# interest income, but coming to you in tax-advantaged form



## humble_pie

the Marret high yield income trust is an interesting new product, one of a small group of interest-bearing investments whose income gets paid out to beneficial owners in tax-advantaged ways. Not madoff or stanford or earl jones ways, but legit ways.

MHY.UN will hold derivatives of a portfolio of high-yield corporate bonds held by a counterparty. Issued a few weeks ago at $10, MHY.UN was pegged to return 8% mostly in the form of return of capital, which is not taxed when received but serves to lower the cost base of the security, becoming taxable as capital gain or loss only upon sale of the security. MHY units are presently trading on the TMX at about 10.30, which reduces the yield somewhat but still places it at double the yield of a 100% taxable GIC. There is a premium to NAV because of sustained demand.

Marret managers, several of whom are former Altamira bond specialists, are also looking at the historically very high spread between high-yield corporate bonds and their low-yielding distant cousins, the government treasuries, expecting that this spread will eventually resolve back down to normal levels as corporate bond yields drop and their prices rise.

the MHY.UN IPO issue was large at $215 million. There has been little publicity. The best description, in fact the only description, is the excellent prospectus available through a link on Marret's home page.

a major risk would be failure of the counterparty. In today's climate, as we approach labour day 2009, one cannot see this happening. Nevertheless the exchange tradeability of MHY is an attractive feature.


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## CanadianCapitalist

That's an interesting product. Thanks for the heads up. The website is here:

http://www.marret.ca/


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## leslie

The distributions will not be based on profits or income earned withing the fund ("_based upon the Manager’s estimate of distributable
cash flow_"). Cash can be generated most easily by selling positions. They say they require "_additional returns of approximately 5.22% in excess of its current cash yield .... through the sale of securities or other returns_" - whatever that means.

Yes, they say they have bought a forward contract to cover the principal value of the eventual redemption, but they can pre-sell it (cashout) '_to fund monthly distributions on the Units_". In other words you will just be getting your own principal back, and shrinking the NAV.

Credit spreads have narrowed A LOT since they determined "_Credit spreads of High Yield Debt are near historically high levels_".

I stopped reading after a few pages. Not for me.


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## humble_pie

i do believe that you stopped reading after the first few paragraphs of the introductory front matter that precedes the actual prospectus itself.

that is, you stopped when you came to the paragraph that recited:

"Marret believes that the credit cycle is in the late stages of Phase III and will enter into Phase I in the near future (see “The Offering —
Investment Rationale”). As a result, the portfolios of Marret High Yield Hedge Limited Partnership (“Marret LP”) and Marret Fund Ltd. (see “The Portfolio – Portfolio Composition”) have a significant allocation to cash and a current cash yield of approximately 5.24% per annum."

had you read the prospectus itself, on page 15 you would have come to the detailed explanation of what Marret means by their Phase I-III model. This model accounts for the cash holdings at this point in time, which are indeed yielding less than the projected distribution.

again according to the prospectus - and i have no reason to doubt the veracity of this document at this moment - the Marret managers are now exiting Phase III and shifting their investment stance into Phase I. That is, they are deploying cash into the long bond strategy as described in the extract below.

if their model has merit, this is the phase when total portfolio return will exceed the projected 8% distribution, thus compensating for any shortfall during the first few months of operation.

a prospective investor should bear in mind that MHY.UN is appropriate only for those who agree with the Marret phased approach to high risk debt markets. 

(from the prospectus, page 15)

Investment Strategy
.
The specific strategy employed by Marret from time to time in managing the Portfolio will depend on the phase of the credit cycle. In Phase I, Marret HYS Trust would adopt a long bias, with the return expectations being the greatest. In Phase II, Marret HYS Trust would have a neutral bias, with capital structure arbitrage (long debt/short equity) becoming the dominant strategy. Finally, in Phase III, Marret HYS Trust would be expected to have a greater allocation to cash, with derivative and shorting strategies being used to generate positive returns. In Phase III, Marret may short CDX North
America High Yield Index, which is widely used to hedge High Yield Debt portfolios.
.
Through all phases of the credit cycle, Marret will employ hedging strategies designed to protect the Portfolio against the risk of losses from currency fluctuations, interest rate changes and market declines. In addition, Marret may employ derivative strategies to invest indirectly in securities or financial markets, provided the investment is consistent with Marret HYS Trust’s investment objectives. Marret intends to hedge the majority (and not less than 75%) of Portfolio investments denominated in foreign currencies to the Canadian dollar.
.
Marret HYS Trust will also engage in short selling of securities that Marret believes to be overvalued, thereby offering the potential for gains as well as limiting the overall credit risk exposure of the Portfolio investments. The degree of short selling will depend on the phase of the credit cycle. In some cases, the equity securities of a company may be sold short to hedge a long position of the same company’s High Yield Debt. Marret believes that this is an effective hedging strategy, since deteriorating company fundamentals hurt the equity securities of a company more than the High Yield Debt, which tend to be protected by legal covenants and have a more senior claim on the company’s assets.


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## Rickson9

Just curious, how much interest income are you pulling in to begin considering this? For my wife and I, we don't seem to have a lot of interest income.


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I don't know what it is but I want it!!


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