This past Friday, I wrote an article on Doubleline's Total Return Fund. In this article, I randomly chose a collateralized loan obligation out of the thousands of holdings in this fund. This particular holding will give you a better idea of the holdings in this fund (though most of the holdings are home mortgages).
I have randomly chosen KVK Ltd. Series 2013-1A-A with a maturity of April 14, 2025. This is the AAA tranche (rated by S&P). Kramer Van Kirk Credit Strategies manages this and Wells Fargo (WFC) is the trustee. This tranche pays LIBOR of 0.3275% plus a spread of 1.4% for a total of 1.72075%. The next interest payment is $1,523,724.13. This tranche is $346.5 million out of $545 million. There is a B, C, D, E, and a subprime tranche.
There are 294 obligors of bank debt in this pool. On the balance sheet of a corporation, this would show up under short term liabilities and long term liabilities. As these loans are private, it is much more difficult to find information. To the best of my knowledge, they do not have Cusips.
Of the top five industries, health and pharmaceuticals make up 10.1%, financials are 9.75%, hotels and gaming are 8.69%, high-tech are 8.11% and retail composes 6.26%. 96.94% are senior secured loans. Almost 66% of the portfolio matures by 2020. The rest will mature by April 2025. The three largest holdings are Avago (AVGO) at 1.99%, First Data Corp. (FDC) at 1.9%, and Station Casinos at 1.72%. Oil and gas accounts for 4.82%.
The following stocks can give you a much better understanding:Â American Airlines (AA), First Eagle Funds, Bass Pro, BATS, Booz Allen Hamilton, Drillships, Duff & Phelps, GoDaddy (GDDY), Guggenheim Partners, Neiman Marcus, Mueller Water, Patriot Coal, Prepaid Legal, Seadrill (SDLP), Six Flags (SIX), and Valeant Pharmaceuticals (VRX). Almost all of the loans are secured and pay LIBOR plus a spread. If interest rates rise, so does the payout. Almost all of the loans are rated in the "B" range by Moody's.
These bonds are secured, meaning they take first claim over publicly traded corporate bonds, accounts payable, preferred stock, and last and least common stock. In a bankruptcy, they will rank with the other secured holders.
The Patriot Coal Bond went into default on May 12, 2015. The fund held $3,416,750, which represents 0.6231% of the portfolio. S&P and Moody's give a recovery rate of 45%. According to Richmond Federal Reserve Economist Nada Mora, "The recovery rate measures the extent to which the creditor recovers the principal and accrued interest due on a defaulted debt. While financial companies, their regulators, and reÂsearchers commonly assume that the recovery rate is constant, in pracÂtice, actual recovery rates vary significantly. Moreover, recovery rates are systematically related to default rates."
The fund should recover $1.5 million. The original loan had a face value of $250 million.
It seems that the AAA tranche is protected by the five junior tranches. There would need to be $198.5 million in defaults before the AAA tranche loses money. Of course, the AAA tranche will not be receiving the income from Patriot Coal or any other loans in default.
It seems that this is a pretty safe investment and that Doubleline is protected in case of a bad economy or rising interest rates. As the Total Return Fund manages almost $50 billion, it's difficult to navigate a fund that large in a bad economy. If any of the information above is incorrect, I reached out to Kramer Van Kirk, but did not hear back. Of course this is just one investment out of thousands that I wanted to research. There are thousands of mortgages and loans, and I will try to find time to research a few more.
