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Summary
- During the second quarter, the Polen Credit U.S. Opportunistic High Yield Composite (the “Composite”) underperformed the ICE BofA U.S. High Yield Index, and outperformed the S&P UBS (UBS) (UBS) Leveraged Loan Index, net of fees.
- Below investment grade credit saw a whipsaw in performance this quarter, primarily due to the initial Liberation Day announcement and subsequent market recovery, with positive performance backloaded in May and June. Leveraged loans experienced continued weakness in the second quarter, underperforming high yield bonds.
- In Q2 Athenahealth, Inc. and HUB International Ltd contributed the most to total returns, while SportsNet New York (SNY) and Oldcastle detracted the most significantly.
- Polen Capital did not make any meaningful changes to portfolio positioning in the second quarter. Most trading activity involved purchases and sales in existing holdings
- As we continue into the second half of 2025, our primary concerns today are much of the same as in the first quarter, including continued market volatility, spread widening, and the Fed’s policy moves, potentially in response to ongoing trade wars and geopolitical risks.
- In our view, remaining patient and not overreaching for yield will leave our portfolios well positioned to take advantage of compelling opportunities in this period of instability.
Seeks Long-Term Yield & Income (Performance (%) as of 6-30-2025)
| The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Periods over one year are annualized. The gross performance returns for the Polen Credit U.S. Opportunistic High Yield Composite set forth above are gross of all fees except for trading expenses, deal-related legal expenses, and withholding taxes. Net returns reflect the application of actual management and performance-based fees to gross returns. Returns of the Polen Credit U.S. Opportunistic High Yield Composite are provided as supplemental information and complement a GIPS Composite report, which has been provided. The commentary is not intended to guarantee profitable outcomes. Any forward-looking statements are based on certain expectations and assumptions susceptible to changes in circumstances. Opinions and views expressed constitute the judgment of Polen Capital as of the date herein and may involve assumptions and estimates which are not guaranteed and are subject to change. |
Commentary
In Q2 2025, “Liberation Day” triggered volatility and prompted significant outflows from risky assets, causing markets to retreat early in the quarter. However, the trend reversed when tariff pauses were announced and geopolitical tensions eased, driving strong high yield inflows and performance through quarter-end. Although U.S. Treasury yields declined during the guarter, the Fed paused its rate-cutting cycle with base rates still elevated. Against this backdrop, high yield bond spreads—after widening early in the quarter—tightened, and the ICE BofA U.S. High Yield Index returned 3.57%. Gains were driven primarily by strong performance in May and June. High yield market gains were led by CCC-rated bonds, which generated a 4.28% return, while B-rated bonds returned 3.47% and BB-rated bonds returned 3.46%. The top performing sectors in Q2 were Healthcare, Services, and Real Estate, while the biggest laggards were the Banking, Energy and Retail sectors.
Similar to high yield bonds, leveraged loans rebounded throughout the second quarter as market sentiment improved following the April sell-off, CLO issuance increased, and fund inflows resumed. However, given the Fed’s dovish tone and expectations for lower rates, leveraged loans underperformed high yield bonds. The S&P UBS Leveraged Loan Index produced a 2.33% gain. Additionally, Brated loans outperformed both BB- and CCC-rated peers in the index, returning 2.49%, 2.17%, and 1.88%, respectively. The top performing sectors were Food & Drug, Housing, and Consumer Durables while the Utility, Metals/Minerals, and Food/Tobacco sectors were the biggest laggards.
Pivoting to primary market activity, high yield bond issuance approached $80 billion, though most of that issuance was used to refinance existing debt. Conversely, new issuance of leveraged loans declined almost 70% quarter over quarter. In Q2 2025, loan primary market activity totaled just $103.9 billion as the market continued to recover from April’s slowdown. Most new issuance proceeds were used for repricing and refinancing. Although leveraging transactions like dividends, M&A, and LBOs have begun to emerge. Further, CLO activity remains strong, however, most of this deal activity is related to refinancings, as net CLO creation is slightly below the average pace compared to last year.
Finally, according to data from J.P. Morgan, default activity in Q2 2025 increased relative to Q1 2025 as June 2025 default and liability management exercise (LME) activity was the highest YTD. However, this increase was driven primarily by 2025’s two largest LME transactions to date. With that noted, the trailing twelvemonth default rates for high yield bonds and leveraged loans (including distressed exchanges) sat at 1.41% and 3.79%, respectively. However, excluding distressed exchanges and LMEs, default rates fell to just 0.43% and 1.36%.
Portfolio Performance & Attribution
The Polen Capital U.S. Opportunistic High Yield Composite generated a total return of 2.63% gross and 2.52% net of fees during the second quarter. The Composite underperformed the ICE BofA U.S. High Yield Index by 94 bps gross and 105 bps net of fees.
