1- Bought ~4.5% position in HYI at the open at $13.79 using cash
The fund has appeared on our radar for a while and we recently discussed it in the weekly commentary. We wrote:
Another fund that appears attractive is Western Asset High Yield Def Opp (HYI). This is a term trust fund meaning it self liquidates at a certain date in the future. This is different than a target term fund that liquidates at a certain date in the future and at a certain price. HYI will liquidate at whatever NAV it is on the date of expiration. That date is September 30, 2025.
At a discount of -13.25%, the fund is giving you over 2% of "juice" per year between now and liquidation. Anytime a term fund gives you over 2% per year in added return, it becomes attractive.
And at the same time, this fund meets all our criteria with high coverage, high yield, and one of the lowest z-scores in the taxable space at -2.20. The NAV has been stable to slightly increasing in the last two weeks while price is down giving the current opportunity. Watch for further analysis in the near future.
In addition, in our monthly letter out Friday, we wrote:
(1) Western Asset High Yield Def Opp (HYI): This fund self-liquidates in September 2025 given the limited term structure. It invests primarily in high yield bonds but does have some emerging market debt, bank loans, and investment grade corporates. The portfolio is 17.5% CCC and some of the top holdings are communications firms like Altice SA which bears some watching. The effective duration is 4.1 years. There is no leverage in the fund. The yield is 7.71% but coverage is ~107% and UNII trending up from the current -8.2 cents. At that coverage ratio, the true yield is 8.25%. With the fund self-liquidating in 6.5 years, you are getting nearly 2% of kicker to your yield for a total return just north of 10%. Despite the credit quality, we think this is compelling even compared to equities. Additionally, I do not think we will have to wait until 2025 to see that discount close. It is likely that within the next two years, the discount will tighten significantly as we have noted that the sweet spot for these term trusts are around 2-4 years out.
Please ask us any questions you may have!