Another High Yield Domino Falls As $900 Million Lucidus Capital Liquidates

Tyler Durden's picture

Last week, the world began to wake up to the fact that all of the “Chicken Littles” screaming that the sky is falling in high yield were right. 

There was Third Avenue which announced it would gate investors in a $788 million mutual fund on the way to liquidating over the next several months (as though liquidity is set to return any day now in HY) and then in short order, the "venerable" Stone Lion Capital (founded by none other than Alan Jay Mintz and Gregory Augustine Hanley, both veterans of Bear Stearns distressed debt and HY trading desk) suspended redemptions after receiving “substantial requests.” 

Yes, “substantial requests” or, in more colloquial terms, “rats from a sinking HY ship” and as we noted just moments after we confirmed the Third Avenue gate news, “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.”

It’s probably more appropriate to call that a foregone conclusion than “prescient.” That is, if one depositor loses access to his demand deposits and tells a friend about it, it won’t be long before the bank run is on. Same principle here. 

Sure enough, just moments ago a third domino fell as Lucidus Capital Partners, a high-yield credit fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, has liquidated its entire portfolio and plans to return its $900 million in AUM. 

Unsurprisingly, the trouble at Lucidus started in October when a "significant investor" submitted a redemption notice. Following that request, Lucidus decided "to start winding down the portfolio and shedding staff," according to a person familiar with the fund’s operations who spoke to Bloomberg. "Shrinking trading volume in credit-default swaps and indexes in the wake of the financial crisis posed a challenge to Lucidus, whose founders sought to profit from volatile credit markets when they started the company in 2009, the person said."

"The fund has exited all investments. We would like to thank our investors and counterparties for their support over the years," Chief Executive Officer Christon Burrows and Chief Investment Officer Geoffrey Sherry said.

Here's a look at the management team:

The founders, Geoff Sherry and Darryl Green, were former heads of distressed debt trading at JP Morgan and Donaldson Lukfin, respectively.

Make no mistake, this will just add more fuel to the fire. As we've been warning for months, HY faces the dreaded "crowded theatre" scenario wherein the crowd has gotten larger and larger while the exit has become smaller and smaller. 

Someone - or, more appropriately, several someones - yelled "fire" and now the rush to the exit is on. The question now is how quickly this spreads across the space and as we said last week, watch HYG and JNK closely to get a read on how quickly the panic is spreading to the more "mainstream" vehicles. 

Unfortunately for those funds who plan on liquidating over the course of the coming weeks or months, liquidity is only going to dry up from here, and that means wide bid-asks and firesale prices, triggering harrowing declines that will only serve to spread more panic, leading to more redemption requests, and around we go. "After junk-bond prices posted their largest drop since 2011 on Friday, investors say they are bracing for another difficult week, likely featuring hectic trading and large splits between buy and sell orders," WSJ warned on Sunday, adding that "gaps as wide as 10% between the price bondholders are willing to accept and buyers are willing to pay are likely to be commonplace until at least the conclusion of the Federal Reserve’s two-day meeting Wednesday, hedge-fund and mutual-fund managers said."

One hedge-fund manager who spoke to The Jounral said he tried Friday morning to sell loans issued by Clear Channel Communications, now known as IHeartMedia (one of the Third Avenue fund’s largest holdings), at 71 cents on the dollar, the price Wall Street traders quoted him. "No buyers materialized until late afternoon when he received a single bid at 64 cents on the dollar, an offer he refused," WSJ says, rather ominously.

By the way, remember that the Street isn't going to be willing to inventory any of this paper, especially into a falling market. So ask yourself this: who's going to buy this stuff? And if buyers can be found, at what price?

We close with the following observation from Bloomberg's Richard Breslow: 

One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones.

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bentaxle's picture
"Another High Yield Domino Falls...."

 

Oh Bless..

 

S/

UndergroundPost's picture

Lucidus --------> Ludicrous

VinceFostersGhost's picture

 

 

$900 Million Lucidus Capital Liquidates

 

A month of QE....whatever.

bentaxle's picture

At least they "Liquidated."

 

How long before liquidated turns to crushed (at the exit?)

Cognitive Dissonance's picture

Whoops, there goes another rubber tree plant fund. Ker-plunk!

High Hopes!

Harlequin001's picture

64 cents? that's like, a 30% loss in a day.

Fuck me, I hope my gold doesn't go the same way...

Do you think I can find a buyer for it? Not that I'm selling mind,, I'm not in that big a rush for an exit as narrow as the size of Jupiter...