During the second quarter, U.S. Treasury yields declined. Given the the Portfolio’s1 shorter duration relative to the Index, the duration effect for the quarter was negative. However, the Portfolio’s income advantage relative to the Index contributed to relative performance. In aggregate, the Portfolio’s reorganized equity positions detracted from absolute and relative returns. However, the Portfolio’s income advantage relative to the Index contributed to the Portfolio’s relative performance.
Attribution by rating shows that the quality allocation effect was slightly positive, driven primarily by the Portfolio’s overweight to CCC3-rated bonds. Conversely, the Portfolio’s aggregate security selection effect by rating was negative. Specifically, the Portfolio’s holdings across the CCC-rated spectrum underperformed those of the Index and detracted from relative performance.
Turning attention to sector attribution, the sector allocation effect was positive. This was primarily driven by the Portfolio’s underweight to the Energy sector and overweight to the Healthcare sector. Further, the sector security selection effect was negative. The Portfolio’s holdings in the Healthcare, Basic Industry, Media, and Automotive sectors lagged those of the Index detracting from relative performance.
Notable issuers that contributed to, or detracted from, the portfolio’s total return for the quarter are set forth below.
Top Contributors
Athenahealth provides software solutions to ambulatory physician practices. Its flagship product, athenaOne, enables practices to schedule visits, manage electronic medical records, and collect reimbursements. Athenahealth has recently gained market share, achieving high single-digit revenue growth and EBITDA growth exceeding 10%. In 2022, Bain Capital and Hellman & Friedman acquired the company for approximately $17.5 billion, committing around $9 billion of equity. We believe Athenahealth will continue to gain market share and reduce leverage through ongoing EBITDA growth. We hold Athenahealth’s 6.5% Senior Notes due 2030 and believe that, despite moderate leverage, they offer an attractive risk-reward profile.
HUB International is the fifth-largest global insurance broker, with over 600 locations across North America. The company acts as an intermediary for middle-market businesses, advising on property and casualty, as well as employee benefits insurance. HUB’s significant scale in the fragmented brokerage industry supports its strong cash flow, diversified customer base, high client retention, low employee turnover, and stable commercial insurance demand. While leverage remains high due to its acquisition-driven growth strategy, we view HUB’s 7.375% Senior Notes due 2032 as attractively valued relative to other middlemarket insurance brokers, reflecting HUB’s scale and platform quality. In Q2 2025, a new $1.6 billion equity investment at a $29 billion valuation reduced leverage and is expected to fund future acquisitions. We believe the Senior Notes continue to offer an appealing mix of yield and downside protection.
Largest Detractors
SportsNet New York (“SNY”) is a regional sports network owned by Sterling Entertainment Enterprises, LLC. SNY has continued to underperform operationally. In January 2025, SNY exchanged its 10.25% Senior Subordinated Notes due 2025 for a new 10.25% Second Lien Term Loan due 2026. This transaction allowed former noteholders to move up in the capital structure and benefit from a lien as additional downside protection, in exchange for a shortterm maturity extension. Like the previous notes, the new Second Lien Term Loan is illiquid and valued internally by Polen. In early April 2025, SNY revised its long-term forecasts, including higherthan-expected subscriber losses, leading Polen to significantly mark down the value of the term loan. As part of the January exchange, SNY agreed to hire an investment banker to explore a sale of the business. By the end of Q2, the banker had begun initial outreach to potential buyers, and the process remains in its early stages.
Oldcastle BuildingEnvelope (OBE) is a (partially) vertically integrated manufacturer and distributor of architectural hardware, glass, and glazing solutions in North America. Acquired by KPS in April 2022, OBE increased EBITDA from approximately $333 million to $419 million (LTM as of March 31, 2024), reducing net leverage from 7.3x to 5.3x. After strong results in 2022 and 2023, OBE experienced declines in volume, revenue, and profitability in 2024, with weak demand expected to persist through at least the end of 2025. Following disappointing Q1 2025 results and a revised, more challenging outlook for the year, OBE’s 9.25% Senior Notes due 2030 declined in price and were a top detractor from quarterly returns. Despite near-term earnings pressure and forecasted rising leverage, we believe the Senior Notes offer attractive relative value due to OBE’s strong normalized cash flow, market leadership, and scale advantages in a fragmented industry. We continue to monitor developments and maintain our position in the notes.
Portfolio Positioning & Activity
In Q2 2025, we did not make any significant changes to portfolio positioning. However, we did execute the relative value sale and new buy described below. We also increased positions in existing holdings, particularly high yield bonds, in which we have a great degree of confidence.
