He added: “We are finding opportunities in cyclicals.” When asked for an example of a high-yield bond that had become more attractive as prices declined in the wake of Trump’s April 2 tariff announcements, McClain pointed to Saturn Oil & Gas Inc. (CA:SOIL), which he said was one of the top holdings of both funds and which had recently been trading at 89.
This is a Canadian oil producer with a market capitalization of $228 million. Of course, as a bondholder, McClain isn’t concerned about the market value of Saturn Oil’s common shares. If the company were to become bankrupt, the bondholders would be its new owners and the common equity would be wiped out.
Saturn Oil issued $650 million in senior bonds due in 2029 with a coupon of 9.625%. A bond’s coupon is the interest rate the issuer pays, based on the par value.
McClain said the Saturn Oil bonds had a credit feature that was “uncharacteristic” in the high-yield space: forced amortization. “The company must retire 2.5% of the bonds each quarter, at a price of 103.813 cents on the dollar,” he said.
He explained that Brandywine Global was “part of the original investment group” when the Saturn Oil bonds were underwritten by Goldman Sachs and that Brandywine Global had requested the amortization feature.
He said that Saturn Oil had already paid down about $49 million of the $650 million, and that what made him even more comfortable as an investor is the year-end valuation of the company’s PDP at $1.4 billion.
PDP is industry jargon for an oil producer’s “proven developed producing” reserves of petroleum. The price of front-month contracts for West Texas crude oil (CL.1) on the New York Mercantile Exchange had declined to $62.35 a barrel Monday from $71.72 at the end of 2024.
Even with that decline, McClain said he feels comfortable with such a large collateral cushion, with additional protection from Saturn Oil’s hedging activities to protect against commodity-price declines and currency fluctuation.
Back to the market
McClain said he and his colleagues couldn’t have had a playbook for the “massive shock in a short period” brought about by Trump’s tariff announcements. But he cautioned investors not to overreact: “We have seen from vicious snapbacks that the moment we get any positive move, investors don’t want to be caught offsides.”
“It is a lot easier to allocate capital to fixed income in this environment [than it is to stocks] because we are levered to the balance sheets,” he said, adding that most companies “were in good shape” heading into April.
McClain said he and his colleagues were continuing to take “advantage of microdislocations in the market.”
“We are trying to find the loose change in couch cushions,” he said, adding: “The outcome is the income.”
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04-28-25 1355ET
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