, Crain News Service
BOSTON -- At last report, Fidelity Investments was holding nearly $100 million worth of junk bonds issued by Iridium LLC, the satellite-based phone network facing bankruptcy. Ten Fidelity funds -- Capital & Income, Puritan, Equity-Income, Strategic Income, Asset Manager, Asset Manager Growth, Asset Manager Income, Advisor High Yield, Advisor Balanced, and Advisor Strategic Income -- held a combined $98.6 million worth of Iridium notes when they last reported fund holdings to Morningstar Inc. in Chicago.
Because the Morningstar report shows the funds held the bonds between September and March 31, it's difficult to determine whether any are still holding the troubled bonds, or how big a loss the funds took if they sold the securities.
"It's a bit surprising," said Eric Jacobson, fixed-income editor for Morningstar. "If anyone was going to get caught holding the bag, you wouldn't think it would be Fidelity because their research is so highly regarded. They are known to be on top of their high-yield research."
They can work it out
Mr. Jacobson added he's not willing yet to second-guess Fidelity's managers. "Depending on the company and the bonds in question, if the manager feels there is a reasonable chance of a workout they may hold on to them. It's too early to speculate as to whether they sold them or might be planning to sell them," he said. Fidelity, for its part, isn't offering any details. "We don't discuss debt or equity issues or whether we hold these bonds," says a spokesman.
Fixed-income traders and analysts say few funds are still holding the bonds. "The people who are holding now are looking to see what comes after the restructuring," said an analyst at a Wall Street investment house who requested anonymity. "The long-term holders have written it all down and taken a beating." Two weeks ago, majority investor Motorola Inc. warned the global phone and paging venture might have to be shuttered because of widening losses. Iridium executives have since invoked a 30-day extension to make a $90 million interest payment on the company's $1.45 billion outstanding senior notes, which were trading at 18 cents to 20 cents on the dollar early last week.
Fidelity's holding was the biggest, but it isn't the only one. St. Louis-based Lindner Asset Management Inc. held Iridium notes valued at $31 million last December in its Asset Allocation and Utility funds. The company says it liquidated the securities in late February and early March for an average 74 cents on the dollar.
Similarly, Jack Utter, a portfolio manager at American Express Financial Advisors in Minneapolis says he liquidated his Iridium holdings in the $1.1 billion IDS (now APX) Extra Income fund "several months ago." According to Morningstar, the fund held $10.9 million worth of the notes as of March 31.
Although many funds have swallowed losses, none appears to have suffered significant bruisings.
"Even though a fund is going to get hurt, it's not going to drop it to its knees," thanks to their diversified holdings, said Mr. Jacobson. "Most high-yield fund managers expect a certain percentage of their holdings to suffer a default now and then. It's the nature of the beast."