(Bloomberg) — The largest holding on the planet’s largest high-yield municipal bond fund isn’t a municipal bond.
It’s a $1.5 billion stake in shares of Power Harbor Corp., a thinly traded energy firm that’s not listed on any US inventory trade. The Nuveen Excessive Yield Municipal Bond Fund — like many others run by the funding large — obtained the inventory three years in the past after the corporate’s precursor, FirstEnergy Options, restructured its money owed in chapter.
It hasn’t been a foul funding. The truth is, the shares have surged a lot that it’s making a dilemma for Nuveen — and posing a little-known danger to its traders.
That rally, coupled with an exodus of money final yr as bonds have been hit by the deepest losses in a long time, has left about 8% of the $18 billion high-yield fund invested within the inventory. Power Harbor shares have additionally turn into the one largest place in 14 of Nuveen’s different muni-bond funds. All informed, Nuveen owns 38 million, or 40%, of Power Harbor’s shares, a inventory that on some days isn’t even traded in any respect.
The focus casts doubt on whether or not any of the funds may unload the shares with out dragging down the worth, elevating the specter of a success that may ripple throughout Nuveen’s holdings if traders yanked out their money. That’s a danger not usually related to automobiles targeted on municipal bonds, a mainstay of buy-and-hold traders.
“I don’t suppose monetary advisers and retail traders who personal Nuveen’s excessive yield muni fund are conscious of the fairness danger,” mentioned Ryan Paylor, a portfolio supervisor at Thomas J. Herzfeld Advisors.
“If they begin redeeming, it’s going to be an issue,” he mentioned. “It’s most likely going to be troublesome for them to get out of that place with out actually pushing the worth down.”
Nuveen, a unit of Lecturers Insurance coverage and Annuity Affiliation of America that oversees greater than $1 trillion in belongings, is assured that its open-end funds will have the ability to meet shareholder redemptions, a Nuveen spokesperson mentioned in a press release. The funds, which disclose their holdings on Nuveen’s web site, efficiently navigated such a pullback final yr, when bonds have been hammered by losses, and the market has since largely stabilized.
Even so, the inventory holdings have created some difficulties. In December, Nuveen disclosed that the high-yield fund’s holdings of sure unnamed “illiquid” belongings had breached a 15% restrict set by the Securities and Change Fee, which requires funds to element plans for getting again under the brink.
The stake additionally led Nuveen to backtrack on share buybacks it proposed as a part of a plan to increase the lifetime of two closed-end muni funds scheduled to wind down this yr. Shareholders accepted the repurchases, which might have given traders who wished to an opportunity to exit.
However Nuveen scuttled the plans final month, saying it seemingly couldn’t promote the funds’ illiquid securities to lift the wanted money. On Wednesday, Nuveen recognized the Power Harbor shares because the illiquid securities, including that, because of the agency’s standing as a considerable minority shareholder and board member, federal legal guidelines forestall the funds from promoting them “besides below restricted situations.”
It’s reverting to the initially scheduled wind-downs, albeit with an method that delays the total payouts till the inventory could be bought. Nuveen mentioned it couldn’t predict when that can occur. On the finish of final yr, the 2 funds held over 1,000,000 Power Harbor shares.
‘Surprising to Me’
Jerry Paul, a senior vice chairman at Icon Advisers, mentioned he was shocked the funds had such a giant place in illiquid securities so near their scheduled wind downs.
“That was surprising to me,” mentioned Paul, whose agency holds shares of each closed-end funds. “In the event you’re mother and pop and also you thought that you simply have been gonna get your a refund and get an opportunity to reinvest it, that’s received to be fairly disappointing.”
In contrast to these two, Nuveen’s high-yield fund is an open-end one, which means that it should stand prepared to fulfill shareholder redemptions every day. It’s the most important of its type, and it swelled below supervisor John Miller as its bets on the riskiest municipal bonds usually delivered huge returns.
It was such an funding that resulted in its stake in Power Harbor. It initially purchased municipal bonds issued for FirstEnergy, which owned and operated nuclear crops in Ohio and Pennsylvania.
In 2018, the corporate collapsed into chapter 11. Nuveen’s high-yield fund held FirstEnergy debt valued at about $190 million on the time, accounting for about 1.2% of its internet belongings. When the corporate emerged from the restructuring as Power Harbor two years later, the high-yield fund and others at Nuveen that additionally held such debt obtained inventory within the firm.
Inventory Worth Triples
The shares have been a boon for the funds. Its value has surged to $77 from $25 in March 2020, supported by robust demand for vitality, rising costs and tax credit prolonged by President Joe Biden’s Inflation Discount Act.
That rally got here because the Federal Reserve’s aggressive interest-rate hikes have been hammering bonds. Because the losses piled up, traders pulled about $2.8 billion out of the fund through the first three quarters of 2022, in accordance with SEC filings. The mix of the 2 forces prompted the Power Harbor stake to account for a rising share of the high-yield fund’s belongings.
Final yr wasn’t the primary time the high-yield fund handled a retreat by traders. In March 2020, when the onset of the pandemic prompted panic in monetary markets, traders withdrew sharply from the fund, threatening to pressure it to promote belongings into a hearth sale. However Nuveen’s guardian, TIAA, helped to move that off: It bought $1.1 billion of the fund’s shares, extending it a lifeline.
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