Gundlach Buys $20 Million Of Junk-Rated Puerto Rico Bonds

Ted

FYI: DoubleLine Capital’s Jeffrey Gundlach bought $20 million of junk-rated Puerto Rico bonds this year as the commonwealth struggled with its fiscal crisis.

DoubleLine’s $2.26 billion Income Solutions Fund held $20 million of Puerto Rico general obligations as of Feb. 27, data compiled by Bloomberg show. The fund didn’t hold any commonwealth debt at the end of 2014. The bonds, which were issued in March 2014, traded Wednesday at record-low prices.
Regards,
Ted
http://www.bloomberg.com/news/articles/2015-04-22/gundlach-s-fund-buys-20-million-of-junk-rated-puerto-rico-bonds

JohnChisum

On the inaugural show of the new Wall Street Week, Mr. Gundlach mentioned that a crisis in junk bonds was coming. I guess he knows the day and the hour when it will begin.

http://m.wyff4.com/money/junk-bonds-the-next-financial-crisis/32465346

Junkster

JohnChisum said:

On the inaugural show of the new Wall Street Week, Mr. Gundlach mentioned that a crisis in junk bonds was coming. I guess he knows the day and the hour when it will begin.

http://m.wyff4.com/money/junk-bonds-the-next-financial-crisis/32465346

Gundlach was referring to a crisis in corporate junk bonds not munis. This year the junk corporates are outperforming the junk munis, the reverse of last year. The link below indicates there could be big problems ahead for Puerto Rico munis

http://blogs.barrons.com/incomeinvesting/2015/04/23/puerto-ricos-government-could-shut-down/?mod=BOL_hp_blog_ii

Dex

HYD has 3.4% of its holdings in PR - not very large.

Dex

NHMAX from what I can find doesn't have any PR holdings

JohnChisum

@Junkster, thanks for that clarification.

heezsafe

@Dex Saw on a blog last week that "over 30%" of all outstanding HY municipal bonds were PR debt. (sigh) Given your note that HYD municipal index has PR debt at 3.4%, the dude obviously has a problem with zee decimal points.
Quite a stretch this is newsworthy. I mean, 20/2260 x 100= 0.885% .... so?

msf

The $20M is in DSL - all a single position.

As Junkster pointed out, this is a muni bond, not a corporate. Aside from that, there are other differences from what Gundlach was talking about. He specifically mentioned a flood of maturities in the 2018 time frame. He felt that this would create a problem both in price (lots of new bonds coming on the market to replace the old ones) and defaults (not having the cash flow to deal with higher coupon bonds?).

PR bonds, in contrast, are generally (still) long term maturing in the 2030s and now 2040s. In particular, the series in DSL mature in 2035. PR is having problems servicing its current debt, but it won't have to deal with rolling over its bonds for many years.

PR bonds are unique in another way. They were recently downgraded to junk (the only "state" bonds to be so graded, so they're in a class by themselves). As a result, funds dumped them (as did many other investors), and they have already been badly punished in the market. As Junkster's link pointed out, they're trading at all-time lows. I have a small portfolio of individual munis, and I watch the PR bond prices drop even as all other muni prices (from BBB to AA) rise.

Not wishing to sound like a Pollyanna, I nevertheless offer a (possibly rare) contrarian view for your consideration: https://www.fmsbonds.com/News/bond_article.asp?id=488

heezsafe

ignore; duplicated when connection cut out.

heezsafe

@msf I agree. The Moment of Truth for corp junk, circa 2010-2011, was supposed to be a big crunch in 2013-14; given the ultra-low interest rates, demand, and lowered barriers to obtaining credit, corporations with low ratings were able to refinance that away and even do so with weak covenants. Being junk, they could only extend that so far, apparently to circa 2018 (I didn't know that; thanks, JG!). Recent sharp rise in corp credit application denials--- doesn't look like they're gonna get to do that again. [I'm hoping we won't have to wait that long for corp junk to give it up; geez, I was thinking we could get a buying op later this year; maybe not]

Under present circumstances, that doesn't make a small position in PR a poor decision. It's that "at the right price..." risk/reward with positive skew kinda thing. Just how discounted are those "state" bonds, anyway? 70%? That would be a great yield while it lasts, and if they were to default, well, negotiate a settlement, etc. and at worst you'd get your fund investment back and move on.

Been awhile since I looked at DSL's SAI, when many of DL's principal fund managers and several of the co. execs had significant investment in DSL. Is that still the case?

Dex

I'm still 100% in HY Muni bonds paying me about 5.1% - only state tax. Munis haven't seen capital appreciation this year. My guess it is the possible Fed increase later in the year holding them back.

My current plan is to stop the re-investment of dividends in Jan of 2016 and put that $ into other places, maybe high yield international bonds. Time will tell.

JohnChisum

Thanks @msf and @heezsafe for the info.

Junkster

Dex said:

I'm still 100% in HY Muni bonds paying me about 5.1% - only state tax. Munis haven't seen capital appreciation this year. My guess it is the possible Fed increase later in the year holding them back.

My current plan is to stop the re-investment of dividends in Jan of 2016 and put that $ into other places, maybe high yield international bonds. Time will tell.

I am 100% in open end corporate junk. Many of the corporate junk funds are up around 4% YTD. But a friend of mine recently made a move into where the real action has been the past many weeks and that is emerging market debt. May move some there. Bank loan funds have also showed some life in 2015.

JohnChisum

I noticed recently that a couple of my funds increased their holdings of emerging markets debt. I wonder how much of this stuff exists and is there enough supply for everyone?

Junkster

Speaking of emerging market debt, here's a recent article that doesn't exactly make you want to run out and buy them. But as one of the reader comments stated, maybe just the opposite. Meaning, when prices are rising amid these type of doom and gloom articles, it's the time to buy.

http://www.wsj.com/articles/investors-grow-wary-of-emerging-market-debt-1429473506

bee

Junkster said:

Dex said:

a friend of mine recently made a move into where the real action has been the past many weeks and that is emerging market debt. May move some there.

Recent TRP article on the good value EM debt may provide:
Emerging-Market-Debt-Offers-Good-Value

Dex

Junkster said:

But a friend of mine recently made a move into where the real action has been the past many weeks and that is emerging market debt. May move some there.

I think you need to watch the US$. If the Fed raises rates and US$ strengthens, then those funds might weaken.

heezsafe

http://www.zerohedge.com/news/2015-04-24/puerto-rico-warns-imminent-government-shutdown-due-liquidity-crisis

Dex

It will get even worse for PR as Cuba opens up. Cuba will suck up a lot of tourist $, tourist capital investment, and Cuba will provide, cheap, educated, hard working workers for companies looking for it.

Crash

Yes, I have read and heard from at least a few different experts that EM debt in DOLLARS these days is a good place to be investing. I've been in PREMX since 2010. I'm really not sure where to find out just how much of the portf. is in dollar-denominated debt. Morningstar seems to give the impression that it is at least most of the portfolio.

heezsafe

"Covenant-lite" corp junk and the impact of second-lien debt issuance. Be cautious; this asset class has a tendency to get crazy-stupid, just before it "gives it (overvaluation) up."
http://www.businessinsider.com/martin-fridson-junk-bonds-are-in-extreme-overvaluation-2015-4

JohnChisum

Standard and Poors just downgraded Puerto Rico to CCC+ with negative outlook.

http://www.cnbc.com/id/102573741