Investors ponder a high-yield market without Nuveen’s John Miller

Buy-siders digesting the departure of Nuveen’s head of municipals John Miller from the high-yield market say they’re watching the new management’s approach to some of his largest and riskiest positions, and whether his exit will ease the concentration that characterized the market under his influence.

“Talk about someone who defines a brand,” a buy-side source said. “Nuveen and John have always been synonymous. Were the big investors investing in John, or were they investing in Nuveen’s investment process? I get the sense that’s the type of question that most advisors or big believers in the fund will find themselves asking.”

Nuveen is reassuring market participants that its investment process, supported by a deep bench of analysts and managers, will remain unchanged after the prominent portfolio manager steps down on June 1.

“John has left the platform in the best of shape,” said Daniel Close, Miller’s successor, Tuesday during a webinar hosted by Nuveen. “I sat right next to John for the last two decades,” Close said. “Our investment philosophy remains unchanged … We have the same process, people and philosophy going forward.”

Chicago-based Nuveen, the global investment manager of Teachers Insurance and Annuity Association of America, has $188 billion of municipal assets under management and runs more than 60 funds, including the High Yield Municipal Bond Fund, Miller’s marquee fund and the market’s largest.

Nuveen announced Monday that Miller, 56, will step down the same day it announced a settlement with Texas-based high-yield shop Preston Hollow Community Capital. The agreement, which calls for Nuveen to invest in Preston Hollow, wraps up four years of contentious legal battle that portrayed Miller as an aggressive manager who attempted to organize a boycott of the smaller firm among the big Wall Street banks.

The size of Nuveen’s high-yield portfolios and Miller’s aggressive style shaped a market that became increasingly concentrated and less transparent over the years, market participants said.

“He presided over the concentration of the high-yield market into fewer hands, which didn’t use to be the case and is not a positive development,” a source said. The market used to be “a bit more competitive and congenial, priced more fairly and with wider distribution.”

Concentration “clearly reduces price transparency and it makes evaluation a little suspect and not totally market-driven,” the source added.

Nuveen’s High Yield Municipal Bond Fund’s net assets totaled $17.7 billion as of Feb. 28, 2023. That’s down from $21.5 billion for the year ending March 31, 2022, after a year of brutal, record outflows across the market.

The largest high-yield fund in the municipal market, it holds 3,311 positions with a relatively long effective duration of nearly 14 years. Nearly 76% of the fund is unrated, according to Nuveen’s website.

The fund’s top 10 holdings feature junk credits that some buy-siders said may be difficult to sell, including prominent ones like the American Dream megamall, which is in default, and Florida’s privately run high-speed train, Brightline.

“Given the concentrated position that some of the higher-yielding funds have, I assume new management will want to take a look at those large positions and figure out what they want to do with them, and that ripples out to other investors in the market,” said a high-yield investor. “You’re going to want to clean up those things that you can blame on the former person, that’s just the nature of it,” the investor said. “But you need a buyer and a seller, and to me that’s the biggest unknown.”

Another investor said the firm has “no choice” but to stick with its credits for now. “But going forward I think [new management will] probably not be as aggressive as John in terms of having that much exposure to single deals.”

Close said Tuesday that he doesn’t plan to make “structural changes” to any portfolios. “I would stress the continuity of our process,” he said.

Nuveen is currently restricted from selling its top holding, a non-municipal credit called Energy Harbor Corp., which makes up 8.4% of the high-yield fund. Energy Harbor, which owns nuclear plants, has been one of the fund’s top performing investments, according to Nuveen’s March 2022 annual report. The firm acquired the credit when Energy Harbor, formerly FirstEnergy Solutions, emerged from bankruptcy in 2020. Nuveen held roughly $190 million of the company’s debt and became one of the top two largest shareholders.  

Nuveen hopes to close a sale of Energy Harbor in the second half of the year to Vistra Corp., which announced in March that it would buy the nuclear company for $3.43 billion, Close said.

“This is a position that we’ve had a very favorable performance of, and we are looking to harvest with a sale sometime in the second half of the year,” he said.

The deal would include $3 billion in cash, with Nuveen and the other top shareholder, Avenue Capital Group, getting a combination of cash and a 15% ownership interest. In addition, Vistra Vision will assume around $430 million of net debt from Energy Harbor. The deal, which still needs regulatory approval, would mean that Nuveen “will no longer have the trading restrictions” on the credit, Close said.

Below Energy Harbor, four of the fund’s top 10 positions consist of unrated Brightline bonds that financed a private rail project for Brightline Holdings, which is backed by Fortress Investment. Nuveen is the largest holder of Brightline debt.

The project, which launched in 2018 between Miami and West Palm Beach and is now in the midst of an expansion to Orlando, was incurring operating losses even prior to the pandemic, during which the company halted all service for several months. Ridership in the last year has enjoyed a strong increase, the company said in recent bond documents. A March bond sale generated proceeds that in part will go to reserve funds on the 2019 bonds, according to the official statement.

A chunk of Brightline 2019A bonds with a 6.25% coupon and 2049 maturity, which make up the fund’s second-largest holding, traded on Wednesday for 99.375. A chunk of the 2022A bonds with a 7.25% coupon and 2057 maturity, which are the fund’s sixth-largest holding, traded on March 27 for 100.66.

The fund’s third-largest position is Wisconsin Public Finance Authority limited-obligation payments-in-lieu-of-taxes bonds issued for the American Dream Meadowlands. The paper has a 7% coupon and is due in 2050. The bonds, which are in default, make up 1.5% of the fund. They last traded on March 17 for 87.75 and an 8.1% yield.

“They have some dreck in their portfolio that they mismark,” said one high-yield portfolio manager. “Maybe [some bonds] are marked at 65 … what happens when you want to sell and they’re really 55?” the PM asked. “You’re going to get clipped and how do you meet those redemptions?”

“It’s hard to pivot when you’ve got a portfolio that big,” the manager added.  

Meanwhile, other high-yield funds will likely be looking for any opportunity to take advantage of the shakeup by touting their funds to financial advisors and asset managers who have allocation authority, said another buy-side source.

“Every shop with a high-yield fund is going to look for a way to view it opportunistically,” the buy-sider said. “Investment performance alone does not sell; what sells is branding, marketing and distribution. Anytime there’s a big change at an investment firm, asset allocators may choose to put a pause on everything because they want the reassurance that everything is sufficiently consistent,” the investor said. “That’s the ‘key person’ risk and why many shops have multiple portfolio managers for their funds.”

Some investors wondered whether Miller would make a return to municipal finance when the dust settles.

“Nuveen is the 300-pound gorilla in the muni demand universe on the buy side,” said an underwriter. “He could end up at a 200-pound gorilla shop.”

Christine Albano contributed to this story.