Tetragon Financial Group Limited (TFG) - PERFORMANCE REPORT FOR PERIOD ENDED 30 JUNE 2010
By Tetragon Financial Group Limited, PRNESunday, August 1, 2010
LONDON, August 2, 2010 - Tetragon Financial Group Limited (TFG) is a Guernsey closed-ended
investment company traded on Euronext Amsterdam by NYSE Euronext under the
ticker symbol "TFG." (1) In this report we provide an update on TFG's
results of operations for the period ending June 30, 2010.(2)
Investors will note that in this update we have endeavored to simplify
the presentation of certain of TFG's financial and portfolio performance
metrics in response to feedback from certain of our investors. We welcome any
further suggestions as we continue to seek to better meet investors'
reporting needs.
- Executive Summary:
Corporate-Level Results
- Strong Operating Results: TFG produced solid operating results during
Q2 2010, with EPS of $0.45, (Q1 2010: $0.58 EPS), consolidated net
income of $55.6 million (Q1 2010: consolidated net income of $72.5
million) and with consolidated net assets increasing to $909.4 million
or $7.44 per share. Please refer to Figure 1 below for a historical
summary of TFG's Net Assets, NAV per share and share price.
- Cash Receipts and Balances: Cash flows from CLO investments were strong
during the quarter totaling $60.9 million (Q1 2010: $51.1). As a
result, the cash balance grew to $156.2 million as of June 30, 2010, of
which approximately $19.3 million was earmarked to pay certain short-
term liabilities. Additionally, TFG held approximately $50.0 million of
liquid U.S. leveraged loans as of the end of Q2 2010.
- Capital Distributions: On July 29, 2010, the Board approved a dividend
of $0.08 per share, with respect to Q2 2010, an increase from $0.06 per
share in Q1 2010, reflecting the company's strong cash generation
during the quarter. Additionally, TFG repurchased 1,581,669 shares
during the quarter for approximately $7.4 million.
Investment Portfolio Performance Highlights
- CLO Collateral Performance: TFG's strong operating performance was
achieved in the context of generally stabilizing fundamental credit
conditions, despite quarter-end secondary loan price declines and pick-
up in volatility. TFG's CLO investment portfolio on average continued
to outperform market-wide default and CCC-asset holding averages.
- CLO IRRs: The weighted-average IRR of TFG's CLO investments ended the
quarter at 13.1%, up from 12.3% at the end of Q1 2010. This reflected,
among other factors, continued declines in the amount of distressed,
excess-CCC and defaulted assets in certain of our CLO investments,
which were sufficient enough to offset any quarter-end declines in the
prices of such stressed assets. Please refer to Figure 2 below for a
historical summary of the weighted-average IRR on TFG's CLO
investments.
- Direct Loan Investments: TFG's directly held loan portfolio with a
market value of approximately $44.3 million continued to perform well,
with no defaults or downgrades and stable to moderately improving
fundamentals.
- Asset Management Platform
LCM: LCM continued to perform in-line with expectations during Q2 2010,
with all of LCM Cash Flow CLOs (3) under management continuing to pay
senior and subordinated management fees.
GreenOak: We are also pleased to have expanded our asset management
platform early in the third quarter through our 10% interest in the
GreenOak real estate venture. (4)
- Corporate-Level Performance Details:
Capital Distributions: TFG's Board approved a dividend of $0.08 per
share with respect to Q2 2010, an increase from $0.06 per share in the
prior quarter. This dividend increase reflects both our commitment to
returning value to shareholders and our confidence in the continued
performance of the Company's investment portfolio. Since its public
listing, TFG has distributed approximately $1.22 per share via
quarterly dividends. (5) In addition, TFG's NAV per share, as
reported each quarter, among other things, reflects value created for
shareholders via the repurchase of shares below NAV. Please
refer to Figures 3 and 4 below for a historical summary of TFG's NAV
per share, dividend distributions, and share buy-back program details.
Investment Portfolio Performance Details:
CLO Portfolio Size: As of the end of Q2 2010, the estimated total fair
value of TFG's CLO investment portfolio totaled approximately $720.2
million. TFG's indirect exposure to leveraged loans totaled
approximately $17.5 billion as of the end of Q2 2010.(6)
CLO Portfolio Composition: During Q2 2010, the CLO portfolio remained
stable with 68 investments managed by 31 external CLO managers.(7)
CLO Collateral Performance: As of the end of Q2 2010, approximately 95%
of TFG's CLO investments were passing their junior-most O/C tests
weighted by fair value (8) - an increase from approximately 94% at
the end of Q1 2010.
When measured on a percentage of transactions basis, 54 or
approximately 84% of the Company's CLO investments were passing their
junior-most O/C tests, an increase from approximately 80% at the end
of Q1 2010.
TFG's U.S. CLOs, which represented approximately 93.1% of the fair value
of TFG's investment portfolio as of the end of June 30, 2010, continued to
perform well during Q2 2010 with approximately 98% of TFG's U.S. CLOs by fair
value and 94% by number passing their junior-most O/C tests. (9)(10) This
compared favorably with the market-wide average as approximately 85.4% of
U.S. CLOs were estimated to be passing their junior O/C tests as of the end
of Q2 2010 (when measured on a percentage of transactions basis).(11)
Please refer to Figure 5 below for a historical summary of TFG's investments'
junior O/C test performance.
Investment Portfolio Performance Details (continued):
CLO Portfolio Credit Quality: As of June 30, 2010, the weighted-average
percentage of corporate obligors rated Caa1/CCC+ or below in TFG's 68 CLO
investments was 10.5% compared to an approximate 7.8% weighted-average
maximum level permitted under the terms of our investments.(12) This
compared favorably with median CCC asset holdings of U.S. CLOs estimated to
be approximately 10.7% as of June 30, 2010. (13) TFG's weighted-average
WARF stood at approximately 2,706. Each of these foregoing statistics
represents a weighted-average summary of all of our 68 investments.(14)
Each individual investment's metrics will differ from this average and vary
across the portfolio.
TFG Invest ment Q2 Q3 Q4 Q1 Q2 Q3
2007 2007 2007 2008 2008 2008
Weighted -Average
Summary Caa1/CCC+ or 2.8% 2.8% 3.0% 3.4% 4.4% 4.9%
Below Obligors:
WARF: 2,415 2,237 2,439 2,443 2,472 2,490
- Table Continued -
TFG Invest ment Q4 Q1 Q2 Q3 Q4 Q1 Q2
2008 2009 2009 2009 2009 2010 2010
Weighted -Average
Summary Caa1/CCC+ or 7.6% 11.4% 11.6% 12.6% 12.0% 11.1% 10.5%
Below Obligors:
WARF: 2,577 2,758 2,800 2,813 2,809 2,762 2,706
TFG and Market Default Rates: The lagging 12-month U.S. institutional
loan default rate fell to 4.02% by principal amount as of June 30, 2010,
according to S&P/LCD, down from approximately 5.8% during the prior
quarter.(15) TFG's lagging 12-month corporate loan default rate decreased
to 3.6% during the first quarter.(16) Please refer to Figure 6 below for a
historical summary of TFG's CLO investments' default performance.
CLO Corporate Actions: During the first half of the year, we sought to
provide support for certain CLO management changes within TFG's CLO
investment portfolio, in particular with respect to three underperforming
European CLOs. We believe that TFG's majority position strategy may help
improve its investment economics by, for example, allowing us to negotiate
long-term fee sharing arrangements for the benefit of TFG shareholders in the
context of various corporate actions. In cases like the aforementioned
European CLOs, this additional source of income may allow TFG to maintain the
profitability of underperforming investments, which we believe to be an
advantage over other investors who may not be able to enact such a strategy.
Direct Loan Investments: As of June 30, 2010, TFG owned approximately
$50.0 million in par amount of liquid U.S. bank loans with a total fair value
of approximately $44.3 million. This direct loan investment portfolio was
selected to seek to take advantage of positive credit migration events as
well as amend-and-extend activity. We believe that these investments have
been successful to date, as the overall credit quality has performed as
expected, with no defaults or downgrades and stable to moderately improving
fundamentals. From inception through the end of June 2010, we have realized
approximately $0.3 million of trading gains despite price declines in the
general loan market. In addition, the portfolio earned $0.4 million of
interest proceeds over that period. We expect to continue to
opportunistically deploy TFG's capital into direct loan investments when
appropriate.
Asset Management Platform Details:
LCM Developments: LCM's strong operating and financial performance
continued during Q2 2010. As of June 30, 2010, all senior and subordinated
CLO management fees on LCM Cash Flow CLOs (17) were current, generating
approximately $6.2 million of gross fees during the first half of 2010. These
results translated into a $0.8 million post-tax profit attributable to TFG
for Q1 and Q2 2010, compared with an acquisition cost of approximately $0.2
million.(18) We continue to explore the possibility of LCM serving as
manager to a new, arbitrage cash flow CLO as well as to existing CLO
transactions that could be transitioned to the LCM platform.
LCM Asset Management Performance Snapshot
Q2 2010 Q1 2010
Assets Under Management: Approx. $2.5 billion Approx. $2.5 billion
Gross Fee Income ($MM) $2.9 $3.3
Net Income After Tax ($MM) $0.3 $0.5
Loan and CLO Market Developments:
U.S. leveraged loan default rates decline: During Q2 2010, the U.S.
leveraged loan market saw continued recovery in credit fundamentals amid
scarce defaults. The U.S. lagged 12-month loan default rate fell to 4.02% by
principal amount as of June 30, 2010, down from 5.8% in the prior quarter and
a high of 10.8% recorded in November 2009.(19) We believe that improving
credit quality of certain of our CLOs insulated them the impact of
quarter-end secondary loan price declines, thus benefiting TFG's equity
investments. It is important to note, however, that key downside risks remain
and we expect that our CLO managers will remain focused on positioning their
portfolios accordingly.