WakeUpPeeeeeople's picture

who's going to buy this stuff?

 

Why, of course, Granny Yellen.

NoDebt's picture

Garage band hedge funds.  Sure they can crank out a decent redition of Hotel Californina in an up market but throw some sheet music at them in a down markets and watch them stare blankly at you like "what are all they funny looking squiggles on the page?"

 

pods's picture

They all cannot afford the computer "help" of a Britney Spears.

Urban Redneck's picture

Guys starting HY funds in 2009 were looking to capitalize on blood in the streets. (One of the smarter guys I work with from time to time seriously considered leaving PE to startup a pureplay vulture fund...) 

It makes sense that any of those guys who actually are smart (as opposed to lemmings or dumb lucky) would be prepped to liquidate at the first serious sign (e.g. gates) of a mean reversion.

Money Boo Boo's picture

...won't the plunge protection team just issue a few IOU's and keep the ponzi afloat until preparations for WW3 are complete?

 

 

ANFS/.......absolutely no fucking snarc 

Glasnost's picture

They're called junk bonds for a reason...

Angel_Eyes's picture
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_ConanTheLibertarian_'s picture

"gate investors in a $788 million mutual fund"

AKA a concentration camp

Uncle Tupelo's picture

Welcome to the Winter of Recovery!!!!! It Feels So Damn Good......

yogibear's picture

The market's cold blast of air in otherwise warmer than usual.

So it can't be the weather.

Omega_Man's picture

if they refused 64 cents next bid 5 cents..... 

pndr4495's picture

Markets were created for CAPITAL formation ( hard poduction assets ) or in the case of commodity markets - hedging price risk. The result of all this financial engineering by the MBA and PHD Economics crowd is that they have become digitized casinos. This begs the question - who in fact is the house?

Vlad the Inhaler's picture

The house are the brokers, the bag holders are the retirement funds where people either have no say in the investment, or are not paying attention.

yogibear's picture

How about the PhDs and their derivative market?

drivenZ's picture

so ZH says there's going to be a recession because HY is down across all sectors but is also keenly aware that investors will need to liquidate better credits instead of their energy and commodity credits? contradictory? 

Cangaroo.TNT's picture

Not contradictory at all.  In fact, at this point you should be buying with both hands because this year's unrealized 10% gain will surely piggyback onto next year's 10% gain.  Just listen to Barron's.  They're the experts.

Money Boo Boo's picture

no

 

ZH has been saying for some time now we ARE in a recession and growing crush at the small HY exit is a sign of further things to come in the high yield space and the contagion will be explosive as in incediary a.k.a woar....

drivenZ's picture

meh, ZH has trotted out the same HY sector chart for the past week or two in multiple posts as a big reason HY is signaling something larger than just an energy problem. As a matter of fact, all of the posts about the supposed "domino's" that are falling only disprove that chart since unless the fund had all it's holdings in energy would be liquidating it's entire inventory indiscriminately.

Cangaroo.TNT's picture

Right.  What does ZH know?  After all, you only bought the 4 stocks that managed to go up this year.  Let me guess:  You're only here for the "contrary indicator" value.

drivenZ's picture

no, in case you haven't noticed ZH has an agenda to push, which helps them maintain readership. They're great at getting analysis out quickly but it's always with a slant and their over arching agenda which is "the sky is falling" hasn't really panned out for the last 7 years. With the exception of their analysis on some of the EM markets. So yes, I am indeed very skeptical of their analysis that the HY markets are signaling that the US is in or is about to be in a recession. 

mayhem_korner's picture

 

 

You are reading into what ZH presents.  It's information, not prognostication.  To do with as you wish.  I think of ZH as akin to the weather channel issuing Tornado Watches: just informing folks that conditions are ripe for certain events to transpire.  Not predicting.

Your skepticism - a tip of the iceberg of naivete - is why we know there will be someone on the other side of the trade.

Soldier on.

drivenZ's picture

No I'm not reading into anything,the editorializing is clear as day. Which is fine, but its not reporting. What happened to all of the posts a few years ago about pushing precious metals? hmmm. They really got that one wrong. 

http://www.zerohedge.com/news/2015-12-14/why-stocks-have-so-far-ignored-...

"Unless of course, credit is sending an accurate recession signal, and it is Goldman's equity strategists who are unwilling to admit that their 2100 price target for 2016 is woefully inaccurate in a year when the Fed is set to soak up trillions in excess liquidity."

