Busy H1 leaves Acencia’s NAV little changed

Over the six months to the end of June 2015, Acencia Debt Strategies (which is now reporting its results in US dollars for the first time) saw total return on net asset value of 1.8% to US$1.73 (NAV was flat – return is down to dividends paid). Total Shareholder returns were up 0.1% per cent to a share price of 103.62p and total dividends of 1.95p paid during the time period. For the same period the S&P 500 returned 0.2%, the Credit Suisse Leverage Loans index increased 2.9% and the Barclay’s High Yield Index rose 2.9%.

The Board is declaring a second interim dividend of 3.03 cents per share, representing 1.75% of the USD NAV per share on 30 June 2015. This represents an annualised yield of 3.69% based on the closing share price of the Company on 19 August 2015 of 164.13 cents.

Looking at their portfolio of funds of distressed assets, the largest bankruptcy of Q1 was Caesars Entertainment (hotels and casinos) with US$18 billion in debt. They say several of the underlying fund managers have exposure to Caesars Entertainment through both equity and debt opportunities. Creditors are currently waiting for the company to file its reorganisation proposal, which could come out at any date between the time of writing and November, if granted an extension. The sale of Indiana Toll Roads was announced in March and those bonds have appreciated to close to par, prompting the underlying fund managers to start exiting that position after achieving gains of approximately 45% over time. Another contributor was the bonds of the forestry company Emerald Plantation, which appreciated up to 90¢ on the dollar, as the liquidating company sold more assets. These bonds were bought for as low as 15¢ approximately two years ago.

In terms of losing positions, one underlying fund manager suffered a setback during the first quarter in bonds of the Austrian bank Hypo Alpe-Adria, as Austria declared a 15 month moratorium on their debt payments at the end of February, casting doubt on the bonds’ state guarantee. Another underlying fund manager saw mark-to-market losses on Puerto Rico’s Cofina bonds in March as politicians suggested they be restructured. The arrival of the second quarter saw sovereign credit take centre stage, as Greece did not reach an agreement with its creditors and defaulted on an IMF payment due 30 June 2015, and Puerto Rico’s governor announced for the first time that the US territory cannot pay its $72 billion of external debt. Nonetheless, several of the Company’s underlying fund managers believe various Puerto Rico credits are an attractive opportunity and are well covered due to their seniority and/or collateral. Another sovereign situation saw a positive development in Q2, producing gains for our managers. In June, Iceland announced agreements with its banks’ creditors (mostly hedge funds) and its intention to lift capital controls which will allow foreign investors to repatriate proceeds.

In structured credit, US residential housing appreciated at approximately 4% year over year and commercial real estate continued to benefit from a strengthening economy. This positive trend, as well as the current low interest environment, has provided a recent tailwind for Residential Mortgage Backed Securities (RMBS). Some underlying fund managers are currently benefitting from issuing and managing CLOs and retaining the equity tranche. One manager has achieved double digit returns by re-securitising bonds for enhanced exposure to legacy subprime mortgages.

In their event driven positions they say the portfolio benefitted from several events: 1) Japanese robotics manufacturer Fanuc agreed to increased distributions to shareholders, 2) UK money manager Alliance Trust agreed to add independent directors to its board (Elliott is a holding), 3) enterprise software company Informatica announced its sale after an underlying fund manager initiated an activist position in January, and 4) Nomad Holdings acquired Iglo Foods, executing on its strategy to consolidate packaged foods businesses in Europe. This trend continued in May, as one of the Company’s underlying fund managers saw its contested proposal for three board seats at Sotheby’s accepted. Also in May, another underlying fund manager announced a large stake in Yum Brands (owner of KFC, Pizza Hut, and Taco Bell), which could benefit from spinning off certain business units. In June, an underlying fund manager’s activist position in energy pipeline company Williams rallied strongly upon receiving a buyout offer (though it was rejected). Among new situations, one underlying fund manager disclosed a 7% stake in Citrix Systems in June and made several activist proposals to management, which the market reacted to positively. Finally, announced mergers have been another profitable investment area. Examples include: Allergan/Actavis, Salix Pharmaceuticals/Valeant, Lorillard/Reynolds and Time Warner Cable/Charter Communications. The Kabel Deutschland minority shareholder litigation in Germany has also generated gains for the underlying fund managers.

ACD : Busy H1 leaves Acencia’s NAV little changed



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