The second part in our series on “High Yielding Equities” was posted to our website last week and covers Business Development Companies (“BDCs”). A summary thread is below, but for more detail please feel free to check out our full post.
1/18
thespreadsite.com/bdc-yields/ BDCs offer high div yields as they make floating rate loans to small/mid-size businesses. Div yield alone is a flawed valuation measure as investors should evaluate Net Investment Income Yield (NII/mkt cap) while incorporating factors that could impact book value (“BV”).
2/18

Often (but not always) credit spreads will tighten when Tsy yields are rising, leading to a more muted increase in credit yields.

Last fall, credit initially ignored the big bond selloff, but spreads eventually began widening at the same time Treasury yields were rising...
1/6 The combo of sharply rising rates and a widening in spreads led to a big increase in credit yields in a short period of time. HY hit 9.5%, IG 6.5%. I'd argue that would have had a meaningful impact - but it reversed sharply in 4Q.
2/6

It’s been a little while since I’ve put together an update on credit. See below for a brief update – spreads, yields, issuance, defaults…
1/12
thespreadsite.com/credit-check/ First, both investment grade and high yield credit spreads have now round-tripped, hitting levels last seen in early 2022.
2/12

We think gold can outperform this year in various macro scenarios. We like playing the asset class through a basket of senior gold miners ( $NEM, $GOLD, $AEM, $KGC). Summary thread below of the note we published yesterday.
1/13
thespreadsite.com/the-case-for-g… We view this as a trade on a macro theme in a beaten-up sector with, in our view, asymmetric return potential. However, these are capital intensive, deeply cyclical businesses that underperformed the physical long-term. We still don’t view them as suitable LT investments.
2/13

Many now believe that because financial conditions eased substantially in Nov/Dec, another bout of accelerating growth/inflation is on the way. And lots of questions on why the Fed hasn’t pushed back harder. I see the argument, but am skeptical.
1/8 Investors give a lot of weight to stock prices in FCI, which do matter (wealth effect, CEO confidence, etc…). I think the cost of borrowing and availability of credit matters more. And we can’t forget that most borrowers today are still benefitting from zirp-era debt costs.
2/8

We published a bullish report on mortgage REITs on 11/4/23 that received quite a bit of interest (both agreement and pushback). Given how much everything has rallied, a very brief update below on book values in the sector.
1/5

https://x.com/SpreadThread1/status/1720794380099875026?s=20

Given recent move in rates/spreads, we look at where book values “might” be for agency mREITs ( $ARR, $DX, $AGNC, $NLY). We only have 3Q23 portfolio data to go from so this is a guesstimate as these co’s can change their portfolios and hedges significantly intra quarter.
2/5

$YELLQ announced winning bidders (buyers & amounts) in their real estate auction on 12/5/23. As a reminder, this is for their trucking terminals. We are still waiting sale results of their trucks & trailers. Results were better than expected sending equity +47%.
1/7 Estes had a “stalking horse bid” at $1.5b, but 128 properties were sold for $1.9b leaving 46 owned properties still for sale (per court doc). It is likely the remaining properties are less desirable, but have some value. Docket #1268 in the ch.11 case provides details.
2/7

Note/thread below with some market thoughts...

We continue to see large swings in sentiment in 2023, and it has paid not to get caught up in a narrative for long. Recession-> H4L-> bank crisis-> soft landing-> fiscal crisis. Now back to soft landing.
1/11
thespreadsite.com/zombies-among-… These swings are par for the course in a late cycle economy. Markets see sharp rallies, often to new highs, near the end of hiking cycles, while the curve is inverted. Why? Because rate hikes work. And slowing growth in an overheated economy is always a positive initially.
2/11

For those who are interested, the thread below summarizes our recently published note on agency mortgage REITs.
1/14
thespreadsite.com/agency-mortgag… Agency mREITs have suffered significant declines in price and total return since 4Q19. We lay out the reasons why, discuss their business models, and why we think $AGNC and $NLY offer attractive risk/reward.
2/14

I put out the thread below about 2 weeks ago showing some numbers around the increase in borrowing costs/tightening in financial conditions given this recent surge in rates. Below is an update after today's close.

https://x.com/SpreadThread1/status/1709378865238261760?s=20

Investment grade corporate yields are now 6.43%. New cycle highs, up about 65bp over the last month. IG cash spreads are now widening but still the rise in corporate bond yields is mostly being driven by rising Treasury yields.

As of today's close, some big moves in fixed income. Not only are Treasury yields rising sharply but spreads are finally also responding at the same time. The net effect - a sharp increase in borrowing costs/ tightening in financial conditions this week. A few charts: IG corporate yields now 6.27%, taking out the highs from last Oct.

