The Next Leg Of The Junk Bond Crisis: Third Avenue "Focused Credit Fund" Liquidates, Gates Redemptions

Tyler Durden's picture


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.

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.


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...

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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Thu, 12/10/2015 - 13:14 | 6904892 nope-1004
nope-1004's picture

#FedRecovery #WelcomeHotel

You can come in, but you can't leave....

Thu, 12/10/2015 - 13:20 | 6904966 unplugged
unplugged's picture

all your dollars, they belong to us

-the mgmt

Thu, 12/10/2015 - 13:32 | 6905035 pemdas
pemdas's picture

Wait until this happens to your money market fund.

Thu, 12/10/2015 - 14:10 | 6905340 NoDebt
NoDebt's picture

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.


Thu, 12/10/2015 - 14:12 | 6905359 El Vaquero
El Vaquero's picture

With what looks to be coming down the pike, better a year too early than a week too late. 

Thu, 12/10/2015 - 14:23 | 6905436 NoDebt
NoDebt's picture

Check out the chart on that fund (compared to HY in general):

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.


Thu, 12/10/2015 - 14:37 | 6905497 JRobby
JRobby's picture

You Are Fucked

Merry Christmas


High yield offerings always emphasize strong (unattainable) increases in cash flows in the future.

Thu, 12/10/2015 - 17:32 | 6906756 CClarity
CClarity's picture

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.

Thu, 12/10/2015 - 17:33 | 6906759 Soul Glow
Soul Glow's picture

And Yellen says she is going to raise rates.


Thu, 12/10/2015 - 14:39 | 6905582 JRobby
JRobby's picture

Setember 2008

It happened once, it will happen again

Thu, 12/10/2015 - 17:08 | 6906643 turnoffthewater
turnoffthewater's picture

"You mean my government pension fund was invested in this?"

Oh the irony.

Thu, 12/10/2015 - 13:40 | 6905092 Kaiser Sousa
Kaiser Sousa's picture

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....


Thu, 12/10/2015 - 13:50 | 6905162 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

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. 

Thu, 12/10/2015 - 13:59 | 6905242 Peak Finance
Peak Finance's picture

Look at the market today, snore snore snore

I just want to go to sleep and wake up on Dec 16th

Thu, 12/10/2015 - 16:09 | 6906242 stormcrow
stormcrow's picture

I want to see people screaming "Sell! Turn those machines back on!"

Thu, 12/10/2015 - 13:29 | 6905016 THE COIN
THE COIN's picture

 " You can checkout anytime you like, but you can never leave. "

Thu, 12/10/2015 - 13:13 | 6904905 slaughterer
slaughterer's picture

Redemptions have also been picking up in energy funds.  Ho Ho Ho.  

Thu, 12/10/2015 - 13:13 | 6904912 KnuckleDragger-X
KnuckleDragger-X's picture

This isn't supposed to happen! The Fed promised!

Thu, 12/10/2015 - 13:14 | 6904921 Rainman
Rainman's picture

...bbut Granma Yellen is about to pull the trigger ....oh, the humanity !

Thu, 12/10/2015 - 13:21 | 6904969 _ConanTheLibert...
_ConanTheLibertarian_'s picture

she will pull the trigger ....on humanity

Thu, 12/10/2015 - 13:42 | 6905113 mademesmile
mademesmile's picture

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.

Thu, 12/10/2015 - 13:57 | 6905202 Deathrips
Deathrips's picture

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.



This was the G rated option.

Thu, 12/10/2015 - 14:07 | 6905312 MsCreant
MsCreant's picture

Spectacular! Style, showmanship! [Golf clap]

Thu, 12/10/2015 - 14:13 | 6905365 Kaiser Sousa
Kaiser Sousa's picture

top post nominee for sure....

bravo Sir...


and some.

Thu, 12/10/2015 - 14:40 | 6905527 JRobby
JRobby's picture

+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.

Thu, 12/10/2015 - 19:03 | 6907129 mademesmile
mademesmile's picture

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.

Thu, 12/10/2015 - 14:04 | 6904942 Francis Marx
Francis Marx's picture

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....

Thu, 12/10/2015 - 13:19 | 6904957 unplugged
unplugged's picture

first out best out

Thu, 12/10/2015 - 13:48 | 6905151 mayhem_korner
mayhem_korner's picture




I own the trademark.  Your bill is in the mail.  8D

Thu, 12/10/2015 - 14:06 | 6905292 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Pulling out in time is advised.

Thu, 12/10/2015 - 14:10 | 6905337 MsCreant
MsCreant's picture

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.

Thu, 12/10/2015 - 14:23 | 6905450 _ConanTheLibert...
_ConanTheLibertarian_'s picture

I do NOT want to imagine that.

Thu, 12/10/2015 - 13:20 | 6904964 Dragon HAwk
Dragon HAwk's picture

Which Part of Junk didn't they Catch..

hope they weren't sellign them to little old Grannies, with Lawyers for Son in laws.

Thu, 12/10/2015 - 13:22 | 6904975 SillySalesmanQu...
SillySalesmanQuestion's picture

Another one bites the dust...

Thu, 12/10/2015 - 13:23 | 6904981 lasvegaspersona
lasvegaspersona's picture

They'll just 'hold to maturity' you getz yer money back...after hyperinflation...

Thu, 12/10/2015 - 13:27 | 6905001 asscannon101
asscannon101's picture

"Aaaaaaaaand its gone..."

Thu, 12/10/2015 - 13:30 | 6905020 Tinky
Tinky's picture

"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!

Thu, 12/10/2015 - 13:42 | 6905110 buzzsaw99
buzzsaw99's picture

that's mighty white of them.

Thu, 12/10/2015 - 13:47 | 6905148 BandGap
BandGap's picture

A dick in the ass butt with lubrication. Now say thank you.

Thu, 12/10/2015 - 15:59 | 6906156 ThroxxOfVron
ThroxxOfVron's picture

I thought the game was 2 & 20.

That means that they take their 20 of the losses, too, right?

Thu, 12/10/2015 - 13:40 | 6905091 buzzsaw99
buzzsaw99's picture

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]

Thu, 12/10/2015 - 13:41 | 6905099 Seasmoke
Seasmoke's picture

Raise the Gates. Release The Krakken.

Thu, 12/10/2015 - 14:01 | 6905257 whoknoz
whoknoz's picture

wow, this page took a long time to load...looked like they had to liquidate the story as well....

Thu, 12/10/2015 - 14:16 | 6905380 dust to dust
dust to dust's picture

 My junk is worth more than Third Avenues' junk and I have access to my junk. I just have to open my garage door.

Thu, 12/10/2015 - 14:20 | 6905414 MsCreant
MsCreant's picture

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. 

Thu, 12/10/2015 - 14:17 | 6905392 carbonmutant
carbonmutant's picture

I wonder who was on the opposite side of the trade....

Thu, 12/10/2015 - 14:21 | 6905421 MsCreant
MsCreant's picture

Someone is getting Corzined! Nice. Good to see you carbonmutant.

Thu, 12/10/2015 - 14:27 | 6905467 surf@jm
surf@jm's picture

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......

Thu, 12/10/2015 - 14:27 | 6905488 scintillator9
Thu, 12/10/2015 - 14:57 | 6905730 BiPolarFrenchman
BiPolarFrenchman's picture

Mark to Market! The Horror!

Do NOT follow this link or you will be banned from the site!