Rout in Junk Bonds Continues

by Marilou Long on December 15, 2015

in Bonds,Fixed Income,Hedge funds

Junk bond spreads have been gradually widening since last spring due to the sell off in oil, but the decline accelerated last week with the news that a Third Avenue Focused Credit fund was going to freeze withdrawals while it winds down.  From the linked WSJ article:

On Dec. 10, the day the firm announced it was halting withdrawals, traders at Wall Street banks circulated a list of bonds offered for sale by a single seller that matched many of the largest holdings reported by Third Avenue, said several hedge-fund managers who saw the list. Most hedge funds passed on the portfolio, which contained deeply distressed bonds and private equity investments that are hard to trade.

But Barry Kupferberg, head of research at hedge fund Trilogy Capital, snapped up private equity in Longview Power LLC, a low-cost coal-burning power plant in West Virginia, at a more-than-40% discount to the $8 price at which the shares were quoted. Trilogy has cash on hand, Mr. Kupferberg says, because the fund has been bearish on high yield since the summer when it raised its cash allocation to about 40% of assets.

“We consider having cash as a real strategic weapon—the one thing you know about cash is it’s completely liquid,” he said.

The withdrawals have spread to other junk bond asset managers as well.  The Fed is widely expected to raise interest rates tomorrow, and that could generate more selling.

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