U.S. CLO O/C ratios improve while European CLO O/C recovery remains
sluggish: During Q2 2010, U.S. CLOs saw continued gains in the strength of
their O/C ratios. According to Morgan Stanley, the median junior O/C test
cushion for U.S. CLOs increased to 2.25% as of June 30, 2010,(20) up from
1.49% as of the end of Q1 2010.(21) However, the share of European CLOs
passing their junior-most O/C tests improved only slightly to approximately
50% as of the end of Q2 2010.(22)
Secondary loan market volatility increases as loan prices decline: Q2
2010 witnessed secondary loan price declines and an escalation in volatility
as we believe the global financial markets reacted to, among other factors,
concerns related to increased sovereign-default risks and reduced global GDP
growth expectations. As a result, the U.S. S&P/LSTA Leveraged Loan Index
ended the quarter down approximately 1.24% while continuing to register a
gain of 3.34% for the year.(23)
U.S. loan prepayments rise in Q2 2010: The Q2 2010 U.S. S&P/LSTA
Leveraged Loan Index quarterly prepayment rate rose to approximately 6.7%, up
from approximately 6.0% as of Q1 2010 and only 2.9% during Q2 2009.(24)
Market participants generally anticipate, however, that this repayment rate
may slow during the remainder of the year, particularly if the Q2 2010
quarter-end high yield bond market softening persists, weakening an important
source of corporate repayment proceeds. (25)
Primary loan issuance volumes increase in the U.S., stall in Europe:
Institutional U.S. loan issuance picked-up pace during Q2 2010 on the heels
of improving fundamentals. During Q2 2010, approximately $44.0 billion of
U.S. institutional loans were issued, up from approximately $31.0 billion in
Q1 2010.(26) In Europe, however, primary institutional loan issuance
remained subdued during Q2 with only EUR1.2 billion institutional loans
issued, down from approximately EUR3.0 billion in Q1 2010.(27)
Amend-to-extend and high-yield bond take-outs reduce "maturity wall":
Approximately $46.6 billion of U.S. loans due through 2010 were either
extended, repaid or went into default during Q2 2010.(28) Nonetheless,
significant outstanding maturities remain. We, therefore, expect to see
amend-to-extend activity continue during the remainder of the year,
particularly in the event of a persistent softening in the high yield bond
markets.
CLO new issuance momentum building: Global CLO issuance totaled
approximately $22.1 billion during the first half of 2010 (29) with the
majority of this volume dominated by balance sheet CLOs. This total, however,
included two new U.S. cash flow CLOs - the $325 million ALM Funding 2010-1
CLO and $450 million Doral CLO 1. We believe that this positive momentum may
continue through the second half of 2010, so long as, among other factors,
fundamental CLO conditions continue to improve rendering CLO debt and equity
tranches more attractive to investors.
Fair Value Determination for TFG's CLO Investments:
In accordance with the Company's valuation policies as set forth on the
Company's website, the values of TFG's CLO investments are determined by
reference to a third-party valuation model. The model contains certain
assumption inputs that we review and adjust as appropriate to factor in
historic, current and potential market developments on the performance of
TFG's CLO investments. As we are modeling, among other things, forward
projections over multiple years, this is not an exercise in recalibrating
future assumptions to the latest quarter's historical data.
Subject to the foregoing, when determining the U.S. GAAP-compliant fair
value of TFG's portfolio we seek to derive a value at which market
participants could transact in an orderly market. Fundamentally, this
determination may also be viewed as an exercise in: (1) projecting future
cash flows and (2) adjusting them at an appropriate discount rate to reflect
the perceived level of risk. Under this view, we use a modeling approach
which involves two main steps: firstly, we model future cash flows for each
deal in the CLO portfolio, using our base case assumptions. This generates
both our investment IRRs, which are used to drive the recognition of income,
and the base case investment fair values. Secondly, we reduce the investment
fair value through what we call an "Accelerated Loss Reserve Fair Value
Adjustment", or "ALR" (30) which has the effect of applying a higher
discount rate than the deals' IRRs to their respective cash flows.
Modeling assumptions unchanged in Q2 2010
When we recalibrated certain modeling assumptions at the end of Q1
2010, we noted that, despite significant improvements in several metrics
relevant to TFG, there remained heightened risks in the mid-term around,
among other things, the so-called "maturity cliff" between 2012 and 2014 and
the possibility of a double-dip recession in the European and U.S. economies.
We are pleased that Q1 2010 improvements have generally continued into
Q2 2010, as reflected in TFG's strong Q2 2010 results and described earlier
in this report. We are also pleased that the "maturity cliff" issue appears
to be improving. However, with mixed economic and corporate results in Q2
2010 and a continuing uncertain outlook, we have not recalibrated our forward
looking assumptions at June 30, 2010 pending, among other things, further
sustained evidence of ongoing improvements. Note 2 to the Financial
Statements of TFG Master Fund sets out the results of the latest
recalibration with respect to certain IRR modeling assumptions.(31)
ALR / effective discount rate also broadly unchanged
The ALR was initially determined by applying a more pessimistic set of
short-term assumptions to the portfolio. As at Q2 2010, the effective
discount rate applied to our cash flows projections, after taking into
account the ALR, was close to 30%, on a portfolio-wide basis, representing a
significant spread over BB-rated CLO debt tranches. (32) The discount rate
applied during Q2 2010 was broadly unchanged from Q1 2010 and has decreased
slightly from the level utilized at the end of 2009. The ALR expressed in
dollar terms as of the end of Q2 2010 was $330.7 million. (33)
Fair Value Determination for TFG's CLO Investments (continued):
Conclusion
With no recalibration of the modeling assumptions announced in
connection with the Q1 2010 performance report and the ALR / effective
discount rate broadly unchanged, the key driver in the increase in fair value
which forms part of the $31.4 million of unrealized appreciation in
investments per the Statement of Operations, was, therefore, the result of
improvements in expected cash flows as deals strengthened, as described
earlier in the report.
Outlook Summary:
Outlook: Although the latter half of Q2 2010 witnessed a return of loan
price declines as well as heightened volatility and risk aversion in the
global financial markets, we believe that gradual fundamental recovery and
positive, albeit modest, GDP growth in the U.S. are likely to continue to
translate into stabilizing and improving performance of TFG's investments.
The progress made on this front year-to-date, as reflected in, among other
things, higher junior O/C test cushions, overall reductions in
distressed-asset holdings, and a greater percentage of transactions achieving
compliance with excess-CCC test limits, has already positively affected the
performance of certain of TFG's CLO investments allowing them to better
weather declines in the market values of distressed assets which are
typically haircut for O/C test purposes.
Nonetheless, we are mindful of the potential downside risks to continued
economic recovery, particularly as fiscal restraint measures, potential
monetary policy tightening in the U.S. and Europe, and continued weakness in
the capital markets may derail the global economy from its current growth
trajectory. We, therefore, expect to continue to focus on risk-management and
seek to pursue investment opportunities, which we believe may offer
attractive expected risk-adjusted returns and are appropriately structured
for the current market environment.
We continue to believe that TFG may have significant potential to become
more of a financial services firm that functions not only as an investment
holding company, but also as an operating company capable of pursuing
attractive investment opportunities across multiple asset classes. In
particular, with respect to our asset management platform, we expect to
continue to focus on supporting the expansion of LCM's asset management
business. We are pleased to have expanded our asset management platform early
in the third quarter through our 10% interest in the GreenOak real estate
venture. We expect to continue to explore other strategic opportunities in
asset management both within and beyond the leveraged loan market.
Finally and importantly, we intend to continue to serve our aim of
returning capital to TFG shareholders (including through dividends, share
repurchases and other means).
Certain Company Information
A performance fee of $16.5 million was accrued in Q2 2010 in accordance
with TFG's investment management agreement and based on a "Reference NAV" of
Q1 2010. The hurdle rate for Q3 2010 incentive fee has been reset at 3.1812%
(Q2: 2.9394%) as per the process outlined in TFG's 2009 Audited Financial
Statements and in accordance with TFG's investment management agreement.
(34)
Capital Distributions
The dividend of $0.08 per share with respect to Q2 2010 will be payable
on August 25, 2010. Please refer to the website (www.tetragoninv.com) for
additional information regarding the dividend, including the Optional Stock
Dividend Plan.
Directors' Statements:
The Directors of TFG confirm that (i) this Performance Report constitutes
the TFG management review for the six month period ended 30 June 2010 and
contains a fair review of that period and (ii) the financial statements in
the accompanying unaudited interim report for the six month period ended 30
June 2010 for TFG have been prepared in accordance with applicable laws and
in conformity with accounting principles generally accepted in the United
States of America.
Quarterly Investor Call
We will host a conference call for investors on August 9, 2010 at 15:00
BST/16:00 CET/10:00 EDT to discuss Q2 2010 results and to provide a company
update.
The conference call may be accessed by dialing +44(0)20-7162-0025 and
+1-334-323-6201 (a passcode is not required). Participants may also register
for the conference call in advance by going to:
https://eventreg1.conferencing.com/webportal3/reg.html?Acc=084793&Conf=173917
or by going to the
TFG website, www.tetragoninv.com.
A replay of the call will be available for 30 days by dialing
+44(0)20-7031-4064 and +1-954-334-0342, access code 846047 and as an MP3
recording on the TFG website.
Expected Upcoming Events Date
Q2 Ex-Dividend Date August 3, 2010
July 2010 Monthly Report August 19, 2010 (approx.)
Q2 Dividend Payment Date August 26, 2010
August 2010 Monthly Report September 20, 2010 (approx.)
