Ackman Bets Against Junk Bonds, Now Resurgent

Bill Ackman, who reaped a bonanza betting against the bond market during the winter panic over the pandemic, is back at it. Only this time, he’s just wagering against the high-yield segment of the fixed-income class.

All he’ll say is that he is targeting a junk index. “We have today a short position in a high-yield index,” he told CNBC. “We are bearish on highly levered companies.”

This is a contrarian move. Junk bonds lately have staged a revival after plunging, along with stocks and other bonds during the February-March nightmare, which ended with the Federal Reserve’s move to bolster fixed income by buying bonds.

The Bank of America (BofA) high-yield index sank 20.8% amid the wintertime unpleasantness, which at least wasn’t as awful as the S&P 500’s fall (34%). Since then, as stocks revived, so did high-yield: The BofA benchmark is almost back to where it started the year.

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The Fed’s corporate debt purchases have been confined to investment grade and “fallen angels”—bonds that fell into junk status recently. But the fact that the central bank is disposed to help these debt issues has had a halo effect on other junk.

Ominously, however, a number of strategists now are expecting the recession and COVID-19 to drag on, delaying reopening businesses, and that would stand to have a nasty effect on high-yield bonds

“The highly levered businesses will struggle because it will take time for the economy to reopen,” said Ackman, who heads hedge fund firm Pershing Square Capital Management. “I don’t think the Fed is going to bail out companies with too much debt.” In other words, it won’t relent and purchase junk bonds that aren’t fallen angels.

Overall, Ackman said he is bullish and has long positions (98% of his assets) in stocks ranging from Hilton to Starbucks. “We are not short any stocks,” he explained. “We are obviously bullish on America, owning restaurant companies, hotel companies, real estate development companies. These are a bet that the country will recover.”

That’s not to say that heavy-debt companies will share in the bounty. His office didn’t return requests for comment and to specify exactly what junk vehicle he is shorting. A likely candidate is the SPDR Bloomberg Barclays High Yield Bond ETF, the largest junk exchange-traded fund ($29.3 billion in assets).

This fund, which tracks a different high-yield index than BofA’s, is down just 1.3% this year, according to Morningstar data.

Ackman’s winter coup garnered him $2.6 billion from spending $27 million on credit default swaps, a hedge against both investment grade and junk indexes. Leading up to that dark time, he drew a lot of attention, not all of it positive, by warning that “hell is coming” and urging the White House to shut down the country.

There’s a case to be made that a rash of junk defaults lies ahead. Already, high-yield-rated companies such as Chesapeake Energy, which pioneered the extraction of shale gas, and storied apparel retailer Brooks Brothers Group have filed for Chapter 11.

Indeed, over 30 American companies with debts exceeding $1 billion have already sought bankruptcy protection in 2020. That number is likely to top 60 by year-end, predicts Edward Altman, professor emeritus at New York University’s Stern School of Business and the leading authority on high-yield.

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Tags: Bankruptcy, Bill Ackman, defaults, Edward Altman, ETFs, Federal Reserve, Junk Bonds, Pershing Square Capital Management

About 217 businesses in the S&P 500 have publicly supported the Black Lives Matter movement to show solidarity and protect their reputations. Question: How sincere are they?

Shareholders continuing to speak out against racial injustice have brought the issue to the fore for many companies. And how well a company supports this endeavor will have a bigger impact on corporate environmental, social, and governance (ESG) scores, S&P Global Ratings analysts said.

Exactly how much it will impact sustainability ratings is unclear. But analysts consider the growing civil and corporate responses to George Floyd’s death to be a tipping point as stakeholders increasingly demand businesses reflect their social values.

Companies receive ESG scores—which a growing number of investors use to help select where to put their money—from various organizations, including Standard & Poor’s, Refinitiv, and Institutional Shareholder Services (the parent of CIO).

About 43% of companies in the S&P 500, or 217 businesses, have publicly made statements to show their solidarity for the Black Lives Matter movement and to protect their reputations, according to the S&P Global Ratings report. The companies most likely to have made public responses were in consumer goods or the financial sector, while the businesses least likely to announce support were in energy, industrials, or materials, the report found.

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But making public statements is not enough to appease internal or external stakeholders. Some companies supporting Black Lives Matter are late to the cause, and get chided, particularly from Millennials or Gen Zers, who question the business’ sincerity.

Financial institutions that have opened their purses to support the Black Lives Matter movement have been knocked for a history of discriminatory lending. While Black-owned firms are more likely to apply for bank loans, less than 47% of applications are approved, according to Federal Reserve data. In 2017, JPMorgan Chase settled a lending discrimination lawsuit for $55 million. In 2012, Wells Fargo reached a $175 million settlement with the Justice Department for allegedly charging higher interest rates and fees to Black American and Latino clients.

After taking to social media to express support for Black Lives Matter, French beauty giant L’Oréal was sharply criticized for dismissing Black model Munroe Bergdorf from a 2017 campaign after she wrote a post denouncing racism at the “Unite the Right” rally in Charlottesville, Virginia. “Where was my support when I spoke out? Where was my apology? I’m disgusted and writing this in floods of tears and shaking,” Bergdorf wrote last month on Instagram.

Instead, S&P analysts reported increasing investor interest in whether companies are addressing the lack of diversity among their ranks, the report said. Companies such as cybersecurity firm Fortinet, Gilead Sciences, Morgan Stanley, and Mastercard have promised to better disclose information on their demographics after shareholder motions were filed.

Other ESG leaders have also advocated for better disclosures from businesses. Last month, the chief executive of responsible investing firm Calvert said he will push companies to provide information on racial demographics, as well as pay equity across race and gender.

Calvert CEO John Streur wrote: “We need information from companies about the outcomes they are achieving, not only the values they espouse, and it is our duty as shareholders to hold them accountable for inaction.”