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  • PHK - September Return of Capital - A Canary in a Coal Mine 0 comments
    Oct 18, 2011 8:59 AM | about stocks: PHK
    Allianz has released an official Section 19 announcement regarding a Return of Capital (NYSE:ROC) for PHK in the September distribution:
    www.allianzinvestors.com/Regulatory/Exte...
    A quick calculation shows that the true dividend without any return of capital equals to about 10.27% a year based on current PHK market price - that is right in the ball park of other HY funds with leverage.
    However, when one examines the same dividend rate against the fund's NAV the yield pops up to a still unquestionably too high 16.55%/year.
    So in essence, current PHK holders are holding a fund at 61% premium to get an easily achievable 10.25% dividend which other funds pay from true earnings but with said funds trading at discounts or just slight premiums to NAV.
    In addition, PHK holders and buyers get back principal at 100% while they buy (or hold) the fund for 161% (or 61% premium ) of its NAV.

    This may be the first harbinger of the process of more ROC announcements over the next few months that will eventually lead fund management to concede the current distribution rate of $0.121875 per months is unrealistic as well as unsustainable in the current market environment.

    The only way to pay for that 21% a year (on NAV) distribution is for PHK management to keep gambling on the funds assets by using leveraged derivatives like CDS,Futures on currencies, indices etc. - AND be on the right side of the trade too.
    The past 9 months have shown PHK management were quite amiss on that front judging by the very poor total return performance by the fund's NAV vs. its peers.
    PHK is currently placed at the very bottom - 100TH PERCENTILE - of its peers group - performance wise, for the past 1 year and 3 months while sporting a 97 percentile (only 3% worst) Year to date.
    Those figures are in stark contrast to the amazing performance for the past 3 years - reflecting the huge speculative recovery from the bottom of the financial crisis of 2008.
    However, when we neutralize the effect of that crisis by going back 5 years , PHK stands out as a LESS THAN MEDIOCRE  fund at the 65 percentile (only 35% did worst while 65% did better).
    This brings me back to my thesis from a few months back - PHK is paying too much in distributions by betting the house on derivatives to gain the extra income needed to complement its natural income from HY bonds.
    At current market environment and judging from the latest available portfolio figures, I believe PHK is hard pressed to gain even 11% on its asset (even with leverage).
    The current premium, which has proven to be very stubborn due to strong retail following the stable distribution rate as well as an Idolization of Bill Gross and Pimco (whose star has been dimmed as of late due to the very weak relative performance of his Flagship fund - Pimco Total Return - due to the same problems that hit PHK , namely, betting on derivatives like treasury bonds, and losing) - That 61% current premium can not be sustained and the first Canary in The Coal Mine has just died with this first notice of ROC.

    When the fund can not turn a stone to find something to pay for this outrageous distribution rate, it must resort to return of capital to maintain the vaunted stable distribution.
    However, if this becomes a habit it will put further undue pressure on the fund's NAV and cash flow and will force it to reduce distributions to a more reasonable market rate..like 10-11% which other HY funds earn.
    Let's see how the next few gambles pan out for Gross..a win or two and he may be able to delay the inevitable by a few more months..a loss or two..mmm..that would be a true disaster both for NAV and the market price (as well as the premium) and that will hasten the cut in distributions.
    In any case, it is coming..sooner rather than later and anyone who ignores it is just burying his head in the sand.

    My strategy is:
    Maintain a hefty core short position on PHK (some of which is hedged by going long on other HY funds to ease the carry cost).
    SHort more on spurts higher in market price and/or premium - and cover on sharp moves lower and/or sharp reduction in premiums in a short time.
    Scale out of core position if I see NAV going higher than other HY funds for a month or two.
    My current target for covering the core short position is 5-10% BELOW NAV - that is where I believe the market price is headed once distribution will be cut.
    It may take 6-9 months but unless we see a very strong rebound in the HY sector soon (highly unlikely) it is quite clear it will happen eventually - AT LEAST IN MY VIEW IT IS.
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