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The Next Leg Of The Junk Bond Crisis: Third Avenue "Focused Credit Fund" Liquidates, Gates Redemptions
Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9.
Third Avenue says outflows would have forced them to accept "prices that would unfairly
disadvantage the remaining shareholders."
— Russ Kinnel (@RussKinnel) December 10, 2015
The redemption block takes place after the fund lost some 27% in 2015, with assets plunging by a whopping 66%.
Not surprisingly, the fund is in the worst percentile with 100% of funds outperforming YTD, however we can only assume that it had accumulated its $789 million in AUM (down from $2.4 billion earlier this year) as a result of being in the top 1% in 2013.
This is what happened, according to the fund manager:
We believe that, with time, FCF would have been able to realize investment returns in the normal course. Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders.
As a result, all shareholders will be equally disadvantaged.
How long will investors have to wait for the "Liquidating Trust" to become, well, liquid? Quite a while:
In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions. We believe that doing so would be contrary to the interests of all of our shareholders, which is why we have taken steps to protect shareholder value by returning cash and implementing the Liquidating Trust to seek maximum value for these investments.
At least it won't cost you anything:
Third Avenue will manage the Liquidating Trust in order to obtain the best overall outcome for the beneficiaries. Third Avenue will not charge any fee for those services.
Finally:
Third Avenue is extremely disappointed that we must take this action.
So is everyone else:
Here is the official statement:
A history of the fund from Bloomberg:
Then again, as Kinnel snydely notes...
PIMCO Total Return handled $100B in outflows without missing a beat but Third Ave Foc Cred is thrown by $1.3B in a year.
— Russ Kinnel (@RussKinnel) December 10, 2015
What this means is that now that the dreaded gates are back, investors in all other junk bond-focused hedge funds, dreading that they too will be gated, will rush to pull what funds they can and submit redemption requests, in the process potentially unleashing a liquidity - and liquidation - scramble within the hedge fund community, which will first impact bonds and then, if the liquidity demands continue, equities as well.
For those curious, here are the top holdings of the fund:
Keep a very close eye on HYG and JNK now that gates are officially back after a 7 year hiatus.
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#FedRecovery #WelcomeHotel
You can come in, but you can't leave....
all your dollars, they belong to us
thanks,
-the mgmt
Wait until this happens to your money market fund.
Exited most high yield positions in early 2014 (and said so on ZH at that time). As usual, I was at least a year early in that call. Somehow, I don't regret it any more, though.
With what looks to be coming down the pike, better a year too early than a week too late.
Check out the chart on that fund (compared to HY in general):
http://www.morningstar.com/funds/XNAS/TFCIX/quote.html
If you invested in this fund in 2009 you'd be right about back where you started. The last couple months have been eye-wateringly bad. It's what the technical analysts would call the infamous "Lawn Dart" chart formation. Straight down, bitchez!
The fund focuses on "distressed debt" (the junkiest part of junk) which, every now and then, lives up to it's name.
You Are Fucked
Merry Christmas
High yield offerings always emphasize strong (unattainable) increases in cash flows in the future.
Translation: "it's not your money, it's ours"
Basically, investors give their money over for investment, but many brokerage houses, mutual funds, and certainly hedge funds pretty much take the attitude that now it's their own money and assets. F--k'ed up situation that investors actually put up with.
And Yellen says she is going to raise rates.
HA!
Setember 2008
It happened once, it will happen again
"You mean my government pension fund was invested in this?"
Oh the irony.
i strongly recommend that the good folks here on ZH who undestand the difference between the "return of ur capital" versus return on ur capital share this with ur loved ones...
and then explain to them why WE have saved in the only 2 forms of real money out of the reach of the Wall St. sociopaths and the scum of the earth MoneyChangers....
https://www.youtube.com/watch?v=HlFvknTzVf8
Is it wrong that I am so excited for December 16th and have been since September. I. LITERALLY. CAN. NOT. WAIT. Looking forward to them being fucked so hard no matter what they do, willing to accept what will happen because of it. Excited.
Look at the market today, snore snore snore
I just want to go to sleep and wake up on Dec 16th
I want to see people screaming "Sell! Turn those machines back on!"
" You can checkout anytime you like, but you can never leave. "
Redemptions have also been picking up in energy funds. Ho Ho Ho.
This isn't supposed to happen! The Fed promised!
