The second specific equity focus involves seeking to take advantage of the recent wave of refinancings for high yield companies. We have stated that we are capital structure agnostic. In this case, we have seen a number of companies refinance their bonds some 3.00% cheaper, or even more. The interest savings flows down the capital structure, with additional cash flow generation to the benefit of the equity. So the dividend is further enhanced/protected by this interest savings and in some cases our determination is the equity becomes the best risk/return part of the capital structure.
On the loan side, we see the biggest benefit being that there are companies that issue only loans and not bonds. In some cases, these loans offer what we see as very attractive yield and by having the flexibility to include both bonds and loans, we are able to take advantage of these opportunities; rather than just being limited to those bond-issuing companies. Furthermore, as we noted above, because of the floating rate nature, where-by rates can reset every three months, this can have a secondary benefit of reducing the portfolio’s duration.
We see that having this sort of flexibility on both the loan and equity side, above and beyond our core high yield bond holdings, as allowing us to expand the opportunity set for yield-bearing securities, giving us more flexibility in a given market cycle and environment, and allowing us to work to maximize alpha.
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD).