Third Avenue Management finally got around to seeking and obtaining permission from the Securities and Exchange Commission to enact a plan it announced last week that sent shivers through the high-yield debt market.
On Wednesday, Third Avenue Management received approval from the SEC to "suspend the right of redemption" until it completes the liquidation of its focused credit fund. Today's filing by Third Avenue to receive that approval came after the firm already had announced last Friday that it was freezing redemptions as it tried to liquidate the fund's portfolio.
The SEC "expressed concerns" with that plan, according to Wednesday's filing. The broader investment community also was concerned with Third Avenue Management's actions; SEC regulations require that mutual fund shares be redeemable at any time, and suspending redemption requires SEC approval.
The SEC's approval comes with significant caveats.
"The Commission required the fund to put in place investor and market protections, including ongoing Commission oversight and provisions involving an orderly and fair process as a condition of its approval of the order," an SEC spokesperson said in a statement emailed to Real Money.
Third Avenue Management's announcement on Friday sparked a mini-panic in the high-yield debt market that was addressed by Federal Reserve Chairwoman Janet Yellen in a press conference following the Federal Open Market Committee meeting.
"Third Avenue Management's Focused Credit Fund was a rather unusual open-end mutual fund," Yellen said. "It had many concentrated positions and especially risky and illiquid bonds."
Indeed, the vast amount of illiquid holdings in the fund became an even bigger problem as the fund had $1.1 billion in estimated net outflows in 2015, which accounted for 145% of the remaining net asset value of the fund, the filing stated. As the redemptions mounted, the fund was unable to find buyers at "rational prices" for its remaining holdings as it had already sold its more-liquid holdings, according to the filing.
In obtaining approval from the SEC to freeze redemptions in the fund, Third Avenue Management believes it will be able to "liquidate its assets in an orderly manner and prevent the fund from from being forced to sell assets at unreasonably low prices to meet redemptions." The goal is to make sure the fund's remaining shareholders are treated appropriately, the filing stated.
Third Avenue Management's recent woes raise questions about the type and amount of low-rated, highly illiquid assets that are reasonable to hold in a mutual fund portfolio. Mutual funds are expected to be highly liquid investments, which would imply that the underlying assets should have pricing transparency. By contrast, low-rated assets could be appropriate in a hedge fund-type investment, which doesn't have the same liquidity and pricing requirements.
However, the filing repeatedly states that the fund faces difficulty in selling the remaining assets at prices the fund deems to be "fair" and "reasonable." This raises questions about how the fund has been valuing its assets as well as what valuations were communicated to investors.