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 June 2010
TFG Total
($MM)
Assets
Investments in securities, at fair value 764.5
Intangible assets - CLO management contracts 0.2
Cash and cash equivalents 156.2
Amounts due from brokers 1.9
Accrued fee income 1.1
Amounts receivable on investments sold 0
Unrealised gain on forward contracts 5.4
Derivative Financial Assets - Call Options 0.002
Other receivables 0.084
Total Assets 929.386
Liabilities
Amounts payable for purchase of investments 0
Unrealised loss on forward contracts 0
Derivative Financial Liabilites - Credit Default Swaps 0
Bank Overdraft 0
Amounts payable to feeder fund 0.1
Income taxes payables 0.78466
Dividend Payable 0
Other payables and accrued expenses 18.384333
Total Liabilities 19.268993
Net Assets Before Noncontrolling Interest 910.117007
Noncontrolling Interest 0.766299
Total Equity Attributable to TFG 909.350708
Instructions
update Balance sheet using State Street Monthly US GAAP report
TFG Quarterly Statement of Operations
Statement of Operations Q2 Q1 Q4 Q3
2010 ($MM) 2010 ($MM) 2009 ($MM) 2009 ($MM)
Interest income 43.4 43.22 41.1 33.1
CLO management fee income 2.9 3.3 0 0
Other income 0.3 0.3 0.3 0.3
Investment income 46.6 46.82 41.4 33.4
Management and
performance fees -19.8 -25.4 -32.7 -2.6
Admin/ custody and
other fees -2.6 -1.9 -0.8 -0.5
Total operating expenses -22.4 -27.3 -33.5 -3.1
Net investment income 24.2 19.52 7.9 30.3
Net change in in
unrealised appreciation
/(depreciation) in
investments 31.39406 54.5 91.8 3
Realised gain/(loss)
on investments 0.26 0 0 0
Realised and
unrealised gains/
(losses) from hedging
and fx 0.750386 0 -5 -2.1
Net realised and
unrealised gains/
(losses) from
investments and fx 32.404446 54.5 86.8 0.9
Income taxes -0.4 -1.3 0 0
Noncontrolling interest -0.6 -0.2 0 0
Net increase/(decrease)
in net assets from
operations 55.604446 72.52 94.7 31.2
Instructions
Insert a new column
for the month /
update relevant data
using State Street
Monthly US GAAP
An investment in TFG involves substantial risks. Please refer to the
Company's website at www.tetragoninv.com for a description of the risks and
uncertainties pertaining to an investment in TFG.
This release does not contain or constitute an offer to sell or a
solicitation of an offer to purchase securities in the United States or any
other jurisdiction. The securities of TFG have not been and will not be
registered under the US Securities Act of 1933 (the "Securities Act"), as
amended, and may not be offered or sold in the United States or to US persons
unless they are registered under applicable law or exempt from registration.
TFG does not intend to register any portion of its securities in the United
States or to conduct a public offer of securities in the United States. In
addition, TFG has not been and will not be registered under the US Investment
Company Act of 1940, and investors will not be entitled to the benefits of
such Act. TFG is registered in the public register of the Netherlands
Authority for the Financial Markets under Section 1:107 of the Financial
Markets Supervision Act ("FMSA") as a collective investment scheme from a
designated country. This release constitutes regulated information
("gereglementeerde informatie") within the meaning of Section 1:1 of the
FMSA.
Board of Directors
Paddy Dear
Reade Griffith
Byron Knief*
Alex Jackson
Rupert Dorey*
David Jeffreys*
Greville Ward*
*Independent Director
Shareholder Information
Registered Office of TFG and the Master Fund
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
Tudor House
Le Bordage
St. Peter Port, Guernsey
Channel Islands GYI 3PF
Issuing Agent, Dutch Paying and Transfer Agent
Kas Bank N.V.
Spuistraat 172
1012 VT Amsterdam, The Netherlands
Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
One Ropemaker Street
London EC2Y 9HR
United Kingdom
Investment Manager
Polygon Credit Management LP
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Legal Advisor (as to Guernsey law)
Ogier
Ogier House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GYI 1WA
General Partner of Investment Manager
Polygon Credit Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam, The Netherlands
Investor Relations
David Wishnow / Yuko Thomas
ir@tetragoninv.com
Press Inquiries
Citigate Dewe Rogerson
Michael Berkeley/Justin Griffiths/Clare Simonds
tetragon@citigatedr.co.uk
Stock Listing
Euronext Amsterdam by NYSE Euronext
Administrator and Registrar
State Street Fund Services (Guernsey) Limited
Tudor House
Le Bordage
St. Peter Port, Guernsey
Channel Islands GYI 3PF
Auditors
KPMG Channel Islands Ltd
20 New Street
St. Peter Port, Guernsey
Channel Islands GYI 4AN
Sub-Registrar and Transfer Agent
The Bank of New York
One Wall Street
New York, NY 10286
United States of America
————————————–
(1) TFG invests substantially all its capital through a master fund,
Tetragon Financial Group Master Fund Limited ("TFGMF"), in which it holds
100% of the issued shares. In this report, unless otherwise stated, we report
on the consolidated business incorporating TFG and TFGMF. References to "we"
are to Polygon Credit Management LP, TFG's investment manager.
(2) This Performance Report constitutes TFG's half-yearly financial
report as required pursuant to Section 5:25d of the FMSA. Pursuant to Section
5:25d and 5:25m of the FMSA, this report is made public by means of a press
release and has been filed with the Netherlands Authority for the Financial
Markets (Autoriteit Financiele Markten) and also made available to the public
by way of publication on the TFG website (www.tetragoninv.com).
(3) The LCM I, LCM II, LCM III, LCM IV, LCM V, and LCM VI CLOs are
referred to as the "LCM Cash Flow CLOs." The LCM VII CLO was a market value
CLO previously managed by LCM, which was liquidated commencing in 2008, and
is not included in the mentioned statistics. In addition, these statistics do
not include the performance of certain transactions that were developed and
previously managed by a third-party prior to being assigned to LCM, some of
which continue to be managed by LCM.
(4) Please see the TFG press release of even date herewith, "Tetragon
Financial Group Limited ("TFG") To Pursue Real Estate Venture."
(5) This figure includes the dividend of $0.08 per share announced on
July 29, 2010 with respect to Q2 2010.
(6) Includes only look-through loan exposures through TFG's CLO
investments.
(7) Excludes CDO-squared and ABS CDO transactions which were written
off in October 2007. TFG continues to hold the economic rights to three of
these written-off transactions.
(8) Based on the most recent trustee reports available for both our
U.S. and European CLO investments as of June 30, 2010.
(9) As of June 30, 2010, European CLOs represented approximately 6.9%
of TFG's investment portfolio; approximately 50% of the fair value of TFG's
European CLOs and 30%, when measured on a percentage of European transactions
basis, were passing their junior-most O/C tests.
(10) As O/C tests are breached, CLO structures may divert excess
interest cash flows away from the equity tranche holders, such as TFG, to pay
down the CLO's debt thereby curing the O/C breach via deleveraging.
Accordingly, the affected investments ceased to generate cash flows to TFG or
are expected to cease generating cash flows on the next applicable payment
date. Once enough debt has been repaid to cure the O/C test breach,
distributions of excess interest cash to equity holders may resume to the
extent not precluded by the investments' realized or unrealized losses.
(11) Morgan Stanley CDO Market Tracker, July 1, 2010; based on a sample
of 478 U.S. CLO transactions.
(12) Excess Caa/CCC+ or below rated assets above transaction-specific
permitted maximum holding levels are generally haircut in our transactions at
market value in U.S. CLOs and recovery rate in European CLOs for purposes of
the O/C or interest reinvestment test ratios.
(13) Morgan Stanley CDO Market Tracker, July 1, 2010; based on the
lower of Moody's and S&P rating. Furthermore, TFG's investment portfolio
includes approximately 6.9% CLOs with primary exposure to European senior
secured loans and such loans are included in the calculation of TFG's average
CCC asset holdings.
(14) Weighted by the original USD cost of each investment.
(15) S&P/LCD News, "With No Defaults in June, Rate Falls to 18-Month
Low," July 13, 2010.
(16) The calculation of TFG's lagging 12-month corporate loan default
rate does not include certain underlying investment collateral that was
assigned a "Selective Default" rating by one or more of the applicable rating
agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month
U.S. institutional loan default rate discussed above. Furthermore, TFG's
investment portfolio includes approximately 6.9% CLOs with primary exposure
to European senior secured loans and such loans are included in the
calculation of TFG's corporate default rate.
(17) The LCM I, LCM II, LCM III, LCM IV, LCM V, and LCM VI CLOs are
referred to as the "LCM Cash Flow CLOs." The LCM VII CLO was a market value
CLO previously managed by LCM, which was liquidated commencing in 2008, and
is not included in the mentioned statistics. In addition, these statistics do
not include the performance of certain transactions that were developed and
previously managed by a third-party prior to being assigned to LCM, some of
which continue to be managed by LCM.
(18) The $0.2 million figure represents TFG's acquisition cost after
the sale of 25% of LCM to Polygon Management LP.
(19) S&P/LCD News, "With no Defaults in June, Rate Falls to 18-Month
Low," July 1, 2010.
(20) Morgan Stanley CDO Market Tracker, July 1, 2010; based on a sample
of 478 U.S. CLO transactions.
(21) Morgan Stanley CDO Market Tracker, April 1, 2010; based on a
sample of 479 U.S. CLO transactions.
(22) Morgan Stanley CDO Market Tracker, July 1, 2010; based on a sample
of 206 European CLO transactions.
(23) S&P/LCD News, "Full Index Analysis: Loans Lose 0.44% in June,
1.24% during Quarter," July 2, 2010.
(24) S&P/LSTA Leveraged Lending Review 2Q 2010.
(25) S&P/LSTA Leveraged Lending Review 2Q 2010.
(26) S&P/LCD Quarterly Review, Second Quarter 2010.
(27) S&P/LCD Quarterly Review, Second Quarter 2010.
(28) S&P/LCD Quarterly Review, Second Quarter 2010.
(29) Morgan Stanley CDO Market Tracker, July 1, 2010.
(30) The Accelerated Loss Reserve is transaction specific. The
Accelerated Loss Reserve is a direct adjustment to the fair value of an
investment to account for the potential impact of certain potential losses
and the cumulative value of such adjustments is evidenced in TFG's financial
statements.
(31) TFG undertakes no obligation to update public disclosure with
respect to its modeling assumptions, except as required by law.
(32) Please note that the BB tranche ratings refer to original ratings;
current ratings of such CLO tranches may be different.
(33) Approximately $8.8 million of the ALR was utilized during Q2 2010.
(34)The hurdle rate is reset each quarter using 3M USD LIBOR plus a
spread of 2.647858% accordance with TFG's investment management agreement.
Please see the TFG website, www.tetragoninv.com, for more details.
