JHAA - JHAA: 3.6% Discount For This 2023 Term Fund

2023-04-11 01:12:00 ET

Summary

• Nuveen Corporate Income 2023 Target Term is a closed-end fund.
• The CEF is set to terminate on or about December 2023.
• Its collateral profile is fairly well duration-matched, with the longest bond maturity being June 2024.
• The CEF is currently trading with a -3.6% discount to net asset value.
• Upon the CEF maturity, a retail holder will realize the value mismatch between the fund NAV and market price.

Thesis

Nuveen Corporate Income 2023 Target Term ( JHAA ) is a fixed income closed end fund. The vehicle is a target term fund, meaning it aims to return its entire NAV to shareholders by a certain date:

The Fund seeks to provide a high level of current income and to return the original $9.875 net asset value per common share on or about December 1, 2023. The Fund invests in a portfolio of primarily corporate debt securities, including bonds and senior loans. The Fund may invest in other types of securities, including convertible securities and other types of debt instruments and derivatives that provide comparable economic exposure to the corporate debt market. In seeking to return the original NAV on or about December 1, 2023, the Fund intends to utilize various portfolio and cash flow management techniques, including setting aside a portion of its net investment income, possibly retaining gains, and limiting the longest maturity of any holding to no later than June 1, 2024.

Target term funds are a special breed, and they can be static portfolios (i.e. nothing changes from day 1) or dynamic ones which are traded. Dynamic ones offer no guarantees of the return of the original NAV value. JHAA pretty much discloses that it will not make the initial NAV:

The Fund’s objective to return original NAV at term is not a guarantee and is dependent on a number of factors, including the extent of market recovery and the cumulative level of income retained in relation to cumulative portfolio gains net of losses. Based on market conditions as of the date of this report, management anticipates that the Fund’s objective of returning the original $9.875 NAV on December 1, 2023 will not be met.

The vehicle has a very low duration due to its portfolio holdings:

As the portfolio nears its maturity date the fund duration is going to get lower - this simply means that changes in interest rates will have less of an impact on pricing here.

From a price level perspective it looks like the fund is going to bounce of $9/share:

There will be a pull to par effect for many bonds (a lot of them will be trading at a discount due to the rise in interest rates and widening of credit spreads) that will see the price slightly accrete higher.

The fund sports a dividend yield of 2.4%, which is going to creep higher as bonds mature and the cash received can be reinvested at T-bill rates of 4% or above.

Holdings

The fund holds a portfolio of corporate bonds:

The portfolio is tilted towards non-investment grade issuers:

We can see that only 25% of the holdings are BBB, with the rest being in the 'junk' category. The fund does not contain a very high amount of speculative 'CCC' credits, which is positive for a term fund.

The parsing of the collateral is tilted towards Consumer Cyclical stocks:

There are no issues with the build or sectors here. The only concern is with any of the CCC bonds actually defaulting, but the beauty of mark-to-market is that the current price/valuation should already embed that probability.

Premium/Discount to NAV

The CEF has been trading at a consistent discount to NAV ever since the Covid melt-down:

We can see how the structure briefly moved to a premium once the Covid recovery took hold, but subsequently moved to a small discount to NAV. The discount will be realized upon maturity.

Conclusion

JHAA is a fixed income closed end fund. The vehicle falls in the term fund category, having a December 2023 maturity date. The fund aims to liquidate its portfolio and return the cash to shareholders on or about December 1st, 2023. The collateral is partly duration matched, with half of the underlying collateral maturing by December, while the other half have staggered maturities up to June 2024. This profile ensures the fund runs a very low duration, and as we approach the end of 2023, interest rates will play a negligible role in pricing the portfolio here. We would have loved to see a full maturity match here, but it is not the case.

The CEF is trading with a -3.57% discount to NAV, and the arbitrage opportunity here is to get that pull to par upon maturity. A retail investor should expect a 6% to 6.5% total return here if they enter JHAA now. We expect the fund to have a modest mark to market risk unless we have a full blown market meltdown. Today is not an ideal entry point, but we would keep this name on our radar for a widening of the discount. If we get another leg down in this market and the name sells off aggressively, this could be a nice 8% plus type of return until year end.

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