Given this spike in rates, a meaningful portion of credit now trades at deeply discounted prices, which matters for valuations. Below- details on how to quantify the fair spread differential for high vs low dollar priced corp bonds.
Warning: bond math
1/9
thespreadsite.com/a-below-par-re… To begin with, the drop in dollar prices, especially for investment grade credit, has been significant, with the index now trading at $86, a level rarely seen in history. The long-duration IG bond index trades at $78, even more dramatic.
2/9

We often hear about the health of balance sheets, yet defaults/delinquencies are clearly rising. In our view, aggregate macro data often misses a very bifurcated economy, that matters going forward.

Thread (and link to this week's report) below.
1/14

thespreadsite.com/the-haves-and-… Taking a step back - corporate, consumer and commercial real estate defaults/ delinquencies are all rising, now likely beyond the point of just ‘normalization,’ despite historically low unemployment and strength in markets. What’s going on?
2/14

As $WBA stock makes multi-year lows on the heels of their CEO departing (2.5yr tenure), wanted to provide some perspective on the debt. The long-dated unsecured bonds due ‘50, also hitting lows in price (~65), highs in yield (~7.0%). Some of that drop in price is from rising Treasury yields. But note the spread (for this bond) is also breaking to new wides (~255bp), now wider than the BB HY index (not adjusting for curve).
2/6

Published and emailed a note yesterday. Summary and link below.

In short, we are not trying to top tick bond yields but do see increasing value in high-quality longer-duration fixed income. Plus a few other mkt thoughts.
1/9

thespreadsite.com/duration-on-sa… First, the problem with higher yields driving lower stock prices is that while P/E multiples are compressing, the risk premium in the market is still declining. In other words, the equity market is arguably becoming modestly more overvalued vs bonds, even as prices fall.
2/9

The Ch.11 filing by $YELLQ has piqued our curiosity. Not as a “meme stock,” but b/c we are interested in restructurings, esp. if there’s a Q on value for equity (i.e. Hertz). To be clear, the Company is liquidating and will cease to exist at end of bankruptcy. A thread…
1/17 We also want to be clear in saying that with available information we’ve looked at, we think the odds favor equity being wiped out (but those odds aren’t 100%). There is (arguably) some optionality, and we discuss the moving pieces influencing that option value.
2/17

Lots of debate around whether this is a new bull mkt or not, and understandably so given the magnitude and duration of the rally. I find it more helpful to think about a late-cycle environment in phases, and how the current rally is not that atypical in this context.
1/7 Phase 1 is the rate hike cycle. Typically markets correct leading up to or while the Fed is hiking. The correction can be small like the 8% drawdown just prior to the rate hikes in ’04-’06, or much larger like the several 20%+ pullbacks/bear markets noted in the table below.
2/7

On May 1st, GS put out a note on $VNO and a potential debt covenant breach. While we don't have the report, a few points on the topic. And as mentioned many times, covenant breaches and fights within one Co’s cap structure can get messy & technical.
therealdeal.com/new-york/2023/…
1/8 For those less familiar w/ corp debt, a quick review on $VNO’s cap structure. They have a lot of property level secured debt. Subordinated to this, they have senior unsecured bonds, senior unsecured revolving lines of credit (“R/C”) and a senior unsecured term loan (“TL”).
2/8

Lots of debate about what the bond market is pricing and if bonds/stocks are saying something different. My quick take below…
1/6 The bond market is pricing in cuts, to state the obvious – and the steeply inverted yield curve tells us that – with the cuts starting late this year and continuing steadily until early 2025, stopping at about a 3% FF rate.
2/6

I’ve generally been conservatively positioned this year (cash/ defensives>cyclicals/ up-in-quality in credit) but not making any big directional index bets – arguing we are likely in the chop zone for a while. Today I bought a Sep 400/360 put spread on SPY.
1/6 Why Sep? Bear market bottoms often coincide with a bigger rise in claims, when econ data gets obviously bad and the Fed must be forced to act. I’m not confident that is imminent, but think it’s coming. Until then, this low vol ‘grind’ could continue.
2/6

https://twitter.com/SpreadThread1/status/1636756170336612352?s=20

For the 3 of you interested in the small special sit ($WE CN/$WECMF) we highlighted in Feb- below an update.
On 4/11 they received shareholder approval to merge with Tiny and closed the transaction as of 4/18. The new tickers are $TINY CN and $TNYZF.
1/7

https://twitter.com/SpreadThread1/status/1630262348509315074?s=20

At a high level, the merger consisted of WeCommerce, which provides ecomm tools and software mainly to the $SHOP ecosystem. And Tiny, a tech-focused holding company which uses organic FCF to make acquisitions in the (mostly) digital space.
2/7