Unaudited Consolidated Interim Report
Tetragon Financial Group Limited
For the Period Ended 30 June 2010
Contents
Consolidated Statements of Assets and Liabilities
Consolidated Statements of Operations
Consolidated Statements of Changes In Net Assets
Consolidated Statements of Cash Flows
Consolidated Schedule of Investments
Financial Highlights
Notes to the Consolidated Financial Statements
Consolidated Interim Report Of Tetragon Financial Group Master Fund
Limited
TETRAGON FINANCIAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
as at 30 June 2010 (unaudited)
Note 30 Jun 2010 31 Dec 2009
US$ US$
Assets
Investment in Master Fund 3 925,814,324 836,628,677
Amounts receivable from Master Fund 101,624 212,635
Total assets 925,915,948 836,841,312
Liabilities
Accrued incentive fee 4 16,458,239 29,781,872
Amounts payable on Treasury Shares 5 101,624 212,635
Total liabilities 16,559,863 29,994,507
Net assets 909,356,085 806,846,805
Equity
Share capital 5 122,234 124,769
Share premium 6 1,166,541,712 1,177,331,614
Capital reserve in respect of share
options 7 11,789,336 11,789,336
Earnings 10 (269,097,197) (382,398,914)
909,356,085 806,846,805
Shares outstanding Number Number
Shares 5 122,234,136 124,768,684
Net asset value per Share
Shares US$ 7.44 US$ 6.47
The accompanying notes are an integral part of the consolidated financial
statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
29 July 2010
TETRAGON FINANCIAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period ended 30 June 2010 (unaudited)
Note Period ended Period ended
30 Jun 2010 30 Jun 2009
US$ US$
Investment income allocated from the Master
Fund
Interest income 86,664,990 97,294,900
CLO management fee income 6,178,805 -
Other income 579,358 681,737
Investment income allocated from the Master
Fund 93,423,153 97,976,637
Direct expenses
Incentive fee 4 (38,724,263) -
Total direct expenses (38,724,263) -
Operating expenses allocated from the
Master Fund
Management fees 7 (6,507,963) (6,866,311)
CLO loan manager operating expenses 7 (2,854,524) -
Administration fees (336,073) (325,857)
Custodian fees (52,141) (25,370)
Legal and professional fees (316,539) (68,446)
Audit fees (120,700) (138,164)
Directors' fees 7 (100,000) (100,004)
Transfer agent fees (63,120) (61,177)
Accumulated amortization on intangible
assets (42,060) -
Other operating expenses (613,869) (363,755)
Interest expense - (566,651)
Total operating expenses allocated from the
Master Fund (11,006,989) (8,515,735)
Total operating expenses (49,731,252) (8,515,735)
Net investment income 43,691,901 89,460,902
TETRAGON FINANCIAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the period ended 30 June 2010 (unaudited)
Note Period ended Period ended
30 Jun 2010 30 Jun 2009
Net realized and unrealized gain / (loss) US$ US$
from investments and foreign currency
allocated from the Master Fund
Net realized gain from:
Investments 261,304 -
Foreign currency transactions 4,351,694 10,409,319
4,612,998 10,409,319
Net increase / (decrease) in unrealized
appreciation / (depreciation) on:
Investments 85,883,833 (528,356,108)
Forward foreign exchange contracts 3,771,450 338,358
Foreign exchange options - (4,880,100)
Translation of assets and liabilities in
foreign currencies (7,372,758) (7,931,935)
82,282,525 (540,829,785)
Net realized and unrealized gain / (loss)
from investments and foreign currencies
allocated from the Master Fund 86,895,523 (530,420,466)
Net increase / (decrease) in net assets
resulting from operations before income
tax 130,587,424 (440,959,564)
Income and deferred tax (1,681,760) -
Net income 128,905,664 (440,959,564)
Less net income attributable to
noncontrolling interest (787,733) -
Net increase / (decrease) in net assets
resulting from operations 128,117,931 (440,959,564)
Earnings per Share
Basic 9 US$ 1.04 US$ (3.51)
Diluted 9 US$ 1.04 US$ (3.51)
Weighted average Shares outstanding Number Number
Basic 9 123,400,107 125,780,174
Diluted 9 123,400,107 125,780,174
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
US$ US$
Total investment income 93,423,153 97,976,637
Total operating expenses (49,731,252) (8,515,735)
Net realized gain from investments and
foreign currencies allocated from the Master
Fund 4,612,998 10,409,319
Net unrealized gain / (loss) from
investments and foreign currencies allocated
from the Master Fund 82,282,525 (540,829,785)
Income taxes (1,681,760) -
Income attributable to noncontrolling
interest (787,733) -
Net increase / (decrease) in net assets
resulting from operations 128,117,931 (440,959,564)
Dividends paid to shareholders (14,816,214) (7,542,110)
Issue of shares 1,927,715 509,939
Treasury shares (12,720,152) (877,379)
Decrease in net assets resulting from net
share transactions (10,792,437) (367,440)
Total increase / (decrease) in net assets 102,509,280 (448,869,114)
Net assets at start of period 806,846,805 1,141,950,194
Net assets at end of period 909,356,085 693,081,080
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
US$ US$
Operating and investing activities
Net increase / (decrease) in net assets
resulting from operations 128,117,931 (440,959,564)
Adjustments for:
Net unrealized (appreciation) / depreciation on
investments in Master Fund (89,185,647) 448,869,114
Operating cash flows before movements in
working capital 38,932,284 7,909,550
Decrease in receivables 111,011 74,366
Decrease in payables (13,434,644) (74,366)
Cash inflows from operating and investing
activities 25,608,651 7,909,950
Financing activities
Issue of shares 1,927,715 509,939
Treasury shares (12,720,152) (877,379)
Dividends paid to shareholders (14,816,214) (7,542,110)
Cash outflows from financing activities (25,608,651) (7,909,550)
Net increase / (decrease) in cash and cash
equivalents - -
Cash and cash equivalents at beginning of
period - -
Cash and cash equivalents at end of period - -
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP LIMITED
SCHEDULE OF INVESTMENTS
as at 30 June 2010 (unaudited)
Nominal
Security Description /Shares Cost Fair Value % of
US$ US$ Net Assets
Investment Funds - Guernsey
Tetragon Financial
Group Master Fund
Limited - shares 122,234,136 1,090,845,630 925,814,324 101.81%
Total Investments 925,814,324 101.81%
Other Assets and Liabilities (16,458,239) (1.81%)
Net Assets 909,356,085 100.00%
TETRAGON FINANCIAL GROUP LIMITED
SCHEDULE OF INVESTMENTS (continued)
as at 31 December 2009 (audited)
Nominal
Security Description /Shares Cost Fair Value % of
US$ US$ Net Assets
Investment Funds - Guernsey
Tetragon Financial
Group Master Fund
Limited - shares 124,768,684 1,113,464,521 836,628,677 103.69%
Total Investments 836,628,677 103.69%
Other Assets and Liabilities (29,781,872) (3.69)%
Net Assets 806,846,805 100.00%
TETRAGON FINANCIAL GROUP LIMITED
FINANCIAL HIGHLIGHTS
For the period ended 30 June 2010 (unaudited) and 31 December 2009
(audited)
The following represents selected per Share operating performance of the
Company, ratios to average net assets and total return information for
the period ended 30 June 2010 and year ended 31 December 2009.
30 Jun 2010 31 Dec 2009
Shares* Shares
US$ US$
Per Share operating performance
Net Asset Value at the start of the period/year 6.47 9.06
Net investment income (excl performance fee) 0.78 1.17
Performance fee (0.37) (0.23)
Net realized and unrealized gain from investments,
options and foreign currencies 0.83 (3.38)
Dividends paid to shareholders (0.14) (0.12)
Income taxes paid (0.02) -
Noncontrolling interest (0.01) -
Other capital transactions (0.10) (0.03)
Net Asset Value at the end of the period/year 7.44 6.47
Total return (NAV excluding dividends) before
performance fee 24.88% (24.72)%
Performance fee (5.72%) (2.54)%
Total return (NAV excluding dividends) after
performance fee 19.16% (27.26)%
Ratios and supplemental data
Ratio to average net assets:
Operating expenses allocated from the Master Fund 1.25% 1.95%
Total operating expenses 1.25% 1.95%
Performance fee 4.41% 3.76%
Net investment income 4.98% 15.36%
An individual shareholder's per Share operating performance and ratios
may vary from the above based on the timing of capital transactions.
*The ratios and returns have not been annualized.
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the period ended 30 June 2010 (unaudited)
Note 1 General Information
Tetragon Financial Group Limited (the "Company") was
registered in Guernsey on 23 June 2005 as a company limited by shares with
registered number 43321. All Voting Shares of the Company are held by Polygon
Credit Holdings II Limited (the "Voting Shareholder").
The registered office of the Company is Tudor House, Le
Bordage, St. Peter Port, Guernsey, Channel Islands, GY1 3PF.
The Company acts as a feeder fund in a "master feeder
structure" investing substantially all of its assets in Tetragon Financial
Group Master Fund Limited (the "Master Fund"). The Company's shares are
listed on the NYSE Euronext Amsterdam Exchange.
Note 2 Significant Accounting Policies
Basis of Presentation
The consolidated financial statements give a true and fair
view, are prepared in conformity with accounting principles generally
accepted in the United States of America ("US GAAP") and comply with the
Companies (Guernsey) Law, 2008.
The Company's investment in the Master Fund is valued based on
the accounting Net Asset Value per share obtained from the Master Fund's
Administrator, which is the Company's proportionate interest in the Net
Assets of the Master Fund. The performance of the Company is directly
affected by the performance of the Master Fund. The Company's Consolidated
Statements of Operations includes its pro-rata share of each type of gain,
loss, income and expense of the Master Fund's Consolidated Statements of
Operations. Attached are the unaudited consolidated financial statements of
the Master Fund, which are an integral part of these consolidated financial
statements. As at 30 June 2010, the Company had 100% (31 December 2009: 100%)
ownership interest in the Master Fund.
For financial statement reporting purposes, the Company is an
investment company and follows the Financial Services - Investment Companies
(ASC 946).
The accounting policies have been consistently applied by the
Company during the period ended 30 June 2010 and are consistent with those
used in the previous year. The consolidated financial statements are
presented in United States Dollars.
Use of Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes,
including the valuation of investments. The Company's management believes
that the estimates utilized in preparing the financial statements are
reasonable and prudent. Actual results could differ materially from these
estimates.
Note 2 Significant Accounting Policies (continued)
Valuation of Investments
The value of the investment in the Master Fund is based on the
accounting Net Asset Value per share obtained from the Master Fund's
Administrator.
Expenses
Expenses, including management fees, incentive fees,
administration fees and custodian fees, are recognized in the Consolidated
Statements of Operations on an accrual basis.
Taxation
The Company is exempt from Guernsey income tax under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged GBP600
per annum.
Capital expenses
Share options granted to the Investment Manager were treated
as a capital expense on the basis that they were granted by the Company as a
fee for the Investment Manager's work in successfully arranging the 2007
global offering and the associated issuance of new capital for the Company.
Share Options
The fair value of options granted to the Investment Manager
was recognised as a charge to the share premium account, with a corresponding
increase in equity, over the period in which the Investment Manager became
unconditionally entitled to the options. The options were fully vested and
immediately exercisable from the date of the grant, on 26 April 2007 and
remain exercisable for ten years.
Dividends payable
Dividends payable on shares are recognised in the Consolidated
Statements of Changes in Net Assets.
Treasury shares
When share capital recognised as equity is repurchased the
amount of the consideration paid, which includes directly attributable costs,
is recognised as a deduction from equity. Repurchased shares are classified
as treasury shares and are presented as a deduction from total equity. When
treasury shares are sold or reissued subsequently, the amount received is
recognised as an increase in equity, and the resulting surplus or deficit on
the transaction is transferred to or from retained earnings.
Note 3 Investment in Master Fund
At the period end, the Master Fund held investments in
securities at fair value, cash and cash equivalents, forward contracts and
other receivables and payables.
As at 30 June 2010, the Company had an investment of US$
925,814,324 in the Master Fund (31 December 2009: US$ 836,628,677).
Note 4 Incentive fee
The Company pays the Investment Manager an incentive fee for
each Calculation Period (a period of three months ending on 31 March, 30
June, 30 September and 31 December in each year or as otherwise determined by
the Directors) equal to 25% of the increase in the Net Asset Value of the
Company during the Calculation Period (before deduction of any dividend paid
or the amount of any redemptions or repurchases of the shares (or other
relevant capital adjustments) during such Calculation Period) above the
Reference Net Asset Value (as defined below) plus a Hurdle (as defined below)
for the Calculation Period. If the Hurdle is not met in any Calculation
Period (and no incentive fee is paid), the shortfall will not carry forward
to any subsequent Calculation Period.
The Hurdle for any Calculation Period will equal (i) the
Reference NAV multiplied by (ii) the Hurdle Rate (as defined below). For
Calculation Periods ending prior to 25 April, 2008 the Hurdle Rate was equal
to 8% per annum multiplied by the actual number of days in the Calculation
Period divided by 365. Subsequently, the Hurdle Rate for any Calculation
Period equals 3-month USD LIBOR determined as of 11:00 a.m. London time on
the first London business date of the then current Calculation Period, plus
the Hurdle Spread of 2.647858% in each case multiplied by (x) the actual
number of days in the Calculation Period divided by 365.
The "Reference NAV" is the greater of (i) NAV at the end of
the Calculation Period immediately preceding the current Calculation Period
and (ii) the NAV as of the end of the Calculation Period immediately
preceding the Calculation Period referred to in clause (i). For the purpose
of determining Reference NAV at the end of a Calculation Period, NAV shall be
adjusted by amount of accrued dividends and the amounts of any redemptions or
repurchase of the shares (or other relevant capital adjustments) and
incentive fees to be paid with respect to that Calculation Period.
The incentive fee in respect of each Calculation Period is
calculated by reference to the Net Asset Value before deduction of any
accrued incentive fee. If the Investment Management Agreement is terminated
other than at the end of a Calculation Period, the date of termination will
be deemed to be the end of the Calculation Period. The incentive fee is
normally payable in arrears within 14 calendar days of the end of the
Calculation Period.
The Incentive Fee for the period ended 30 June 2010 was US$
38,724,263 (30 June 2009: US$ Nil). As at 30 June 2010 US$ 16,458,239 was
outstanding (31 December 2009: US$ 29,781,872).
Note 5 Share Capital
Authorized
The Company has an authorized share capital of US$1,000,000
divided into 10 Voting Shares, having a par value of US$ 0.001 each and
999,999,990 Non-Voting Shares (which are the "Shares" referred to herein),
having a par value of US$ 0.001 each. Shares are issuable either as
certificated shares or uncertificated shares, and in both cases as registered
shares. Shares are only transferable pursuant to regulations that the
Directors may adopt in their discretion.
Voting Shares
The 10 Voting Shares in issue were issued at par and are owned
by the Voting Shareholder, which is a non-U.S. affiliate of the Investment
Manager.
The Voting Shares are the only shares of the Company entitled
to vote for the election of Directors and on all other matters put to a vote
of shareholders, subject to the limited rights of the shares described below.
The Voting Shares are not entitled to receive dividends.
Shares
The Shares are not entitled to vote on any matter other than
limited voting rights in respect of variation of their class rights. The
Shares carry a right to any dividends or other distributions declared by the
Company.
The Directors, upon the recommendation of the Investment
Manager and with prior approval of a resolution of Voting Shares, may allot,
issue or otherwise dispose of Shares to such persons, at such times, for such
consideration and on such terms and conditions as they deem necessary or
desirable. There are no pre-emption rights attaching to any shares.
The Directors, upon the recommendation of the Investment
Manager, may grant options over the shares. The Company may repurchase Shares
and hold Shares as Treasury Shares.
Share transactions
Voting
Shares Shares Shares
No. No. US$
Shares in issue at 31 December 2008 10 125,979,883 125,980
Issued - 1,209,442 1,210
Treasury Shares - (2,420,641) (2,421)
Shares in issue at 31 December 2009 10 124,768,684 124,769
Issued - 425,211 425
Treasury Shares - (2,959,759) (2,960)
Shares in issue at 30 June 2010 10 122,234,136 122,234
Note 5 Share Capital (continued)
Optional Stock Dividend
The Company has an Optional Stock Dividend Plan which offers
investors an opportunity to elect to receive any declared dividend in the
form of dividend shares at a reference price determined by calculating the
five-day weighted average price post ex-dividend date.
During the period, a total dividend of US$ 14,816,214 (30 June
2009: US$ 7,542,110) was declared, of which US$ 12,888,499 (30 June 2009: US$
7,032,171) was paid out as a cash dividend, and the remaining US$ 1,927,715
(30 June 2009: US$ 509,939) reinvested under the Optional Stock Dividend
Plan.
Treasury Shares
On 30 November 2007, the Company announced the implementation
of a share repurchase program of their outstanding Shares. This program was
subsequently updated and will now continue from 26 October, 2009 until 31
October 2010 or until 5% of the Company's outstanding shares have been
repurchased under the updated program or until terminated by the Board. The
Company purchases its Shares in the open market which are then held in a
Treasury Account allowing them to be resold in the market at a later date.
Whilst they are held in the Treasury Account the Shares are neither eligible
to receive dividends nor are they included in the Shares outstanding on the
Consolidated Statements of Assets and Liabilities.
Note 6 Share Premium
30 Jun 2010 31 Dec 2009
US$ US$
Balance at start of period/year 1,177,331,614 1,182,232,455
Discount arising from transaction of shares (10,789,902) (4,900,841)
Balance at end of period/year 1,166,541,712 1,177,331,614
Note 7 Related party transactions
The Investment Manager is entitled to receive management fees
equal to 1.5% per annum of the Net Asset Value of the Company payable monthly
in advance prior to the deduction of any accrued incentive fee. All fees and
expenses of the Company including the Management and Administration fees, but
excluding incentive fees from the Investment Manager, are paid by the Master
Fund and allocated fully to the Company. An incentive fee may be paid to the
Investment Manager as disclosed in Note 4.
The Company invests substantially all of its assets in the
Master Fund, a Guernsey based closed-ended investment company which has the
same Investment Manager as the Company.
Note 7 Related party transactions (continued)
The remuneration for Directors shall be determined by
resolution of the Voting Shareholder. The Directors' annual fee shall be US$
50,000 in compensation for service on the Boards of Directors of both the
Company and the Master Fund. The Master Fund will pay the Directors' fees.
Patrick Dear, Reade Griffith and Alex Jackson have waived their entitlement
to a fee. The Directors are entitled to be repaid by the Company all travel,
hotel and other expenses reasonably incurred by them in the discharge of
their duties. None of the Directors has a contract with the Company or the
Master Fund providing for benefits upon termination of employment.
The Voting Shareholder is an affiliate of Polygon Investment
Partners LLP and Polygon Investment Partners LP (the "Service Providers") and
the Investment Manager and holds all of the Voting Shares. As a result of its
ownership and the degree of control that it exercises, the Voting Shareholder
will be able to control the appointment and removal of the Company's
Directors. Affiliates of the Service Providers also control the Investment
Manager and, accordingly, control the Company's business and affairs.
In recognition of the work performed by the Investment Manager
in successfully arranging the global offering and the associated raising of
new capital for the Company, the Company granted to Polygon Credit Management
LP options (the "Investment Management Options") to purchase 12,545,330 of
the Company's Non-Voting Shares at an exercise price per share equal to the
Offer Price (US$ 10). The Investment Management Options are fully vested and
immediately exercisable on the date of admission to the NYSE Euronext
Amsterdam Exchange and will remain exercisable until the 10th anniversary of
that date. The aggregate fair value of the options granted at the time of the
global offering was US$ 11,789,336. The fair value of each option granted
during 2007 was US$ 0.94 on the date of grant using the Binomial-pricing
model with the following average assumptions: expected dividend yield 8%,
risk-free interest rate of 5.306%, an expected life of 5 years and a
volatility of 17.5%.
Byron Knief, Paddy Dear, Reade Griffith, Alex Jackson and
Rupert Dorey, all Directors of the Company and Master Fund, were shareholders
in the Company as at 30 June 2010, with holdings of 110,000, 276,092,
1,036,209, 417,458 and 77,232 shares, respectively (31 December 2009:
110,000, 276,092, 1,036,209, 417,458 and 75,203 shares respectively).
Note 8 Dividends
30 Jun 2010 31 Dec 2009
US$ US$
Quarter ended 31 December 2008 of US$ 0.03
per share - 3,770,136
Quarter ended 31 March 2009 of US$ 0.03 share - 3,771,974
Quarter ended 30 June 2009 of US$ 0.03 per share - 3,775,617
Quarter ended 30 September 2009 of US$ 0.03
per share - 3,781,939
Quarter ended 31 December 2009 of US$ 0.06
per share 7,442,348 -
Quarter ended 31 March 2010 of US$ 0.06 share 7,373,866 -
14,816,214 15,099,666
The second quarter dividend of US$ 0.08 cents was proposed by
directors on 29 July 2010 and has not been included as a liability in these
consolidated financial statements.
Note 9 Earnings per share
30 Jun 2010 30 Jun 2009
US$ US$
The calculation of the basic and diluted
earnings per share is based on the following
data:
Earnings for the purposes of basic earnings
per share being net profit/(loss)attributable
to shareholders for the period 128,117,931 (440,959,564)
Weighted average number of Shares for the
purposes of basic earnings per share 123,400,107 125,780,174
Effect of dilutive potential Shares:
Share options - -
Weighted average number of Shares for the
purposes of diluted earnings per share 123,400,107 125,780,174
Note 10 Earnings
30 Jun 2010 31 Dec 2009
US$ US$
Balance at start of period/year (382,398,914) (52,197,577)
Net increase/(decrease) in net assets
resulting from operations for the
period/year 128,117,931 (315,101,671)
Dividends paid (14,816,214) (15,099,666)
Balance at end of period/year (269,097,197) (382,398,914)
Note 11 Recent changes to US GAAP
Improving Disclosures about Fair Value Measurements (ASC 820).
In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements
and Disclosures (Topic 820)- Improving Disclosures about Fair Value
Measurements." ASU No. 2010-06 provides amended disclosure requirements
related to fair value measurements. Certain disclosure requirements of ASU
No. 2010-06 were effective for the Company beginning in the first half of
2010, while other disclosure requirements of the ASU are effective for
financial statements issued for reporting periods beginning after December
15, 2010. Since these amended principles require only additional disclosures
concerning fair value measurements, adoption did not and will not affect the
Company's financial condition, results of operations or cash flows.
Note 12 Approval of financial statements
The Directors approved the financial statements on 29 July 2010.
Unaudited Consolidated Interim Report
Tetragon Financial Group Master Fund Limited
For the Period Ended 30 June 2010
Contents
Consolidated Statements of Assets And Liabilities
Consolidated Statements of Operations
Consolidated Statements of Changes In Net Assets
Consolidated Statements of Cash Flows
Consolidated Schedule of Investments
Financial Highlights
Notes To The Consolidated Financial Statements
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
as at 30 June 2010 (unaudited)
30 Jun 2010 31 Dec 2009
Note US$ US$
Assets
Investments in securities, at fair value
(cost US$ 1,445,633,824
(31 Dec 2009: US$ 1,389,420,696)) 2 764,548,314 655,234,320
Intangible assets - CLO Management
Contracts 3,15 260,774 -
Cash and cash equivalents 4 156,188,413 174,352,827
Amounts due from brokers 6 1,880,657 5,870,597
Accrued fee income 2 1,106,628 -
Derivative financial assets - forward
contracts 5 5,367,051 1,595,601
Other receivables 7 84,307 186,393
Total assets 929,436,144 837,239,738
Liabilities
Amounts payable to Guernsey Feeder 101,624 212,635
Other payables and accrued expenses 8 1,926,094 398,426
Income and deferred tax payable 784,660 -
Total liabilities 2,812,378 611,061
Net assets 926,623,766 836,628,677
Equity
Share capital 9 122,234 124,769
Share premium 10 1,125,764,796 1,136,554,698
Earnings 12 (200,072,706) (300,050,790)
Total equity attributable to TFG Master
Fund Limited 925,814,324 836,628,677
Noncontrolling interest 809,442 -
Total shareholders equity 926,623,766 836,628,677
Shares outstanding Number Number
Shares 9 122,234,136 124,768,684
Net asset value per share*
Shares US$ 7.57 US$ 6.71
*calculated by dividing Total equity attributable to TFG Master Fund
Limited by Shares outstanding.
The accompanying notes are an integral part of the consolidated financial
statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
29 July 2010
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
Note US$ US$
Interest income 14 86,664,990 97,294,900
CLO management fee income 6,178,805 -
Other income 579,358 681,737
Investment income 93,423,153 97,976,637
Management fees 16 (6,507,963) (6,866,311)
CLO loan manager operating expenses 16 (2,854,524) -
Administration fees (336,073) (325,857)
Custodian fees (52,141) (25,370)
Legal and professional fees (316,539) (68,446)
Audit fees (120,700) (138,164)
Directors' fees 16 (100,000) (100,004)
Transfer agent fees (63,120) (61,177)
Accumulated amortization on intangible
assets 3 (42,060) -
Other operating expenses (613,869) (338,385)
Interest expense - (592,021)
Operating expenses (11,006,989) (8,515,735)
Net investment income 82,416,164 89,460,902
Net realized and unrealized gain/(loss)
from investments and foreign currency
Net realized gain from:
Investments 261,304 -
Foreign currency transactions 4,351,694 10,409,319
4,612,998 10,409,319
Net increase / (decrease) in unrealized
appreciation / (depreciation) on:
Investments 85,883,833 (528,356,108)
Forward foreign exchange contracts 3,771,450 338,358
Foreign exchange options - (4,880,100)
Translation of assets and liabilities
in foreign currencies (7,372,758) (7,931,935)
82,282,525 (540,829,785)
Net realized and unrealized gain /
(loss) from investments and foreign
currency 86,895,523 (530,420,466)
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
Note US$ US$
Net increase / (decrease) in net assets
resulting from operations before tax 169,311,687 (440,959,564)
Income and deferred tax 13 (1,681,760) -
Net income 167,629,927 (440,959,564)
Less net income attributable to
noncontrolling interest 9 (787,733) -
Net increase / (decrease) in net assets
resulting from operations 166,842,194 (440,959,564)
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
Note US$ US$
Investment income 93,423,153 97,976,637
Operating expenses (11,006,989) (8,515,735)
Net realized gain from investments and
foreign currency 4,612,998 10,409,319
Net unrealized (depreciation) /
appreciation on investments and translation
of assets and liabilities in foreign
currencies 82,282,525 (540,829,785)
Income and deferred tax (1,681,760) -
Income attributable to noncontrolling
interest (787,733) -
Net increase / (decrease) in net assets
resulting from operations 166,842,194 (440,959,564)
Dividends paid to Guernsey Feeder (52,047,896) -
Dividends paid to shareholders 11 (14,816,214) (7,542,110)
Decrease in net assets resulting from
dividends (66,864,110) (7,542,110)
Issue of Shares 1,927,715 509,939
Treasury Shares (12,720,152) (877,379)
(Decrease) / increase in net assets
resulting from net Share transactions (10,792,437) (367,440)
Total increase / (decrease) in net assets 89,185,647 (448,869,114)
Net assets at start of period 836,628,677 1,141,950,194
Net assets before noncontrolling interest 925,814,324 693,081,080
Noncontrolling interest 809,442 -
Net assets at end of period after non
controlling interest 926,623,766 693,081,080
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period ended 30 June 2010 (unaudited)
Period ended Period ended
30 Jun 2010 30 Jun 2009
US$ US$
Operating and investing activities
Net increase / (decrease) in net assets
resulting from operations 166,842,194 (440,959,564)
Adjustments for:
Realized gains on investments (261,304) -
Non cash interest income on investments 29,389,698 (20,286,416)
Net income attributable to non controlling
interest 787,733 -
Accumulate amortization on intangible assets 42,060 -
Unrealized (gains) / losses (82,282,525) 540,829,785
Operating cash flows before movements in
working capital 114,517,856 79,583,805
(Increase) / decrease in receivables (1,004,542) 169,269
Increase / (decrease) in payables 1,416,657 (985,173)
Increase in income and deferred tax payable 784,660 -
Cash flows from operations 115,714,631 78,767,901
Proceeds from sale on investments 10,886,894 -
Purchase of investments (70,732,910) -
Purchase of asset manager (302,834) -
Cash inflows from operating and investing
activities 55,565,781 78,767,901
Financing activities
Amounts due from brokers 3,989,940 105,999,951
Proceeds from issue of Shares 1,927,715 509,939
Treasury Shares (12,720,152) (877,379)
Dividends paid to shareholders (14,816,214) (7,542,110)
Dividends paid to Guernsey Feeder (52,047,896) -
Repayments on repurchase and swap agreements - (117,557,492)
Cash outflows from financing activities (73,666,607) (19,467,091)
Net (decrease) / increase in cash and cash
equivalents (18,100,826) 59,300,810
Cash and cash equivalents at beginning of
period 174,352,827 63,042,822
Effect of exchange rate fluctuations on cash
and cash equivalents (63,588) 1,451,626
Cash and cash equivalents at end of period 156,188,413 123,795,258
The accompanying notes are an integral part of the consolidated financial
statements.
