third Avenue Focused Credit Fund halts investor withdrawals

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

Third Avenue said poor bond-market trading conditions made it almost impossible to raise sufficient cash to meet redemption demands from investors without resorting to fire sales of assets.  The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year. It comes amid redemption requests at the fund and reduced liquidity in some parts of the bond market.

The move at the Third Avenue mutual fund comes at a time of widespread uneasiness about holdings of hard-to-sell securities in funds that trade daily or intraday.

Seadrill Turns to Loss on $1.8 Billion Writedown in Oil Rout

Seadrill Ltd., the offshore driller controlled by billionaire John Fredriksen, reported its first quarterly loss since 2011 as a collapse in oil prices reduced demand for its rigs.

The net loss of $1.83 billion came after the Hamilton, Bermuda-based company booked $1.8 billion in non-cash impairment charges to investments and goodwill, it said in a statement. Earnings before interest, taxes, depreciation and amortization fell 14 percent to $546 million from a year earlier, beating the $506 million average estimate in a Bloomberg survey of 21 analysts.

Seadrill rose as much as 6.5 percent in Oslo, the most since Nov. 16, and the shares closed 2.9 percent higher at 55 kroner, bringing losses over the past 12 months to 61 percent.

Seadrill and other offshore-rig owners such as Transocean Ltd. and Ensco Plc are suffering as oil companies cut investments after crude prices fell to about $45 a barrel from a high of $115 in June 2014. Demand is weakening at the same time as the market faces a glut of new vessels, prompting drillers to cut dividends, defer newbuild deliveries and renegotiate contracts to weather the downturn.

The company said $1.1 billion of the impairment charge was related to its ownership in Seadrill Partners LLC and $563 million came after a test on goodwill.

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