The Principal Street Partners Distressed Municipal Bond Opportunity Strategy applies a distressed investment strategy in the municipal credit market. The objective of the strategy is long-term capital appreciation with a tax-free income component. The strategy primarily acquires bonds in smaller sizes or odd-lots to ensure the best pricing for limited partners, builds positions over time and sells when pricing has improved. The resulting portfolio is diversified across credits, geographies and types of municipal credit as well as uncorrelated to other asset classes.
We seek out the best opportunities based on upside potential and market misperception across sectors, including:
— Bonds purchased in the secondary market at broker auctions as opposed to the offering side to achieve the best possible prices
— Purchase investments at substantial discounts to the value the underlying assets would fetch in a worst-case scenario, such as liquidation or bankruptcy
— Invest in securities that are mispriced or otherwise dislocated
— Manager has spent entire career in municipal bond market
— Manager has managed distressed municipal portfolio for last 15 years
— The municipal bond market is a $3.7 trillion dollar negotiated market
— The distressed municipal market is approximately $180 billion in size
— Unlevered return profile
— A percentage of the returns generated are federally tax exempt due to the interest received from the tax-free bonds in the portfolio
— 1-3 year holding periods limits short-term capital gains
The distressed municipal bond market is roughly $180 billion in size with the opportunity set expanding rapidly due to the COVID-19 virus. Within this space, the strategy focuses on smaller, secondary issues, typically $10 million to $150 million in size. These smaller issues tend to be more heavily owned by retail investors and are generally not covered by larger institutions or analysts. The Principal Street Distressed Opportunity Strategy seeks to capitalize on bonds that are driven down quickly by negative news, allowing us to invest in municipal bonds at deep discounts relative to the underlying asset value. We also take an activist role and work with other distressed holders on bondholder committees to enhance the value of assets and exit position.
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