Pender Credit Opportunities Fund – Q1 2025
Dear Co-investors,
We sincerely thank you for partnering with us in the Pender Credit Opportunities Fund. We are truly grateful for the trust you have placed in us by allocating your capital to this strategy.
The Fund is focused on identifying and investing in securities of financially challenged businesses that are trading below our assessment of their intrinsic value. This approach creates opportunities for unique, high-conviction investments.
Fund at glance: (Period: January 21 to March 31, 2025)
- Portfolio returned -1.4%
- Benchmark[1] returned 0.9%
- Portfolio’s Yield to Maturity: 10.6%
- Portfolio’s Current Yield: 6.03%
- Total Net Asset Value: $14.7 million
- Total number of securities invested: 31 among 27 issuers
Market Outlook: Challenging Times Ahead—An Environment We Have Been Preparing For A Rapid Shift in Market Conditions
While we expected more market volatility, the speed of its arrival has been surprisingly fast. Geopolitical tensions—especially the sudden use of tariffs—have sent shockwaves through fixed income markets, driving sharp selloffs across most asset classes, with gold as the standout exception. Whether these tariffs are a short-term negotiation tactic, or a lasting policy shift remains unclear. What is certain is that they have injected a high level of uncertainty into securities, shifting focus from company fundamentals to broader macro risks. On the upside, for us, volatility is not just something to manage—it is also a source of opportunity.
Bond Market Volatility: A More Subtle Warning
While equity market swings often dominate headlines, the growing turbulence in bond markets may be more concerning. Both markets are showing signs of strain, hinting at a possible liquidity crunch. One area drawing attention is the instability around “the basis trade,” which is raising red flags for systemic risk.
Still Early—Opportunities Are Emerging, but Caution Remains
We are not sounding an “all-in” signal just yet. With over 24% of the Fund still allocated to investment-grade or Treasury securities, we have meaningful dry powder ready to deploy. Should the recently proposed tariffs be fully implemented and sustained, we expect further market dislocation, especially in more cyclical segments.
Credit markets still offer room for additional spread widening, but they are already significantly more attractive than they were a quarter ago. We believe, this repricing has created selective opportunities where investors are now being better compensated for taking on risk. While we may not have reached the absolute bottom, the early signs of a market reset are taking shape.
For instance:
- US High Yield spreads (Bloomberg US Corporate High Yield Index) have widened to +375 basis points, roughly 100 bps above the recent low of +281 (Feb 18, 2025)—a move of about 33%.
- BBB Investment-Grade spreads (Bloomberg US BBB Corporate Index) have widened to around +120, up 25 basis points and 27% off the lows.
- Since the global financial crisis, high yield spreads have generally ranged between 300–650 bps, while investment-grade spreads have hovered between 100–200 bps roughly 84% of the time since March 2011.
Fund Activities
We are optimistic about the outlook for 2025 and beyond. Right now, we hold 17 positions in securities with credit spreads over 1,000 basis points—offering potential for attractive returns. We are actively working with four issuers on credit workouts, including a recently completed and successful engagement with Lucid Group. In short, we see meaningful opportunities in the current portfolio, with a growing pipeline of ideas on deck. Below are a few examples that highlight the types of opportunities we are finding:
Spirit Airlines, Inc.: After its planned merger with JetBlue fell through in 2024, Spirit Airlines filed for Chapter 11 to manage liquidity issues and upcoming debt maturities. We took part in the restructuring and converted our secured notes into take-back debt, reorg equity and rights offering participation. As is typical in bankruptcy, valuations were low—Spirit’s equity was priced at just $805 million, with the rights offering issued at a steep 30% discount ($14). Still, on a per-aircraft basis, Spirit was the most undervalued airline in its peer group. We capitalized on the panic selling, adding both debt and equity at compelling prices. With a strong entry point and potential industry consolidation ahead, this position offers good risk to reward investment.
New Fortress Energy Inc.: In Q1 2025, we initiated a position in the first-lien bonds of New Fortress Energy, a company focused on LNG shipping and energy infrastructure across Latin America and the Caribbean. While the company owns high-quality assets, it is currently managing a short-term cash crunch as it works to complete several key projects. At the time of investment, its 2026 and 2029 bonds were yielding over 17%. A recently announced $1 billion sale of its Jamaican operations is expected to ease near-term liquidity pressure. In addition, once ongoing projects are completed, management expects a 50% increase in cash flow, which would help strengthen the balance sheet. To further improve its financial position, the company is also exploring the sale of another $1 billion in non-core assets[2]. Importantly, New Fortress is led by its co-founder—also a co-founder of Fortress Investment Group—who, along with his partners, holds a 40% equity stake in the company.
Nio Inc.: We added a position in the puttable convertible notes of NIO, a Shanghai-based electric vehicle manufacturer. We believe the EV sector has reached a turning point, and NIO—backed by strong capital, advanced technology and growing global market share—is well-positioned to benefit. NIO’s cash position exceeds its total debt, and sales momentum continues to build. We expect the company will comfortably meet its put obligations on its US dollar-denominated notes maturing in 2027 and 2028. At entry, our position yielded over 15% to the put dates.
Cardlytics Inc.: We also initiated a position in the deeply discounted convertible bonds of Cardlytics Inc., an advertising technology company embedded within banking apps. It partners with leading US financial institutions and shares revenue generated through targeted offers. Some investors have grown impatient with the pace of Cardlytics’ path to profitability, and its recently issued convertible bonds fell to as low as 50 cents on the dollar. We believe the company has strong prospects, particularly with the launch of its new partnership with American Express in 2025, which could significantly enhance revenue and cash flow.
Lucid Group, Inc.: We entered a position in Lucid Group’s 2026 convertible notes at approximately 77 cents on the dollar, with a yield-to-maturity of ~16%. Our thesis centered on improving vehicle deliveries and deepening ties with the Saudi sovereign wealth fund (Public Investment Fund), Lucid’s key strategic investor. Following active engagement with the issuer, we successfully tendered our full position back to the company at 88.5—delivering a 15% premium to our cost. This entire investment cycle occurred within a single month, highlighting our ability to identify and execute high-conviction, time-sensitive opportunities.
Looking Ahead
We expect continued volatility in the near term, but remain focused on fundamentals. Our process stays consistent: avoid reacting to short-term noise, invest in well-structured credit, and act when risk is mispriced and the margin of safety is strong. We believe this is a constructive time to invest with us. As always, we thank you for your trust. It is what allows us to stay focused on doing the work that matters most.
Parul Garg
April 24, 2025
[1] ICE BofA US High Yield Index
[2] Company filings
