A splashy debut for First Eagle's high-yield muni fund

First Eagle Investment's new high-yield municipal bond fund ballooned from scratch to more than $5 billion in its first year ? and generated market-beating returns of nearly 12% ? buoyed by a wave of cash flowing into high-yield funds and an investment strategy that seeks value in market pockets that other investors avoid.

It marked a dramatic debut for one of the municipal market's most closely watched high-yield startups led by prominent portfolio manager John Miller.

"The timing was impeccable," said a high-yield muni investor. "High-yield did really well this year and First Eagle outperformed that. They were getting cash at the right time and they were investing in the right names," the investor said. "Time will tell if they do it again."

Miller, 57, joined the New York City-based firm in January 2024 after 27 years at Nuveen, where he built up the market's largest muni junk bond fund and became a powerbroker known for his expertise of the often-opaque and cultish world of high-yield municipal finance.

He left the investment giant amid fallout from a contentious lawsuit with competitor Preston Hollow Community Capital.

Since joining First Eagle, Miller has started to replicate what he built at Nuveen, buying many of the same credits, hiring former Nuveen employees and quickly scaling up its funds.

More hirings are likely on the horizon, and the firm plans to launch two new muni funds, according to SEC filings. The First Eagle Core Plus Municipal Fundwill invest in higher-rated state and local debt. The First Eagle Tactical Municipal Opportunities Fund will be an interval fund that will be allowed to have as much as 25% invested in distressed, bankrupt or special situation debt, according to the SEC filing.

The first success was quickly securing approval to market to financial advisors, a process that can take up to three years, Miller told The Bond Buyer.

"The whole process of platform placement has gotten far, far more rigorous over the years and more selective and more hoops to jump through," Miller said. Firms generally would like to see a fully built-out team and "at least a few hundred million under management," he said. "That creates a chicken and egg situation ? how do you pay to build a team and get the first $400 million to take to the major brokers and get it on their platform? The first success is solving that issue."

The reputation of Miller and muni veterans Bryce Pickering and Carl Katerndahl, coupled with their investment strategies and First Eagle's assets, accelerated the process of winning approval, Miller said.

"It creates some of the uniqueness of the story," he said.

At the same time, after two tough years of fund outflows, cash was flowing into the market again. Miller and his team built the funds during a year in which high-yield funds saw inflows for all but a handful of weeks.

The team sifted through challenged sectors like senior living, higher education and dirt deals, looking for deeply discounted or undervalued bonds to find pockets of value. They avoided the traditional high-yield sectors of Puerto Rico and tobacco bonds, both of which rallied in late 2023 and were, in First Eagle's estimate, overvalued. The move proved prescient as both sectors saw flat to minimal returns last year.

"We're always looking at everything ? it's not one large thing but just many, many little things," Miller said of the investment strategy. "It's a lot of individual blocking and tackling."

The fund's first purchase was a collection of senior living facilities in Texas, Oklahoma and Colorado called Sanctuary that was trading at a deep discount last January, Miller said. The paper was trading at around 73 in February and climbed to 99 by late November, according to Electronic Municipal Market Access, and Miller said the bonds were a leading contributor to performance last year.

The fund bought debt issued for the Centennial Yards development in downtown Atlanta and subordinate debt for the Miami Worldcenter development, both so-called dirt deals that proved to be top performers last year.

Another top performer was Florida's Brightline passenger train, a prominent name in the high-yield market long owned by Nuveen under Miller's leadership.

The credit now occupies the top spot in the First Eagle High Yield Municipal Fund, accounting for just under 7% of the portfolio. The second-largest position is Brightline West, set to be the nation's first electric-high speed rail line that will run between Las Vegas and southern California.

A "bit of panic" among investors about trends in the private higher-education sector offered some opportunity as well, Miller said.

"We're very well aware of the macro trends" that have pressured some of the smaller colleges, but "nevertheless, some [credits] have been overly punished," he said. "People got really, really nervous and that created some value opportunity for us on the secondary market."

The firm bought some bonds for the struggling Michigan-based Albion College that were trading at about 50 cents on the dollar and that were called at par a few months later, Miller said. A tranche of the college's bonds issued through the Michigan Finance Authority with a 4% coupon due in 2041 were trading in November at 64.5, down from 82 in February.

Miller's team also bought bonds for one of the market's highest-profile distressed credits, New Jersey's American Dream mall. The struggling shopping center has missed a series of interest payments, and most recently in December tapped reserves for interest payments. It's also in the midst of litigation brought by the developers who have challenged the tax assessment valuation for tax years from 2019 through 2024.

First Eagle paid 102 for a chunk of the revenue bonds backed by payments in lieu of taxes, betting that the mall will overcome its legal disputes and continue to grow its business.

The dispute over the property tax payments "taints" the credit, Miller admitted, but "we think that the credit will get through that phase of it on the legal and tax side, and the value of the facility is being proven by people who are going there."

Looking ahead, Miller said he expects to see some volatility around interest rates but is optimistic about the credit landscape and supply and not overly worried about threats to the tax-exemption coming out of Congress.

"We're in a really good position one year in," Miller said. "We've gotten a lot accomplished, the team is happy to be here and working together well," he said. "There's a lot to watch in the year ahead but it should be very interesting and we're in a strong position."