 


mayhem_korner's picture

What happened to all of the posts a few years ago about pushing precious metals? hmmm. They really got that one wrong. 

 

The game isn't over yet, Jethro.  Ask a Texas Ranger fan how important it is to record the last out.

Neo's picture

You should ask for a refund.

firstdivision's picture

"significant investor" = Goldman Sachs

 

Goldman positioned against the credit bubble and is now creating its demise.

Step 1: Invest large amounts of capital into HY funds

Step 2: Buy CDS/CDO and short the HY market

Step 3: Send out a flurry of redemption notices to the HY funds forcing them to fire sale liquidate their assets.

Step 4: Crash the markets and profit.

overmedicatedundersexed's picture

first divey, sorta, but my guess the HY become assets for Mr Yellen to buy, to you know, keep stability in the bank world..NIRP will kill em, but alot of good guys will go first, (those with no discount window access)

firstdivision's picture

The HY market will have to burn for Yellen to whip out his dick and put it out.  GS will be the buyer of the HY debt at pennies on the dollar only to flip it to the Fed for a massive profit.  They own the CB's of the developed world, and they wiil extract every penny they can from the taxpayers.   With so few players left in the HY market since 2008, the joke is calling it a market. 

overmedicatedundersexed's picture

the crooks look around and all the suckers are gone..so now it's shark vs shark, first they came for HY then they came for treasury bonds..oh the humanity!

wizteknet's picture

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.[

SimplePrinciple's picture

The problem goes back to FASB getting rid of mark to market. Chickens come home to roost.  The best post I've seen on today's topic is here: http://investmentresearchdynamics.com/second-warning-get-out-of-your-bon...

Bopper09's picture

Nothing that a little QE can't fix.

mayhem_korner's picture

 

 

"jumbo shrimp"

"military intelligence"

"pretty ugly"

"a little QE"

GoldLion's picture

And these are the smart money managers to their clients out in tact. We will hear about the not so lucky investors very soon.

Rainman's picture

Not-so-lucky investors should have noticed Lucidus co-founder Daryl Green jumped ship .... er, retired ... on Oct. 29

             http://www.reuters.com/article/moves-lucidus-green-idUSL8N12Y4D220151103

Grandad Grumps's picture

If we can summarize:
Phase 1
1. Send massive amounts of money into the markets
2. Use the money to vastly increase the price of ALL asset classes
3. Lend more money based on the new "asset values", indebting people, companies and countries further
4. Incent financialization (getting rich through money manipulation) and Escew productive work
5. Take the excess human capital released from productive work and put it into makework destabilization projects, such as murdering people in foreign lands and oppressing people at airports and such ...
6. Destabilize the family, create new propagandized values/non-values, create unrepayable personal debt, create schisms between races, religions, people and their government/police ... make people fearful and vulnerable.
Phase 2.
7. Continue "6." above
8. Reduce the price of commodities, putting pressure on those who have used the commodities as collateral and those producing countries and entities that have financed their activities with commodity production
9. (where we are now) destabilize the debt markets, making it impossible for commodity producing companies and countries to get cheap debt as they were able to get before.
10. Allow some high priced debt to be created, but start collapsing the commodity side of the asset build-up, consolidating asset producers into the strong hands of the financial elitists.
12. Eventially make it almost impossible for all but the financial elitists to get cheap financialization ... callling everyone else high risk or a bad risk.
13. The junk bond market collapses, giving no refuge for yield that keeps up with inflation.
Phase 3 (a projectsion)
14. Pull out the people's safety net, through government confiscation of assets and productive capacity, using some false excuse, such as contrived war, the government's greater need for money than the people's own need ... etc.
15. Brutally counteract the predictable violence from the disillusioned people, changing governmet to totalitarianism (as we had all feared and been conditioned to believe is inevitable)
Phase 4. (a forecast)
16. Provide a solution that will be attractive to the people, but incorporates the ultimate goal of global government and global financial system under elitist control.

Notice at no point does the stock market need to collapse. Instead, under this scenario, the assets in the stock market are consolidated into the government, before they can collapse, using the lie of "the greater good". It is also possible that they will collapse the market ... but unlike commodities (which have real value) and bonds (which create a real claim), equity has phantom unenforable value and creates no claim, except as a beneficiary. It does not need to be collapsed.

mayhem_korner's picture

 

 

How about:

1.  De-couple currency from production.

2.  Expand currency faster than production.

3.  Make up reasons why asset values are "rising" to encourage mass participation.

4.  Go back to 2.  Repeat until discovered.