SuperValu: Dan Fuss Of Loomis Sayles Thinks Bonds Are A Super Value

| About: SUPERVALU Inc. (SVU)
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Although we have been disappointed in SUPERVALU's (NYSE:SVU) performance since we reentered it in Q2 2012, we can see that we are not the only firm that has taken a position in the company. With regards to SVU's top 20 institutional shareholders as reported by Morningstar, we can see that three of SVU's top 20 institutional shareholders are subsidiaries of investment banking firms, another three of SVU's top 20 institutional shareholders are investment management boutique firms and eight of SVU's top 20 institutional shareholders are hedge fund and other alternative asset firms. We also noted that two multi-asset allocation mutual funds with Morningstar Ratings of 4 stars were amongst SVU's top 10 largest bond holders (if we were to exclude SVU's New Albertsons Inc debt or term loans) with regards to all mutual funds.

The American Funds Income Fund of America is SVU's fifth largest bond holder and it has $65M (face value) of SVU's short term debt ($43M of SVU's 7.5% November 2014 bond issue and $22M of SVU's 8% May 2016 bond issue) and $2.3M of SVU's 8% Real Estate Backed August 2018 Term Loan (as of September 30th, 2012). We were disappointed that Morningstar failed to account for the Income Fund of America's $15M face value investment in SVU's New Albertsons Inc debt in its rankings of largest SVU debt holders. Franklin Income is a fund we've had a long-time personal and professional opinion of respect for because it is a top-performing, well-known income-oriented multi-asset-allocation mutual fund. Franklin Income owns more of SVU's bonds than any other mutual fund in the US and Franklin has $223M face value of SVU's 8% May 2016 bond issue. Franklin Income also has $35M of SVU's 8% Real Estate Backed August 2018 Term Loan.

The well-known, well respected bond fund manager Daniel Fuss of Loomis Sayles and his team has nearly $408M in SVU debt. Fuss and his team have $70M of SVU's Real Estate Term Loan and $338M in SVU's New Albertsons debt. All of Fuss's SVU Real Estate Term Loan holdings are in the Loomis Sayles Bond Fund ($40.8M) and the Loomis Sayles Strategic Income Fund ($29.2M) and the majority of Loomis Sayles's New Albertsons debt is in the Loomis Sayles Bond Fund ($156.5M) and the Loomis Sayles Strategic Income Fund ($122M). We were amazed that Loomis Sayles's New Albertsons debt is primarily in issues with maturities from 2026 to 2031 and that Loomis Sayles's Strategic Alpha Fund has also sold credit default protection on nearly $8M on SVU. Loomis Sayles's Senior Floating Rate and Fixed Income Fund also has $1M in SVU's 8% Real Estate Term Loan. We were not able to determine how much of SVU's debt Loomis has in its separate account and wrap products but we can see that Loomis Sayles has made a strong commitment to SVU and its new CEO Wayne Sales.
Loomis Sayles

Source: Loomis Sayles Mutual Fund Portfolio Holdings

We were surprised that the funds were able to pick up a portion of SVU's $850M August 2018 Real Estate Backed Term Loan. If we were the bank(s) that underwrote the loan, we'd be hesitant about selling the loan to investors because we'd want to keep it ourselves. We'd want to keep the loan since it boasts an 8% coupon (LIBOR + 675bp with 125bp Floor) and it is secured by SVU's real estate. SVU borrowed $850M and it is secured by $1.15B of SVU's real estate and equipment. Furthermore, we'd be less likely to sell this term loan since it requires mandatory repayments of 0.25 % of the outstanding balance on a quarterly basis before its maturity and the company must make mandatory prepayments by up to 50% of its annual excess cash flow as defined in the loan agreement. We can see that as of September 30th, that loan was valued at 77bp above par. We think investors overreacted to SVU's new credit facility in July by pushing down SVU's bond prices because we believe that the company's best interest is to still devote as much cash to debt pay-downs as possible in order to reduce interest expenses and to salvage value through a sale of the company or its assets.

Source: Morningstar Direct and Our Estimates

In conclusion, we are pleased to see that leading institutional and mutual fund fixed income managers have a large commitment to SUPERVALU on behalf of their shareholders. We believe that although SVU is facing a challenging set of circumstances, we believe that investors in SVU's bonds or shares will find it to be a super value, especially in light of deal speculation involving Cerberus. We were particularly pleased to see that two of our favorite income-oriented mutual fund products (Franklin Income and Loomis Sayles's active fixed income funds managed by Dan Fuss) have committed $258M (Franklin) and $408M (Loomis Sayles) to SVU. We believe that Dan Fuss's $338M investment in SVU's longest dated New Albertsons bonds shows investors that not only should they expect a return of their SVU investment, they should expect a return on their SVU investment.

Source: MRQ Portfolio Holding Detail for Loomis Sayles, Franklin Income and Income Fund of America

Disclosure: I am long SVU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.