First Eagle high-yield municipal bond fund off to strong start

John Miller joined the boutique firm First Eagle Investments in late 2023 where launched a high-yield fund that climbed to $5 billion the primary 12 months with returns of virtually 12%.

First Eagle

First Eagle Investment’s latest high-yield municipal bond fund ballooned from scratch to greater than $5 billion in its first 12 months — and generated market-beating returns of nearly 12% — buoyed by a wave of money flowing into high-yield funds and an investment strategy that seeks value in market pockets that other investors avoid.

It marked a dramatic debut for one in every of the municipal market’s most closely watched high-yield startups led by outstanding portfolio manager John Miller.

“The timing was impeccable,” said a high-yield muni investor. “High-yield did rather well this 12 months and First Eagle outperformed that. They were getting money at the appropriate time they usually were investing in the appropriate names,” the investor said. “Time will tell in the event that they do it again.”

Miller, 57, joined the Latest York City-based firm in January 2024 after 27 years at Nuveen, where he built up the market’s largest muni junk bond fund and have become a powerbroker known for his expertise of the often-opaque and cultish world of high-yield municipal finance.

He left the investment giant amid fallout from a contentious lawsuit with competitor Preston Hole Community Capital.

Since joining First Eagle, Miller has began to duplicate what he built at Nuveen, buying most of the same credits, hiring former Nuveen employees and quickly scaling up its funds.

More hirings are likely on the horizon, and the firm plans to launch two latest muni funds, in keeping with SEC filings. The First Eagle Core Plus Municipal Fund will spend money on higher-rated state and native debt. The First Eagle Tactical Municipal Opportunities Fund shall be an interval fund that shall be allowed to have as much as 25% invested in distressed, bankrupt or special situation debt, in keeping with the SEC filing.

The primary success was quickly securing approval to market to financial advisors, a process that may take up to a few years, Miller told The Bond Buyer.

“The entire means of platform placement has gotten far, much more rigorous through the years and more selective and more hoops to leap through,” Miller said. Firms generally would love to see a completely built-out team and “not less than a number of hundred million under management,” he said. “That creates a chicken and egg situation — how do you pay to construct a team and get the primary $400 million to take to the key brokers and get it on their platform? The primary success is solving that issue.”

The status of Miller and muni veterans Bryce Pickering and Carl Katerndahl, coupled with their investment strategies and First Eagle’s assets, accelerated the means of winning approval, Miller said.

“It creates a few of the distinctiveness of the story,” he said.

At the identical time, after two tough years of fund outflows, money was flowing into the market again. Miller and his team built the funds during a 12 months by which high-yield funds saw inflows for all but a handful of weeks.

The team sifted through challenged sectors like senior living, higher education and dirt deals, on the lookout for deeply discounted or undervalued bonds to seek out pockets of value. They avoided the normal high-yield sectors of Puerto Rico and tobacco bonds, each of which rallied in late 2023 and were, in First Eagle’s estimate, overvalued. The move proved prescient as each sectors saw flat to minimal returns last 12 months.

“We’re at all times taking a look at all the things — it is not one large thing but just many, many little things,” Miller said of the investment strategy. “It’s loads of individual blocking and tackling.”

The fund’s first purchase was a set of senior living facilities in Texas, Oklahoma and Colorado called Sanctuary that was trading at a deep discount last January, Miller said. The paper was trading at around 73 in February and climbed to 99 by late November, in keeping with Electronic Municipal Market Access, and Miller said the bonds were a number one contributor to performance last 12 months.

The fund bought debt issued for the Centennial Yards development in downtown Atlanta and subordinate debt for the Miami Worldcenter development, each so-called dirt deals that proved to be top performers last 12 months.

One other top performer was Florida’s Brightline passenger train, a outstanding name within the high-yield market long owned by Nuveen under Miller’s leadership.

The credit now occupies the highest spot within the First Eagle High Yield Municipal Fund, accounting for just below 7% of the portfolio. The second-largest position is Brightline West, set to be the nation’s first electric-high speed rail line that can run between Las Vegas and southern California.

A “little bit of panic” amongst investors about trends within the private higher-education sector offered some opportunity as well, Miller said.

“We’re thoroughly aware of the macro trends” which have pressured among the smaller colleges, but “nevertheless, some [credits] have been overly punished,” he said. “People got really, really nervous and that created some value opportunity for us on the secondary market.”

The firm bought some bonds for the struggling Michigan-based Albion College that were trading at about 50 cents on the dollar and that were called at par a number of months later, Miller said. A tranche of the faculty’s bonds issued through the Michigan Finance Authority with a 4% coupon due in 2041 were trading in November at 64.5, down from 82 in February.

Miller’s team also bought bonds for one in every of the market’s highest-profile distressed credits, Latest Jersey’s American Dream mall. The struggling shopping mall has missed a series of interest payments, and most recently in December tapped reserves for interest payments. It is also within the midst of litigation brought by the developers who’ve challenged the tax assessment valuation for tax years from 2019 through 2024.

First Eagle paid 102 for a piece of the revenue bonds backed by payments in lieu of taxes, betting that the mall will overcome its legal disputes and proceed to grow its business.

The dispute over the property tax payments “taints” the credit, Miller admitted, but “we expect that the credit will get through that phase of it on the legal and tax side, and the worth of the ability is being proven by people who find themselves going there.”

Looking ahead, Miller said he expects to see some volatility around rates of interest but is optimistic in regards to the credit landscape and provide and never overly anxious about threats to the tax-exemption coming out of Congress.

“We’re in a very good position one 12 months in,” Miller said. “We have gotten loads completed, the team is completely happy to be here and dealing together well,” he said. “There’s loads to look at within the 12 months ahead but it surely needs to be very interesting and we’re in a robust position.”

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