This just in:
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Important Update on the Osterweis Short Duration Credit and Sustainable Credit Funds
Date: Mon, 02 Oct 2023 18:32:58 -0600
We are writing to let you know we have made the difficult decision to liquidate the Osterweis Short Duration Credit Fund (ZEOIX) and Osterweis Sustainable Credit Fund (ZSRIX). You can read the prospectus sticker that was filed here
https://info.osterweis.com/e/504651/-Osterweis-Prospectus-2023-pdf/3l9fmqHere is an overview of important dates:
-9/29/23: The funds were closed to new investments.
-12/15/23: The funds will liquidate, and any remaining shareholders will receive a cash distribution.
You can redeem at any time and all such sales will be settled T+3. If you are planning to sell shares prior to 12/15/23, please email mailto:
[email protected] or call us at (800) 700-3316.
If you have any questions, please let us know.
Best regards,
Carl Kaufman
Co-Chief Executive Officer, Chief Investment Officer - Strategic Income & Managing Director - Fixed Income
Cathy Halberstadt
Co-Chief Executive Officer
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Kind of sudden, but guess it's a good thing I liquidated most of my Osterweis (ZEOIX) holdings earlier...
/dave
Comments
https://www.businesswire.com/news/home/20221011005063/en/Osterweis-to-Include-ESG-Integrated-Fixed-Income-Strategies-in-Product-Suite
This sort of principal protection concerns bankruptcy. When a company goes bust, whatever assets it has go first toward paying off debt (bond holders). If the company has anything left over (i.e. if it's net value is positive), the remainder goes to stock holders.
There's also income protection - bond holders get paid interest (if possible); only if there is money left do stockholders get paid divs.
TFCVX (Focused Credit Fund) owners were hurt when it was forced into fire sales because people wanted to redeem shares and the mostly illiquid bond assets could not be sold except at huge discounts. Summary Prospectus, 2014
Nevertheless, it ultimately had an 85% recovery rate. This was helped by closing down redemptions to allow it to sell off assets gradually at better prices.
https://focusedcreditfund.com/
https://www.morningstar.com/funds/third-avenue-focused-credit-abruptly-shuttered
M* didn't help: ZEOIX AUM $73.5 million, M* 1*; Negative
M* groups RPHYX and ZEOIX, two short term HY funds, with "regular" (intermediate/long term) HY funds. That results in lower star ratings than they deserve and a negative medalist rating. But that doesn't seem to have hurt RPHYX.
ZEOIX always had risk. @dtconroe noted in Jan 2020 that "in the toughest downmarket for the 2 funds (2015/2016), RPHYX showed almost no dip, compared to a slight dip for ZEOIX". That was posted just before this greater risk was dramatically brought home. Between Feb 21, 2020 and March 24, 2020, ZEOIX lost 14.1% vs. a 2.8% loss by RPHYX. (JNK dropped 21.1%).
Still, it wasn't until 4Q 2022 that assets left in droves (from M*'s ZEOIX performance page). Not because the fund underperformed its category (top quartile for the year, per M*). Perhaps because that's when the fund was sold to Osterweis.
https://www.osterweis.com/files/Osterweis_Prospectus_2023.pdf
https://www.sec.gov/Archives/edgar/data/811030/000089418923007341/osterweis497eliquidation9-.htm
However there were several drawdowns where the NAV dropped 2 or 3% in a couple of days so I was concerned enough to call them. They said it was all because the bonds in the portfolio traded so infrequently they had to estimate their value, at at times this value dropped, but because they were such short term bonds, it would soon be made whole. This sorta made sense until you realize with large withdrawals they have to sell regardless of the price. I decided to bail.