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED SCHEDULE OF INVESTMENTS
As at 30 June 2010 (unaudited)
Security Description Nominal Cost
US$
US Dollar
Cayman Islands - CLO debt equity security
ABS and Structured Finance 18,400,000 17,572,000
Broadly Syndicated Senior Secured Loans 979,292,986 861,426,308
CDOs Squared 28,250,000 25,060,000
Middle Market Senior Secured Loans 245,249,000 227,357,145
1,271,191,986 1,131,415,453
Euro
Ireland - CLO debt equity security
Broadly Syndicated Senior Secured Loans 127,400,000 155,916,581
127,400,000 155,916,581
Luxembourg - CLO debt equity security
Broadly Syndicated Senior Secured Loans 65,100,000 80,651,697
65,100,000 80,651,697
Netherlands - CLO debt equity security
Broadly Syndicated Senior Secured Loans 24,000,000 31,758,532
24,000,000 31,578,532
United States - Leveraged Loans
Broadly Syndicated Senior Secured Loans 49,950,296 45,891,561
49,950,296 45,891,561
Total Investments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Security Description Fair Value % of Net Assets
US$
US Dollar
Cayman Islands - CLO debt equity security
ABS and Structured Finance - -
Broadly Syndicated Senior Secured Loans 522,151,084 56.35%
CDOs Squared - -
Middle Market Senior Secured Loans 144,905,302 15.64%
667,056,386 71.99%
Euro
Ireland - CLO debt equity security
Broadly Syndicated Senior Secured Loans 37,486,006 4.04%
37,486,006 4.04%
Luxembourg - CLO debt equity security
Broadly Syndicated Senior Secured Loans 7,035,579 0.76%
7,035,579 0.76%
Netherlands - CLO debt equity security
Broadly Syndicated Senior Secured Loans 8,583,482 0.93%
8,583,482 0.93%
United States - Leveraged Loans
Broadly Syndicated Senior Secured Loans 44,386,861 4.79%
44,386,861 4.79%
Total Investments 764,548,314 82.51%
Cash and Cash Equivalents 156,188,413 16.85%
Other Assets and Liabilities 5,887,039 0.64%
Net Assets 926,623,766 100.00%
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2009 (audited)
Security Description Nominal Cost
US$
US Dollar
Cayman Islands - CLO debt equity security
ABS and Structured Finance 18,400,000 17,572,000
Broadly Syndicated Senior Secured Loans 940,375,986 858,664,741
CDOs Squared 28,250,000 25,060,000
Middle Market Senior Secured Loans 236,249,000 219,797,145
1,223,274,986 1,121,093,886
Euro
Ireland - CLO debt equity security
Broadly Syndicated Senior Secured Loans 127,400,000 155,916,581
127,400,000 155,916,581
Luxembourg - CLO debt equity security
Broadly Syndicated Senior Secured Loans 65,100,000 80,651,697
65,100,000 80,651,697
Netherlands - CLO debt equity security
Broadly Syndicated Senior Secured Loans 24,000,000 31,758,532
24,000,000 31,758,532
Total Investments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Security Description Fair Value % of Net Assets
US$
US Dollar
Cayman Islands - CLO debt equity security
ABS and Structured Finance - -
Broadly Syndicated Senior Secured Loans 473,608,932 56.61%
CDOs Squared - -
Middle Market Senior Secured Loans 137,793,706 16.47%
611,402,638 73.08%
Euro
Ireland - CLO debt equity security
Broadly Syndicated Senior Secured Loans 27,855,736 3.33%
27,855,736 3.33%
Luxembourg - CLO debt equity security
Broadly Syndicated Senior Secured Loans 6,394,500 0.76%
6,394,500 0.76%
Netherlands - CLO debt equity security
Broadly Syndicated Senior Secured Loans 9,581,446 1.15%
9,581,446 1.15%
Total Investments 655,234,320 78.32%
Cash and Cash Equivalents 174,352,827 20.84%
Other Assets and Liabilities 7,041,530 0.84%
Net Assets 836,628,677 100.00%
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
FINANCIAL HIGHLIGHTS
For the period ended 30 June 2010 (unaudited) and 31 December 2009
(audited)
The following represents selected per share operating performance of the
Fund, ratios to average net assets and total return information for the
period ended 30 June 2010 and the year ended 31 December 2009.
Shares* Shares
1 Jan 2010 to 1 Jan 2009 to
30 Jun 2010 31 Dec 2009
US$ US$
Per Share operating performance
Net asset value at start of period/year 6.71 9.06
Net investment income 0.79 1.17
Net realized and unrealized gain / (loss) from
investments, options and foreign currencies 0.84 (3.37)
Dividends paid to shareholders (0.64) (0.12)
Income tax (0.02) -
Noncontrolling interest (0.01) -
Other capital transactions (0.10) (0.03)
Net Asset Value at the end of the period/year 7.57 6.71
Return (NAV change excluding dividends) 23.99% (24.28%)
Ratios and supplemental data
Ratio to average net assets:
Total operating expenses (1.24%) (1.93%)
Net investment income 9.34% 18.99%
An individual shareholder's per Share operating performance and ratios
may vary from the above based on the timing of capital transactions.
*The ratios and returns have not been annualized.
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the period ended 30 June 2010 (unaudited)
Note 1 General Information
Tetragon Financial Group Master Fund Limited (the "Fund") was
registered in Guernsey on 23 June 2005 as a company limited by shares, with
registered number 43322. All Voting Shares of the Fund are held by Polygon
Credit Holdings II Limited (the "Voting Shareholder"). The Fund continues to
be registered and domiciled in Guernsey. On 29 January 2010, the Fund closed
a transaction with Calyon and certain of its affiliates to acquire Lyon
Capital Management LLC ("LCM"), and certain CLO securities. LCM was
subsequently renamed LCM Asset Management LLC. The Fund currently owns 75% of
LCM through a 100% owned U.S. subsidiary, Tetragon Capital Management LLC
("TCM") and consolidates the income and expenses and assets and liabilities
of that entity in these accounts.
The registered office of the Fund is Tudor House, Le Bordage,
St. Peter Port, Guernsey, Channel Islands GY1 3PF.
Note 2 Significant Accounting Policies
Basis of Presentation
The consolidated financial statements give a true and fair
view, are prepared in conformity with accounting principles generally
accepted in the United State of America ("US GAAP") and comply with the
Companies (Guernsey) Law, 2008.
For financial statement reporting purposes, the Fund is an
investment company and follows Financial Services - Investment Companies (ASC
946).
The accounting policies have been consistently applied by the
Fund during the period ended 30 June 2010 and are consistent with those used
in the previous year.
The financial statements are presented in United States Dollars.
Use of Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes,
including the valuation of investments. The Fund's management believes that
the estimates utilized in preparing the financial statements are reasonable
and prudent; however, actual results could differ materially from these
estimates.
Foreign Currency Translation
Transactions in foreign currencies are translated at the
foreign currency exchange rate ruling at the date of the transaction. All
assets and liabilities denominated in foreign currencies are translated to US
Dollars at the foreign currency closing exchange rate ruling at the reporting
date. Foreign currency exchange differences arising on translation and
realized gains and losses on disposals or settlements of monetary assets and
liabilities are recognized in the Consolidated Statements of Operations.
Foreign currency exchange differences relating to derivative
financial instruments are included in foreign currency transactions and
translation of assets and liabilities in foreign currencies in the
Consolidated Statements of Operations. All other foreign currency exchange
differences relating to monetary items, including cash and cash equivalents
and investments, are included in the foreign currency transactions and
translation of assets and liabilities in foreign currencies in the
Consolidated Statements of Operations.
Note 2 Significant Accounting Policies (continued)
Investment Transactions and Investment Income
Investment transactions are recorded on a trade date basis
(the trade date is the date that an entity commits to purchase or sell an
asset). Realized gains and losses from equity "tranche" investments,
leveraged loans, forwards and options, are calculated on the identified cost
basis. Interest income and expense is recognized in the Consolidated
Statements of Operations as it accrues. Interest income is recognized on an
effective interest rate basis.
Financial Instruments
Investments in CLO debt equity securities, at fair value
In the absence of an active market for the equity tranche
investments in securitization vehicles, a mark to model approach has been
adopted to determine their valuation. A third party valuation model that is
used by the Investment Manager and the Administrator has been selected for
this purpose. The model contains characteristics of the securitization
vehicle structure, including current assets and liabilities and inception to
date performance, based upon information derived by a specialist firm, from
data sources such as the trustee reports. Key model inputs include asset
spreads, expected defaults and expected recovery rates for the relevant
category of underlying collateral held in the securitization vehicle. These
inputs are derived by reference to a variety of market sources, which are
used by both the Investment Manager and the Administrator. The model is used
to project performance ("Expected IRR") for each investment, based on
performance to date and expected future cash flows. As income is received
from the securitization vehicle, only the Expected IRR is recognized as
income and any difference is treated as an adjustment of principal.
The fair value calculations for the equity tranches are
sensitive to the key model inputs, including defaults and recovery rates. The
default rate, recovery rate and other assumptions are determined by reference
to a variety of market sources and applied according to the quality and asset
class mix of the underlying collateral.
The model assumptions are reviewed on a regular basis and
adjusted as appropriate to factor in historic, current and potential market
developments.
As at 30 June 2010 some of the modeling assumptions used,
which were effective as of 31 March 2010 valuation, are as follows:
- Constant Annual Default Rate ("CADR"): This is approximately 5.4%,
which is 2.5x the original Weighted Average Rating Factor ("WARF")
derived base-case default rate, until the end of 2010 and approximately
4.3% or 2.0x the original base-case in 2011. The CADR is approximately
3.2% or 1.5x the original base-case for 2012-14 and approximately 2.2%
or 1.0x the original base-case thereafter. This amount has been
determined by reference to the underlying collateral and rating
agencies research.
- Recovery Rate: The assumed recovery rate is 55%, or
approximately 0.8x of the original base-case assumed weighted-average
recovery rate, until the end of 2011, followed by a return to
approximately 71% the original base-case recovery rate thereafter.
- Prepayment Rate: Loan prepayments are assumed to be 17.5%
p.a. until the end of 2011, followed by 20% p.a. the original base-case
prepayment rate thereafter; a 0% prepayment rate on bonds has been
assumed throughout the life of the transaction.
- Reinvestment Price and Spread: The assumed reinvestment
price is 95%, a level that generates an effective spread over LIBOR of
approximately 440 bps on broadly U.S. syndicated loans, 469 bps on
European loans, and 515 bps on middle market loans, until the end of
2011, followed by a return to par reinvestment price the original base
case reinvestment price thereafter until maturity.
Note 2 Significant Accounting Policies (continued)
Investments in CLO debt equity securities, at fair value (continued)
If over the lifetime of an individual deal, collateral losses diverge
from the levels assumed in the model, then the actual returns may differ from
the current levels projected by the model, which would impact the Net Asset
Value of the Fund.
