Hastings High Yield Fund (HHY)

HHY is in wind-down mode: underlying assets are gradually being sold-down and cash is being returned to shareholders. It's a true cigar-butt.* 

A chunk of cash has already been paid to shareholders. HHY has now gone ex a further 18.1c capital return. HHY's estimated NTA as at 31 May is 69c; therefore the NTA is ~50.9c. HHY closed is 37.5c. 

This is the estimated run-off of the investment portfolio (provided by the fund):

Investors will now need to wait until September 2015 to get the bulk of their money back. In addition, income payments should still continue to be made assuming the underlying investments continue to provide a return. The table below shows the estimated remaining assets and applicable interest rates:

Corey Environmental is due to mature in 2014 while Maher Terminals is due to mature 2015.

I've assumed it costs $1.4m p.a. to run the fund (based on the current annualised rate - which is a bit rough and ready), no currency impact and the investments will be realised at the current book value at the targeted dates. Based on this, I come up with an annualised return of 18% p.a. if shares are bought at the current price of 37.5c.

These numbers are back-of-the-envelope and should not be relied upon without further examination. The main problem with this type of trade is that usually the upside is capped: it is rare that assets of this type will sell substantially above book value. Therefore, the primary source of surprise would probably be to the downside.

That leads us to risks. All sorts of things can go pear shaped here. The valuations may change substantially - they already have in some other cases such as the Hyne & Son investment. Cory Environmental is on a 'negative' credit watch. Maher Terminals is a large part of the portfolio; a small hiccup may have a big impact on the HHY valuation. And then of course is the potential for left field events.

All very interesting. I am doing some more digging on this one.

Kristian 

Disclosure: small position in HHY 

*(check out page 94 of The Essays of Warren Buffett: Lessons for Corporate America)