Thanks, Dick;  that's the sanity check I was looking for.  If we have a difference in POV, it is our position in the economic cycle.  I feel we are closer to the end of the trough than the beginning, whether or not it amounts to an official recession (I suspect it does).

The other two influences I felt are (1)  there is always some alternative other than cash for best risk-adjusted return and (2) the asymmetries into and out of tops and bottoms suggest it is better in both cases to be early than late.

You've caused me to pause and hold what I've got until things clear more.  the point about LBO pain to yet increase is a hard one to get a handle on.  Best wishes,  Bill

FRN CEFs?  I'm already out.  Bought in mid-February, made double digit gains, and moved on.  There might be another opportunity in a few months, but for now they don't look that great any more.

Thanks, but not much money has been made so far this year.  PHD, for example, is down 11% YTD through March in total return, despite a 11.5% distribution rate.  PFN even more.

April is the first up month for those I follow.  

This topic could not be more timely for me! I'm a new investor, and I was motivated by a recent article in Barron's suggesting that the Bank Loan class would be especially lucrative for fixed-income investors. Although I'm a quick study in general, I started bogging down with the ins and outs of LIBOR rates (in the original article, and again in your exchange on this thread). But I think I got the gist of it.

 So, going on a quest for the piece of the action, I finally found PHD. I'm just beginning to understand the complexities of CEF investing, but the consistent 12% return and the bulletproof Morningstar ratings overcame my uncertainty, and I bought--a little ($3000).

So I'm trying to decide whether to triple or quadruple this foray. But I still don't really grasp the risks. Perhaps one of you wise ones can explain what you just said so I can get it?

Thanks

Alan 

 

The risk is how much of PHD's floating rate notes will default.  For example to pick on one of the notes, will the Delta notes pay off or will they default?   And, probably more important, if Delta does default on them, will PHD get most of it's money back on them?  Some of the notes in their portfolio will default.  It's not for noting that it's portfolio is rated BBB or less.

Another way to play this high income, FRN market would be to buy a BDC [business developement company]. I know this is a little off target since BDC's are not CEF's.  For example, ACAS makes floating rate loans directly to companies, probably some of the same companies that PHD buys notes.  The difference is that ACAS loans are mostly not publically traded.  From reading some of the company literature of BDC's, while the default rate has been only 1% over the last few years, it could go as high as 6% in this cycle based on previous down cycles.  But the 12% current yield/yr and 10% drop in PHD net value, kind of covers that.

Full disclosure, I own both PHD and ACAS.  If my understanding of above is wrong, I invite corrections.

 

 

 

Thanks to all for extending this conversation; I'll offer the following thoughts:

I believe most BDCs, including ACAS, are organized as registered investment companies under ICA 1940 and operate as Closed End Funds.  From the ACAS 10-K (my bold for accent):

American Capital Strategies, Ltd. (which is referred throughout this report as “American Capital”, “we” and “us”) was incorporated in 1986. On August 29, 1997, we completed an initial public offering (“IPO”) and became a non-diversified closed end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). We operate so as to qualify to be taxed as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC, we primarily invest in senior debt, mezzanine debt and equity in the buyouts of private companies sponsored by us, the buyouts of private companies sponsored by other private equity firms and directly to early stage and mature private and small public companies. We also invest in structured finance investments including commercial mortgage backed (“CMBS”) securities, commercial collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities and invest in alternative asset funds managed by us. "

I believe the distinction with FRN funds, such as PFN, PHD and VVR), is that the ACAS portfolio is more diversified in the nature of the debt created in its portfolio.  FRNs are largely senior secured bank loans with the lenders having first claim in BK on hard assets, such as aircraft and terminal facilities owned by Delta. Recovery rates are quite high compared to other corporate debt, such as bonds.

PHD has not reduced its distribution rate this year, as have some other FRN funds; one may be due.  VVR just announced a significant reduction and all these funds, including ACAS, have been miserable performers on a one year price basis, down maybe 30% YoY.  It's one reason to become interested, unlike the prospects for fixed rate debt, should the economy strengthen.  

As Dick has pointed out, it is likely too early to quantify the various risks, so moderation and DD are probably a good idea.  FRN CEF have made a gain in April, however, so there may be a glimmer of hope.  It may hold true as well for the BDCs, which I haven't looked at for a long time.   I hasten to add in closing that I am not an expert in this area and am looking for information, which has been appreciated.  Best wishes,  Bill

 

 

Hello,

Why the Western Asset Emerging Markets Floating Rate Fund, Inc (EFL) gained 22% and moved to 18% premium  in less then a month?

Thanks,

 Thomas

 

Hello, Thomas...

I, too, asked myself and others this question about a week ago.... could find "almost" NOTHING to support such a move to a "large" premium.  I sold about a week ago and bought its "cousin", soon to be "married" ESD.  Herzfeld has a "strong sell".  I did find a "recommendation" by a ?newsletter? "Yield....".  It touted both EFL and TEI.  EFL made a BIG move... not sure TEI did as well.   Who knows....  If you find out, I'd love to know!

Jane s.


 

Did one of the big brokerages like ML have a broker contest or recommendation on it?  Can you say cynical?

Roberta 

EFL has one of the weirdest CEF graphs I have ever seen.  Before this, I thought CRF was the weirdest and hardest CEF to understand.  Congratulation on owning this fund, and my free and uninformed advice is to sell at at this astounding premium especially since you don't know why it went from negative to premium.