I have posted about senior bank loans as an attractive area in the debt market right now. The tenant of the thesis is as follows:
- defaults will increase beyond 10% however recoveries on first lien and senior loans will be better than junk and could come at 50-60% below the 75% historical average
- at 70 cents on the dollar the IRR will around 22%
- the principal is almost covered by the recovery of the defaulted issues while you can enjoy a wide spread yield over treasuries.
However what I struggled with is how to invest in this idea. Individual loans are about inaccessible to retail investors and you need a large number of issue to diversify. Open ended funds can struggle with redemption forcing them to sell at inopportune time. On the other hand closed-end-funds (CEF) do not have that issue; shareholders can sell on the open market. I have narrowed the the alternatives to the following CEFs:
As of Dec 11,2008
|Symbol||Price$||Yield %||Premium/ Discount to NAV%|
I have considered the following questions is my selection:
- What sectors make up the majority of the funds assets?
- What type of bank loans: senior vs second lien?
- What is the percentage of leverage employed? Is it debt vs preferred leverage?
- What is the discount to NAV? Is it bigger that historical averages?
- What is the manager quality: tenure, rating and his/ her commentary and communication to unit holders.
My preference is to buy PHD as a vehicle to invest in this theme, here is why:
- 18% of assets are in health care loans, which a bit safer and should outperform.
- The majority of their loans are senior; senior loans make up 88% of the funds assets. There are some second lien loans but does not make up a significant percentage of the fund.
- The fund trades at 22% discount to NAV compared to 11% historical average. The large discount is a result of the recent suspension of dividends due to preach of preferred shares covenants. However the dividends have been resumed.
- Its leverage is in the form of preferred shares which can not force the fund to
liquidate like loans. The fund already started to pay it down. Preferred leverage is 38% of total assets and the fund began to redeem
some of this leverage earlier this month. Total preferred outstanding is $234m and the fund redeemed $10m worth of these securities.
Off course there are many other funds that I reviewed but I did not like for a reason or another. Here are some of my notes and thought on those funds:
What do readers think? I have some discussion with some readers interested in the theme and I value their input.
|Fund||Why I excluded it|