The Same issues should be true of RHPIX unless they focus only on bonds that are very close to maturity
That seems a bit excessive. Even MMFs can have debt that doesn't mature for 397 days. One only needs enough liquidity to meet redemptions. The SEC is increasing liquidity requirements for MMFs from 10% to 25% for daily liquidity and from 30% to 50% for weekly liquidity. MMFs are not entirely liquid; they don't have to be.
https://www.federalregister.gov/d/2023-15124/p-453
Average effective maturity of RPHYX is around 5 months. This is significantly longer than MMFs. I'm not suggesting otherwise, just that the portfolio has adequate assets close enough to maturity to address concerns. Probably
FWIW, ZEOIX has an "average life" of 2.34 years. Quite a difference.
https://riverparkfunds.com/assets/pdfs/rpsthyf/RiverPark_Short_Term_High_Yield_Fund_Fact_Sheet.pdf
https://www.osterweis.com/mutual_funds/short_duration_credit/portfolio
RPHIX has an additional out - it can reopen the fund. Currently it is soft closed - a new investor can open an account only directly with the fund.
All of which is speculative. Folks never want to talk about failed partnerships, so I'm trying for an educated guess.
https://www.law.cornell.edu/wex/voluntary_bankruptcy
OTOH, creditors can under some circumstances force a debtor into involuntary bankruptcy.
https://www.justia.com/bankruptcy/involuntary-bankruptcy/
Hypothetically, a debtor might be solvent but simply choose to stiff his lawyers, his contractors, his employees, etc. Regardless of solvency, his creditors might try to force him into bankruptcy. But the debtor is likely to argue that the amounts owed are in dispute, which is a defense against involuntary bankruptcy.
So more often, the creditors just sue. Or they might try to work some arrangement out with the debtor. From what you wrote, it sounds like ZEOIX is working those angles.
Covenants are basically conditions that a lender imposes on a borrower before lending money. A simple example: before a bank will issue you a mortgage, it will require you to have homeowners insurance. In this way it protects its security interest (the real estate) but that does little to ensure timely mortgage payments.
Conversely, breaching covenants doesn't necessarily mean that payments are missed. MSRB Glossary of Municipal Securities Terms
"When a large player like Brookfield defaults on a $300M office loan they just hand the keys to the bank...
The bank then has two options:
1. Sell the property at a significant discount (let's say $200M)
2. Add value to the property themselves then sell it
Most banks choose option 1
But how many buyers do you think are out there for distressed $200M office buildings?
Not many. Enter Brookfield again...
Yes, companies like Brookfield will default on a loan (with no recourse), hand back the keys, then buy the same asset back for a huge discount.
Pretty crazy if you ask me."
The bank then has two options:
1. Sell the property at a significant discount (let's say $200M)
2. Add value to the property themselves then sell it
Assuming the lender perfected its security interest (i.e. did a UCC 9 filing to put the world on notice that it had a type of lien on the property), then in #1, the buyer would get the property subject to a $300M lien.
how many buyers do you think are out there for distressed $200M office buildings
None, and even fewer (if that were possible) who would buy a $200M office building with a $300M lien against it. Even for $1. That $200M sale ain't a-gonna happen.
As far as walking away from the loan (neither option 1 nor option 2) goes, it is premised on at best a somewhat incomplete understanding of non-recourse loans. Most loans aren't. https://fidelityca.com/non-recourse-loan-financing/
If a large player walks away from a debt, especially one that it could pay, its reputation will be mud for a long time. Most players won't risk their reputation. Though there are exceptions, and they might get lucky - they might find "a reckless institution willing to do business with clients nobody else would touch."
Historically, non-recourse mortgages arose out of the Great Depression. They made the news in the 1990s when several regional real estate markets collapsed and so many homeowners who were underwater simply walked away. https://scholarship.law.nd.edu/jleg/vol42/iss2/2/
There are roughly a dozen non-recourse states, the largest of course being California. But it's not so simple there. A bank may execute a non-judicial foreclosure, bypassing the courts and getting a relatively quick sale. If it follows this path, it has no recourse for any deficiency (shortfall). This is the norm for small potato mortgages (I suppose that means $3M homes in California).
However, a bank is not likely to let a creditor with deep pockets like Brookfield simply walk away with a $100M deficiency. It will go through the courts. In California, judicial foreclosures are not non-recourse (pardon the double negative).
Commercial Mortgage Foreclosure (CA), Practice Note, Alston and Bird LLP (14 pages)
Yes, companies like Brookfield will default on a loan (with no recourse), hand back the keys, then buy the same asset back for a huge discount.
Pretty crazy if you ask me
Yes, the idea that they will, or even can, do this is pretty crazy.