...bbut Granma Yellen is about to pull the trigger ....oh, the humanity !
she will pull the trigger ....on humanity
Seriously, what would you do if in her place? You want the fed to end, but don't want to be the person who ends it.
You asked what should she do...ill answer.
She should call a generational FED chair meeting with Fischer, Greenspan and Bernanke. In this meeting they should toast the exceptionalism of Keynesian economics. After dinner she should serve up some polonium desert for all.
Following the meeting she should give a press conference LIVE and explain how fiat money is life theft, then inform the head vampires that they have ingested garlic and holy water, before blowing her brains out on live tee vee.
I still dont have hope that the public would understand.
RIPS
This was the G rated option.
Spectacular! Style, showmanship! [Golf clap]
top post nominee for sure....
bravo Sir...
DEATH TO THE MONEYCHANGERS....
and some.
+1000 RIPS. Your description is like a very vivid dream that occurs right before waking. When you awaken, you know to the bone, you are fucked.
I should clarify - I want the fed to end
You want the fed to end
The people they put in charge DONT want the fed to end.
If you had the power they had, what you you do to ensure it dosent end? It kinda seems gravity will catch up regardless of what they want.
I guess that means buying PUTs on HYG at 85, was the way to go. Resistance right now is 81.30's. If it closes fri below 81.20 , look out below....
first out best out
foboTM
I own the trademark. Your bill is in the mail. 8D
Pulling out in time is advised.
I hear you, they absolutely should, but fucked is fucked, yes?
Imagine pulling out of Yellin...see what I mean? You just can't get some things back.
I do NOT want to imagine that.
Which Part of Junk didn't they Catch..
hope they weren't sellign them to little old Grannies, with Lawyers for Son in laws.
Another one bites the dust...
They'll just 'hold to maturity'....so you getz yer money back...after hyperinflation...
"Aaaaaaaaand its gone..."
"Third Avenue will manage the Liquidating Trust in order to obtain the best overall outcome for the beneficiaries. Third Avenue will not charge any fee for those services."
No fees! Glass half-full, baby!
that's mighty white of them.
A dick in the ass butt with lubrication. Now say thank you.
I thought the game was 2 & 20.
That means that they take their 20 of the losses, too, right?
The way is shut. It was made by those who are Dead. And the Dead keep it. [/King of the Dead, Lord of the Rings]
Raise the Gates. Release The Krakken.
wow, this page took a long time to load...looked like they had to liquidate the story as well....
My junk is worth more than Third Avenues' junk and I have access to my junk. I just have to open my garage door.
I just put some junk in your trunk. The junk I gave you is worth more than Third Avenue's junk, won't cost you a thing.
I wonder who was on the opposite side of the trade....
Someone is getting Corzined! Nice. Good to see you carbonmutant.
Well wait a minute......If things are that bad with my junk bond fund.....maybe I should quit holding my breath on getting my money back from my Russell Simmons rapping Rush Card.............I`m calling the Clinton Foundation......I want a bailout......
From the archives on gating in:
http://www.zerohedge.com/news/2013-06-05/slamming-money-market-%E2%80%9C...
http://www.zerohedge.com/news/2014-07-23/gates-are-closing-sec-votes-thr...
And, of course, one should also familiarize oneself with the term "breaking the buck", too:
http://www.investopedia.com/terms/b/breaking-the-buck.asp
Mark to Market! The Horror!
yoy will see many gates in the next four months. when will these suckers learn?
This fund was not representative of the high yield market as half of its assets were invested in stressed and distressed bonds. Having an open end fund with these types of assets is begging for trouble because they are generally illiquid and volatile which makes meeting daily redemptions difficult. While some may take glee in this fund's problems, all you are doing is showing your ignorance when it comes to capital markets especially the high yield market by extrapolating this poorly structured fund to all funds in HY. The stupidity expressed by so many on this site would be comical if not for the fact it is sad.
The Credit Market Collapse Intensifies; Redemption Gates Up Next - Dave Kranzler
http://thenewsdoctors.com/?p=560012
J.P. Morgan analysts wrote that the three best leading indicators for recession have been credit spreads, the shape of the yield curve and profit margins.
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.
http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Great ! Good excuse for the still liquid HFs to gate. Fashionable to have liquidating trusts where you go through the motion and compensate yourself handsomely. The lesson of return of your momey and not return on your money is still not sinking in