During the quarter, we purchased IPL Plastics’ 9.50% First Lien Notes due May 2030. IPL Plastics manufactures rigid plastic packaging for food, consumer, agricultural, logistics, and environmental end markets. Since its acquisition by Madison Dearborn in 2020, IPL has grown through acquisitions and operational improvements. In April 2025, IPL acquired Schoeller Allibert, funding the transaction and refinancing existing debt with new $975 million USD and €310 million EUR first lien bond offerings. While leverage is elevated following the deal, we believe it will decline as IPL realizes synergies from the acquisition. We believe the Portfolio’s position in the $975 million 9.50% First Lien Notes presents attractive value and potential price appreciation as IPL integrates Schoeller Allibert and reduces leverage.
We trimmed our position in Clear Channel Outdoor (CCO) (CCO)’s 7.875% Secured Notes due 2030 in Q2. Clear Channel Outdoor (CCO) is one of the world’s largest outdoor advertising companies, operating over 470,000 print and digital displays across 21 countries. We continue to have a favorable view of CCO’s first lien debt, supported by the company’s strong competitive position, high barriers to entry, and growth drivers such as expanding digital displays and improved audience attribution technology. Our reduction followed a price increase in the Portfolio’s holdings of the 7.875% Secured Notes. The Portfolio continues to hold a position in these notes.
Outlook
The announcement of sweeping tariffs on Trump’s “Liberation Day” gave markets a jolt. The initial reaction by leveraged credit markets was negative as credit spreads increased rapidly. However, as tariff “pauses” were announced markets settled and the immediate risk-off response reversed. Since that time, credit markets continued to grind tighter as several trade deals have been announced, including a tentative agreement between the U.S. and China. As a result, at the end of the second quarter, the high yield market’s credit spread was below 300 bps for the first time since early March.
Nevertheless, the tariff announcements by the Trump Administration caused many market participants to lower their economic growth outlook, with recession fears expected to surface in the second half of 2025.
Although markets are currently acting as if a recession is unlikely, we believe company fundamentals remain resilient.
Further, inflation, while still above the Fed’s target, remains contained, and unemployment rates are low. However, the “One Big Beautiful Bill Act” has been signed into law and introduces potential deficit and inflationary pressures. Today, the Fed faces challenges, balancing political pressure from the President with its own desire to remain apolitical. In our view this raises the risk of monetary policy mistake which could potentially worsen economic conditions.
Not surprisingly, Q2 2025’s turbulent backdrop has not lent itself to private equity realizations. Regardless, the need for private equity sponsors to divest from their portfolio investments remains. However, until conditions improve, M&A activity will likely remain subdued. Nonetheless, as capital markets thawed following the shock of the initial Liberation Day announcement, an increasing number of dividend deals has provided private equity sponsors, and as a result their LPs, with some much-needed liquidity. This new deal flow has been well received by market participants and is often oversubscribed, a trend we expect to continue into the back half of the year.
Recent volatility notwithstanding, in our opinion, it feels late in the credit cycle and caution is warranted. However, higher base rates, combined with issuer specific opportunities, continue to provide a compelling entry point for leveraged credit markets, offering investors attractive all-in yields. Given the current backdrop, our focus remains on our investment philosophy and process, as we continue to identify competitively advantaged businesses that generate durable free cash flow and offer a reasonable margin of safety. We believe that this focus should leave our client portfolios well positioned to weather bouts of weakness and capitalize on attractive total return opportunities.
Sincerely,
Dave Breazzano, Ben Santonelli, and John Sherman
Source: ICE, Credit Suisse, J.P. Morgan. 1Portfolio information provided is based on a representative account of the Polen Credit U.S. Opportunistic High Yield Composite. The representative account is an account within the Polen Credit U.S. Opportunistic High Yield Composite that Polen Capital Credit has deemed the most representative of the accounts managed by Polen Capital pursuing the investment strategy. Indices: ICE BofA U.S. High Yield Index: The ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Polen Capital Credit, LLC . ICE Data and its Third-Party Suppliers accept no liability in connection with its use. Please contact Polen Capital Credit for a full copy of the applicable disclaimer. S&P UBS Leveraged Loan Index: The S&P UBS Leveraged Loan Index is designed to mirror the investable universe of USD institutional leveraged loans, including U.S. and international borrowers. GIPS Report Schedule of Investment Performance – Polen Credit U.S. Opportunistic High Yield Composite March 31, 1998 to December 31, 2023
Performance % as of 12-31-2024: (Annualized returns are presented for periods greater than one year)
