Live From the Desk 7

A Look at High Yield

The action in the markets these past few months has forced us to revisit our theses on names in the Enhanced Income Fund. The high yield space has been hit just like equities and in some cases worse because it is relatively illiquid.

To give us a reprieve from looking at macro issues all day, let’s revisit one of these names together. LBI Media bonds are a good proxy for a lot of the bonds that we own. With only $42m outstanding it doesn’t hit many Fund Managers radar, however, the company is the second largest Spanish language radio & TV broadcaster in the US. Four months ago, we wrote about their short dated bonds representing an opportunity because they yielded over 11% and the company had recently raised cash to refinance it. They not only have raised the cash to take these bonds out but they also entered a new revolving credit facility for up to $50m as a back-up. Clearly, the company recognized that the 11% coupon was a drag and would want to refinance at a better rate.

Fast forward to today and the bonds have moved down as someone has wanted to sell. They are now offered at a 16.6% yield to maturity and 78% yield to an October 2011 call. There does not appear to be any fundamental changes as their spanish radio stations continue to to perform well. From an analyst:

“LBI launched a new programming network, Estrella, on September 14 of 2009. The network is already the fourth rated Hispanic network in the country behind Univision, Telemundo and Telefutura. Because it is producing the programming already, the company has had limited incremental costs to launch the network and therefore the vast majority of the incremental revenue will fall to the bottom line. The network generated $10.9 million of new revenue in 2010 and is already on a run rate of over $20 million.

LBI’s only near term maturity are the $42 million of holding company notes. The company intends to use the combination of cash on hand and revolver to retire these, most likely at the end of 2012, 12 months before they mature.”

When you see these kind of gyrations in the market it’s prudent to reevaluate a position and ask yourself: Is there that much added risk now to repayment? Is there now a refinancing risk if the market moves down further? In the case of LBI Media, we see their business is performing well and they have great leverage to opening new TV/Radio stations across the US. So, we don’t identify any new risks to their business that would be a cause for concern. Our thesis has not changed, we are comfortable that this bond will either be called, or mature at par and we don’t view any new micro risks. The macro risk may be real, but is it going to “kill the radio star”? We doubt it.

The thing to remember about bonds is that they are contracts for repayment. Even though we’re seeing some short term volatility here, when the noise disappears, these notes will give the fund some upside Beta as they move back towards parity. We do expect that high yield will lag equities if there is a large turnaround in the market, but it will pay off over time as a sense of normality returns.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)

Michael Lindblad
(Central and Eastern Ontario)

James Wilson
(Central and Western Ontario, Maritime Canada)