PTY - Checking In On CIK A Monthly Pay 10% Yielding Fund

Summary

• Credit Suisse Asset Management Income Fund is a U.S. HY closed end fund.
• The CEF has a 10% true dividend yield, with no ROC currently utilized.
• The fund runs substantial credit risk, with the 'B' and 'CCC' buckets having very large allocations.
• The vehicle has a -5% discount to NAV, and historically has exhibited a very narrow range for its discount.

Thesis

Credit Suisse Asset Management Income Fund ( CIK ) is a closed-end fund focused on fixed income. The vehicle has a large concentration of fixed rate high yield bonds at 72%, followed by leveraged loans at 20%. The fund uses a normal amount of leverage at 33%, and has managed to perform largely in line with a golden standard in the space in the past year, namely PIMCO Corporate & Income Opportunity Fund ( PTY ).

From a macro perspective, one item that is of concern for HY CEFs in general, is the level of credit spreads:

U.S. high yield credit spreads are closing in on the 400 bps threshold that would move them into a more 'normalized' environment. We feel this is a too much of a narrowing, down substantially from the 600 bps level recorded at the end of July 2022. We are not out of the woods yet in terms of fundamental performance, with defaults just getting started . Moody's Rating Agency is expecting default rates to double in 2023:

Higher default rates should put upward pressure on spreads, and thus decrease the NAV of a HY CEF such as CIK. As this recessionary cycle continues, we will see another spike up in credit spreads. While market timing is an impossible feat to achieve, we do believe that credit spreads around 600 bps plus risk free rates in the 4% to 5% range are going to be at the top end for spreads, and thus a nice buy signal (mind you this translates into all-in yields of 10% plus).

Performance

In the past year, CIK has had a total return profile in line with a golden standard in the HY CEF space, namely PIMCO Corporate & Income Opportunity Fund ( PTY ):

The fund had a drawdown which exceeded -20%, but has recovered some of that move on the back of tighter credit spreads and lower rates.

On a longer time-frame, the three funds converge in terms of total returns:

We like longer time-frames cohort distributions because it gives us a sense of true performance for a buy-and-hold retail investor. Longer periods of time smooth out any temporary divergences due to premium moves or individual credit issues.

Premium / Discount to NAV

The fund's discount to NAV has been range-bound in the past years:

We can see that the vehicle traded pre-Covid with roughly a -10% discount to NAV, which moved to a premium in a zero rates environment. That move made sense given the fixed rate nature of the underlying collateral. In 2022 the fund's discount has had a high beta to the risk-on / risk-off market environments.

Holdings

The CEF focuses on fixed paying high yield bonds:

We can see from the above table that the fund has a 72% concentration in high yield bonds, followed by leveraged loans. CIK is the bond take on the classic leveraged loan CEF (i.e. 70% lev loans and 30% bonds).

The vehicle has a granular build, with industry concentrations below 18%:

We can see that the fund does not overly concentrate its positioning in any specific industry, having a granular build. We can observe the same theme in the top issuers:

The fund is granular, with the top issuer constituting only 1.6% of the fund. Most names are under 1% of the portfolio.

From a credit risk standpoint as reflected in the ratings of the underlying collateral, the fund is on the riskier side:

The vehicle has most of the exposure allocated to the 'B' bucket at 39%, followed by 'BB' at 29% and 'CCC' at 25%. We find the 'CCC' bucket to be very large, reminding us of KKR Income Opportunities Fund ( KIO ) which we reviewed here .

Distributions

The CEF has a 10% distribution yield, which is now fully covered:

The vehicle does not post in the public space its Section 19a. notices, but we managed to get the August 2022 one, which matches the above data from Morningstar:

As spreads have risen in the HY space, the fund was able to reinvest its cash in much higher yielding bonds. This has now resulted in a fully covered distribution. You are getting a true 10% yield here.

Conclusion

Credit Suisse Asset Management Income Fund is a high yield CEF. The vehicle has a 72% fixed bond sleeve, followed by a leveraged loans sleeve of 20%. The fund is on the credit-riskier side, with the 'B' bucket at 39%, and 'CCC' at 25%. Middle of the road HY CEFs usually have the 'CCC' bucket capped at 10% of the portfolio. CIK has nonetheless managed a robust performance, comparing favorably on a 1- and 5-year time frame with the much better known PIMCO Corporate & Income Opportunity Fund ( PTY ). CIK is a very well managed fund that will continue to post good returns in our mind. The CEF's 10% dividend yield is fully supported, with the latest figures showing a 0% ROC utilization. This feat was achieved on the back of much wider all-in yields, the result of higher risk free rates and higher credit spreads. CIK is a good fund in the HY CEF sector, but we would wait for another leg down in the wider risk markets before layering in this name.

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