The Fund has thus far held above the summer lows, all the while seeing much improved forward-looking returns available in credit markets.
Line items that drove relative outperformance for the Fund included our position in Exterran Corporation 8 1/8% notes, which rallied on signs that the company’s acquisition by Enerflex Ltd. may proceed as planned. A resilient performance from high-quality short-term notes such as McDonald’s Corporation 2025 maple bond was also a source of relative strength.
Weaker lines generally included longer duration positions that fell in sympathy with the move in the yield curve. Specific weak spots included a position in National CineMedia, LLC 1st lien notes, which suffered from uncertainty created by the bankruptcy filing of theatre operator Cineworld Group, plc. The Cineworld filing, which we believe to be related primarily to the necessity to effectuate lease restructurings, may create credit opportunities across the theatre sector, including in the notes we hold, which now are priced to yield 18% to a 2028 maturity.
“When GICs are return leaders, the best forward-looking returns could well be elsewhere." - Geoff Castle
For participants in the “Great Barbecue” – that four-decade run of declining yields and rising bond prices that began in the 1980s – this price reset in the bond market has been shocking. And, as the shock has given way to acceptance, conversations in the market have changed. Two years ago, the unsolicited pitches we received were focused on Austrian 1% “century bonds” or various cryptocurrency convertible deals. Today, the phone rings and a voice says, “Brother, can I sell you a hedge?”
We have no special power to see the future, and we acknowledge that *anything* can trade *anywhere*. But we credit some past success to the use of four factors to identify good entry points: price, positioning, flows and sentiment. And, although there are undeniable risks around, we believe those factors are looking very positive, especially for the higher quality strata of the bond market. Let us elaborate:
If a few decades of investing has taught us anything, it is that crowded trades can have bad outcomes and unpopular ones can have very good outcomes. In this respect, we decided to take a quick peek at reported short interest in some major fixed income ETFs. It will not surprise the contrarians amongst us that the largest high-yield ETFs and investment-grade bond ETFs recently have seen multi-year highs in short interest. In fact, expressed as a percentage of units outstanding, one large high-yield ETF was over 40% sold short at the September 15 disclosure date. Yes, we understand that the news on your Twitter feed is bad. But is it possible that market participants have, through trading, already priced in the bad news4?
In September we continued to add weight in high-quality issuers, including a new position in the 2026 maple bonds of Waste Management, Inc. As a leader in the sector, Waste Management benefits from consistent, stable revenue streams that are relatively insulated from economic swings. Interest coverage at Waste Management is a healthy 13x EBITDA/Interest while we view one-year default probability at less than 0.1%. Nevertheless, these bonds have retreated more than 12 points in the past year to yield approximately 5%.
We also expanded our position in the first lien term loan of Uber Technologies, Inc. First lien debt makes up only $2.5 billion of Uber’s $61 billion total capitalization, so we are positioned here in the top 4% of the company’s enterprise value, and at a level of debt well below Uber’s $4 billion cash balance. The floating rate loan is priced to yield over 7% to a 2025 maturity. We like Uber’s business, which has, on an unlevered basis, generated over $1 billion in cash from operations over the past 12 months.
The Pender Corporate Bond Fund yield to maturity at September 30 was 9.3% with current yield of 6.0% and average duration of maturity‐based instruments of 3.9 years. There is a 0.7% weight in distressed securities held for workout value whose notional yield is not included in the foregoing calculation. Cash represented 0.2% of the total portfolio at September 30.
Geoff Castle
October 7, 2022