Domestic equity markets rebounded in broad strength due to actions in response to fairly discouraging economic data. Bond and precious metals also saw sustained appreciation throughout the month. On June 4th, Federal Reserve Chair Jerome Powell gave a speech at the Conference on Monetary Policy Strategy, Tools, and Communications Practices that bolstered financial markets after five consecutive weekly losses. In particular, Powell encouraged market participants to “act as appropriate to sustain the expansion,” conveying the Fed’s focus on sustaining the current economic cycle. Some see this as an indication that an interest rate cut will be forthcoming. The market’s expectation now stands at a 71 percent chance of a 25bps reduction in July and a 64 percent chance of another 25 bps shaved off the Fed Funds Rate after the September meeting (there is no meeting in August).
As a reminder, the Federal Reserve generally is averse to reducing interest rates, but shaky economic data and souring investor sentiment may compel action on this front. The month began with a sluggish May jobs report as both private payroll job growth and year-over-year growth rates slowed. Layoffs in, cyclical sectors like the automotive industry, continue to grow year-over-year and consumer confidence for the month of June came in well below forecasts. The monthly New York Fed Recession model puts the odds of a recession in the next 12 months at 30 percent. It is important to emphasize that the odds are against an economic recession in the near term. Moreover, any gains made toward a US-China trade agreement would likely produce significant buying pressure in all markets and possibly new all-time highs in domestic equity markets. The June 7th announcement of Mexico’s ratification of the US-Mexico trade agreement demonstrated what a powerful influence such headlines can be in setting market performance.
Please review the following updates from some of the existing positions that we manage.
Medley Capital Corporation Bonds— (MCX and MCV): The company continues to work with activist investor FrontFour on establishing a future direction. Company assets continue to come under pressure as uncertainty grows. We monitor the situation daily and see a sufficient margin of safety in overall asset value versus outstanding debt. The odds of a purchase by Sierra Income Fund remain steady. A deal with Sierra Income would alleviate any concerns on asset coverage ratios given their cash holdings and willingness to inject that capital.
GasLog Partners LP Series B Preferred Stock— (GLOP-B): On June 24th, GasLog (GLOG) and GasLog Partners LP (GLOP) announced an agreement to eliminate the General Partner’s incentive distribution rights (IDRs) in exchange for newly issued limited partner units. In exchange for the IDRs, GasLog will receive 2,532,911 common units and 2,490,000 Class B units. The transaction is expected to close on June 30th, 2019. This transaction is favorable for our position. We project the cost of capital should decrease while GasLog’s ownership in the Limited Partnership increases. In the long run, the strengthening of the relationship between General and Limited Partnerships will help the capital structure and investor sentiment.
Icahn Enterprises Senior Bonds due 2020— (CUSIP: 909218AB5): As we mentioned in the May letter, IEP completed a $500 million debt raise. On June 10th, we received notification that the company intends to call our 2020 bonds early. Across all accounts this bond was our largest position. We regret having to part with this lucrative investment because it has been very good to us. At this time we will not investing additional capital on the debt side of IEP as yields are too low.
Enviva Partners LP Bond due November 2021— (CUSIP: 29413XAB3): Over the last week, respected Goldman Sachs analyst Brian Maguire upgraded the company’s equity price to a “buy” rating with a $37 price target (it currently trades in the low $30s). The Goldman Sachs analyst believes the company “is poised to benefit from rapid industry growth driven by the need for utilities in Europe (and increasingly in Asia) to meet more stringent renewable energy mandates. Enviva offers three desirable traits rarely seen in a single industry in our coverage today: growth, defense, and sustainability. Lastly, this upgrade provided a near-term boost to the market capitalization of the company (adding 3.5 percent). Increased market capitalization provides more protection for our senior position in the company structure. We are actively looking for more bonds.