*Partial year, inception 03-31-1998 Polen Capital Credit, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Polen Capital Credit, LLC has been independently verified for the periods March 1, 1996 to December 31, 2023. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The Polen Credit U.S. Opportunistic High Yield Composite has had a performance examination for the periods January 1, 2005 to December 31, 2023. The verification and performance examination reports are available upon request. U.S. Opportunistic High Yield Disclosures “>– GIPS Report Polen Capital Credit, LLC (“the Firm”, “Polen Credit”) is an investment adviser, registered with the Securities and Exchange Commission, which specializes in high yield securities and special situations investing. Polen Credit was formerly known as DDJ Capital Management, LLC. On January 31, 2022, Polen Credit was acquired by Polen Capital Management, LLC. The transaction resulted in no changes to the Polen Credit investment team or its investment process. The Polen Credit U.S. Opportunistic High Yield Composite (“the Composite”) was created in August 2007. The U.S. Opportunistic High Yield strategy seeks to generate capital appreciation and income by investing in high yield securities or higher rated securities that offer yields similar to those available in the high yield market. The strategy focuses on investments in high yield bonds and has a bias toward lower tier securities. Opportunistic High Yield portfolios not denominated in U.S. dollars, where currency hedging is a significant component of the strategy, are excluded from the Composite. Derivatives may be used for hedging purposes only; however, certain credit derivatives may be used in limited circumstances subject to client guidelines. Portfolios within the Composite will be permitted to invest in lower-rated debt securities, equity securities, bank debt, small issues and direct private investments, but allocations to these security types will vary. Portfolios within the Composite will generally invest at least 25% of assets in bank loans, hold no fewer than 50 issuers and will invest in illiquid securities. In January 2021, a lower limit on issuers held was added. In January 2025, following an internal review of the portfolios included within the Polen Credit U.S. Opportunistic High Yield Composite, Polen Capital has redefined such Composite to exclude, effective January 1, 2024, portfolios that maintain an exposure to illiquid securities in excess of 35% of assets for a consecutive three-month period. Polen Capital concluded that portfolios with an illiquid exposure in excess of that 35% limit (as a result of client flows or otherwise) were not consistent with the Polen Credit U.S. Opportunistic High Yield strategy. As a result of this redefinition, one portfolio that was previously included in the Composite has now been excluded as of such date. Following such removal, the Composite’s gross and net returns for the calendar year 2024 (as well as all prior performance periods that are inclusive of the 2024 calendar year) have been restated. Gross returns do not reflect the deduction of investment management fees, but are net of trading expenses, deal-related legal expenses and foreign withholding tax. Net returns reflect the application of actual management and, if applicable, performance-based fees to gross returns. Composite dispersion is the equalweighted standard deviation of annual gross returns of all accounts included in the Composite for the entire year. Composite dispersion is not applicable for composites which contain five accounts or fewer for the entire year. The threeyear annualized standard deviation measures the variability of the Composite gross returns and the benchmark returns over the preceding 36-month period. A list of composite descriptions, a list of limited distribution pooled fund descriptions, and a list of broad distribution pooled funds as well as policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request. At 12/31/2023, 13% of Composite assets were valued using subjective, unobservable inputs. The ICE BofA U.S. High Yield Index, which is used for comparative purposes only, is a broad high yield index that tracks the performance of U.S. dollardenominated below investment grade corporate debt publicly issued in the U.S. domestic market. Like the investments of the benchmark, the Composite consists primarily of bonds and notes rated BB or lower. However, the benchmark is an unmanaged index and does not include any private (non-144A) obligations, convertible bonds, preferred and common equity, and certain other securities and obligations. Investments made by Polen Credit on behalf of the portfolios managed according to the strategy will differ from those of the benchmark and will not have an identical investment strategy. Accordingly, investment results for the Composite will differ from those of the benchmark. In March 2023, the Composite benchmark was changed, for all periods 1/1/13 to present, to the ICE BofA U.S. High Yield Index. Prior to 3/31/2023, the Composite was shown against a custom index comprising (x) the ICE BofA U.S. High Yield Index (the current benchmark) from inception until 12/31/2013, and (y) the ICE BofA U.S. Non-Financial High Yield Index from 12/31/2013 until 3/31/2023. Given the Composite investment strategy, Polen Credit believes that the ICE BofA U.S. High Yield Index is an appropriate benchmark for all historical periods. The standard management fee schedule is as follows (per annum):
***The All-in Fee, which is also the total expense ratio for both the collective investment trust and the private fund, includes all administrative and operational expenses of each fund, as well as the management fee paid to Polen Credit. ****The Founders Share Class is honored until the applicable fund reaches $250 million in assets. As of December 31, 2023, 0.33% of the Composite comprises one non-fee-paying portfolio, which is the private fund. Net-of-fees returns for such nonfee-paying portfolio has been calculated by accruing the model fee of 0.55%. Performance-based fee schedules are available for separate accounts. Management and performance-based fees may vary according to the specific mandate of the account, investment performance, and assets under management. The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Polen Credit. ICE Data and its Third Party Suppliers accept no liability in connection with its use. Please contact Polen Credit for a full copy of the applicable disclaimer. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Past performance is not an indication of future results. |
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