At the end of July, it held about a third of distressed tween-jewelry retailer Claire’s Stores Inc. $320 million of 7.75 percent bonds. Those securities lost almost half of their market value after just two trades on Dec. 1.
Many of the fund’s positions are in the debt of bankrupt companies, where gains can take months, if not years, to be realized. Third Avenue was the biggest holder of one set of bonds issued by bankrupt power producer Energy Future Holdings Corp., according to data through July 31. The 11.25 percent securities, which traded for as high as 121 cents on the dollar, have since lost 11 percent of their market value, last trading at 107.5 cents on Wednesday.
The fund, which had $3.5 billion in assets as recently as July 2014, suffered almost $1 billion in redemptions this year through November. Instead of meeting future withdrawals requests with cash, Third Avenue will redeem the fund’s shares for interests in a trust that will hold the focused credit fund’s assets -- primarily high yield bonds and corporate bank loans -- and liquidate them over time.
“It is highly unusual to see a liquidation of a fund of this scale,” Jeff Tjornehoj, an analyst with Denver-based Lipper, a provider of mutual-fund analysis, said in a telephone interview. “Normally it happens to funds with $10 or $20 million.”
Halting withdrawals is rare for a mutual fund. The Investment Company Act of 1940 requires them to stand ready to redeem their shares at net asset value on a daily basis. Suspending such redemptions would typically require an explicit authorization from the U.S. Securities and Exchange Commission, though Third Avenue’s trust arrangement could eliminate the need to get an SEC order, according to Jay Baris, the chair of Morrison & Foerster’s investment management practice.
“We are in communication with representatives of the fund and are currently monitoring the situation,” an SEC spokeswoman said.
In September, the SEC proposed new rules that would require funds to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Another proposal would allow funds to offer less favorable share pricing to investors who pull their money during periods of elevated withdrawals. Investors withdrew $3.46 billion from U.S. high- yield funds in the past week, according to Lipper.
Aside from growing concerns over liquidity and credit risks, bond-fund managers are also grappling with the impact of higher interest rates. Futures trading suggests 76 percent odds that the Fed will lift borrowing costs at next week’s policy meeting.
It’s a headwind that’s likely to keep weighing on high- yield debt markets, according to Jeffrey Gundlach, the chief executive officer of Los Angeles-based DoubleLine Capital.
“We’re looking at some real carnage in the junk-bond market,” Gundlach, whose $51.3 billion DoubleLine Total Return Bond Fund has outperformed 99 percent of peers over the past five years, said during a webcast Tuesday. “This is a little bit disconcerting that we’re talking about raising interest rates with the credit markets in corporate credit absolutely tanking.”
Third Avenue Fund Redemption Freeze Sends Ominous Sign
December 11, 2015
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