The Fund recognizes interest income and any impairment pursuant to
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" (ASC 325). Recognition
of Interest Income as impairment on purchased and Retained Beneficial
Interest in Securitized Financial Assets sets forth rules for recognizing
interest income and determining when an investment's amortized cost must be
written down to fair value because of other than temporary impairments.
The Fund determines periodic interest income based on the principles of
ASC 325. The excess of the estimated future cash flows over the initial
investment is the accretable yield which is recognized as interest income
over the life of the investment using the effective yield method. Cash
distributions received from investments under ASC 325 may not necessarily
equal the income earned during any given year or period. The amortized cost
of each investment is equal to the initial investment plus the yield accrued
to date less all cash received to date less any write downs for impairment.
Investments are evaluated for impairment as of each month end or more
frequently if the Fund becomes aware of any material information that would
lead it to believe an investment may be impaired. Unrealized gains and losses
occur when actual cash receipts differ from the amounts initially estimated,
discount rates and/or assumptions included in the fair valuation models (such
as estimated default rates, prepayment or recovery rates) have changed. Any
unrealized loss is tested for permanent impairment as required by ASC 325.
In determining permanent impairment, the present value of the future
estimated remaining cash flows discounted at the last rate used to recognize
the accretable yield on the investment is compared with the present value of
the previously estimated remaining cash flows discounted at the last rate
used to recognize accretable yield on the investment adjusted for the cash
received during the intervening period. If the present value of the newly
estimated cash flows has decreased then an adverse change and a temporary
impairment has occurred. When an impairment is other than temporary, the
investment is written down to fair value as of the reporting date and any
previously unrealized loss is realized in the period such a determination is
made. The Fund evaluates its impairment for investments on an investment by
investment basis, not on an overall portfolio basis.
The Fund adopted the provisions of "Fair Value Measurements" (ASC 820).
ASC 820 defines fair value as the price that the Fund would receive to sell
an asset or pay to transfer a liability in an orderly transaction between
market participants at the measurement date.
ASC 820 also establishes a framework for measuring fair value and a three
level hierarchy for fair value measurement based upon the transparency of
inputs to the valuation of an asset or liability. Inputs may be observable or
unobservable and refer broadly to the assumptions that market participants
would use in pricing the asset or liability.
The following is a summary of the inputs used as of 30 June 2010 in
valuing the Fund's assets carried at fair value:
The three levels of the fair value hierarchy are described below:
Level 1 - Quoted in active markets for identical investments
Level 2 - Prices determined using other significant observable inputs.
These may include quoted prices for similar securities,
interest rates, prepayments speeds, credit risk and others.
Level 3 - Unobservable inputs. Unobservable inputs reflect assumptions
market participants would be expected to use in pricing the
asset or liability.
Note 2 Significant Accounting Policies (continued)
Investments in CLO debt equity securities, at fair value (continued)
CLO Debt Broadly Syndicated
Equity Securities Senior Secured Loans
US$ US$
Level 1 - Quoted prices - -
Level 2 - Other significant
observable inputs - 44,386,861
Level 3 - Significant unobservable
inputs 720,161,453 -
720,161,453 44,386,861
Net Unrealised Appreciation /
(Depreciation) on forward
foreign exchange contracts Total
US$ US$
Level 1 - Quoted prices - -
Level 2 - Other significant
observable inputs 5,367,051 49,753,912
Level 3 - Significant unobservable
inputs - 720,161,453
5,367,051 769,915,365
The following is a reconciliation of the Fund's assets in which
significant unobservable inputs (Level 3) were used in determining fair
value at 30 June 2010.
30 Jun 2010 31 Dec 2009
US$ US$
Balance at start of period/year 655,234,320 1,082,495,071
Purchases of investments 10,321,567 -
Change in unrealized appreciation
/ (depreciation) 61,208,246 (234,373,996)
Change in ALR Fair Value adjustment 18,179,507 (207,945,924)
(Amortisation)/ Accretion (24,782,187) 15,059,169
Balance at end of period/year 720,161,453 655,234,320
In determining fair value of the portfolio the Fund has applied, on a
deal by deal basis, a Statement of Assets and Liabilities fair value
adjustment (the "Accelerated Loss Reserve Fair Value Adjustment" or "ALR").
The ALR was initially determined by applying a more pessimistic set of
short term assumptions to the portfolio and sought to reflect, among other
things, potential losses which in each case may not be appropriate for
inclusion in the Fund's base case IRR modeling assumptions, but which may
have an impact on the fair value of its investments. The current impact of
the ALR is to have the effect of applying a higher discount rate than the
deals IRRs to their respective cash flows.
When assessing the reasonableness of the fair value of the Fund's
portfolio after taking into account the ALR, the Investment Manager uses
several benchmarks, including the effective discount rate implied by the ALR
and the change in the value of the Fund's investments relative to other CLO
tranches. As at 30 June 2010, TFG's portfolio fair value, which is the sum of
the base case fair value plus the ALR, was the equivalent of applying a
discount rate that was a significant spread above BB tranches of CLO equity
to the base cash flows. At 30 June 2010, the ALR totaled approximately US$
330.8 million (31 December 2009: US$ 349.0 million).
Investments in leveraged loans, at fair value
To the extent that the Fund's leveraged loans are exchange traded and are
priced or have sufficient bid price indications from normal course trading at
or around the valuation date (financial reporting date), such pricing will
determine fair value. Pricing service marks from third party pricing services
may be used as an indication of fair value, depending on the volume and
reliability of the marks, sufficient and reasonable correlation of bid and
ask quotes, and, most importantly, the level of actual trading activity.
Note 2 Significant Accounting Policies (continued)
Investments in leveraged loans, at fair value (continued)
Interest income on leverage loans, including amortization of premium and
accretion of discount, is recorded on an effective interest rate basis to the
extent that such amounts are expected to be collected. As of 30 June 2010, no
issuers were considered in default.
Forward currency contracts
Forward currency contracts are recognized at fair value on the date on
which a derivative contract is entered into and are subsequently re-measured
at their fair value. Fair values are obtained from quoted market prices in
active markets, including recent market transactions, and valuation
techniques, including discounted cash flow models, as appropriate. All
derivatives are carried as assets when fair value is positive and as
liabilities when fair value is negative.
The best evidence of fair value of a forward contract at initial
recognition is the transaction price. Subsequent changes in the fair value of
any forward contract are recognized immediately in the Consolidated
Statements of Operations.
Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents, short-term
highly liquid investments that are readily convertible to known amounts of
cash, are subject to an insignificant risk of changes in value, and are held
for the purpose of meeting short-term cash commitments rather than for
investment or other purposes.
Acquired intangible assets, CLO management agreements
Acquired intangible assets represent CLO management agreements and are
amortised over its useful life. Acquired intangible assets are stated at cost
less accumulated amortisation and impairment.
Amortisation is recognised in profit or loss on a straight-line basis
over the useful life of the agreements. The estimated useful life for the
purposes of amortization is three years.
Income from CLO Management
Income from CLO management comprises discretionary portfolio
management fees of senior management fee and subordinated management fee.
Senior management fee income is recognised on an accruals basis. For the
subordinated management fee income, the Fund makes estimate interim accruals
of such subordinated income based on recent historical distributions and
CLO's performance and adjusts such accruals on a quarterly basis to reflect
actual distributions. Senior management fees range from 0 bps to 20 bps and
subordinated management fees range from 30 bps to 50 bps.
Expenses
Expenses, including management fees, incentive fees, administration fees,
custodian fees and CLO loan manager operating expenses are recognized in the
Consolidated Statements of Operations on an accrual basis.
Taxation
Income taxes, Fund
The Fund is exempt from Guernsey income tax under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 and is charged GBP 600 per annum. The Fund
has however consolidated a US operating business which is subject to US
federal, state and city taxes.
Note 2 Significant Accounting Policies (continued)
Taxation (continued)
Income taxes, CLO manager
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Following the adoption of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (included in FASB ASC Subtopic 740aEUR'10 - Income
Taxes - Overall), the Fund recognizes the effect of income tax positions only
if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. There are no
uncertain tax positions recognized at 30 June 2010.
Dividends payable
Dividends payable on shares are recognized in the Consolidated Statements
of Changes in Net Assets.
Principles of Consolidation
The Fund owns 100% of a US subsidiary, TCM which purchased 75% of an
asset manager, LCM. The Fund has determined that it has control over LCM for
the purposes of consolidation and therefore consolidates 100% of the income
and expenses and assets and liabilities on a line by line basis. The
remaining 25% is reflected through the Noncontrolling interest line.
The Fund also invests in certain securities which are managed by LCM or
other CLO managers and has determined that it does not have control over the
significant operational and financial decisions of these securities.
The Fund is the primary beneficiary of some securities which are
considered variable interest entities ("VIE"). As the Fund is accounting for
its investments at fair value in accordance with the accounting guidance in
the AICPA Audit and Accounting Guide: Investment Companies, consolidation of
these entities is not required. At 30 June, 2010 the Fair value of these VIEs
is approximately $720.2 million. These are non-recourse securities with no
contingent liabilities where the Fund's maximum loss exposure is capped at
the current carrying value.
Note 3 Acquired intangible assets
30 June 2010
Weighted
average
Gross outstanding
carrying amortization Accumulated
amount period amortization
$ $
Amortizing intangible assets
CLO Management contracts 260,774 2 years 7 months (42,060)
Total 260,774 (42,060)
Note 3 Acquired intangible assets (continued)
Aggregate amortization expense for amortizing intangible
assets was US$ 42,060 for the period ended 30 June 2010. Estimated
amortization expense for the next four years is US$ 92,532 in 2010, US$
100,945 in 2011, US$ 100,945 in 2012 and US$ 8,412 in 2013.
Note 4 Cash and Cash Equivalents
30 Jun 2010 31 Dec 2009
US$ US$
Cash and current deposits with banks 155,363,128 174,282,168
Foreign currency cash (cost: US$ 873,595 (31
December 2009: US$ 55,380)) 825,285 70,659
156,188,413 174,352,827
Note 5 Financial Instruments with Off-Balance Sheet Risk and
Concentration of Credit Risk
To the extent prices may be obtained on some or all of the Fund's assets,
those prices may be extremely volatile, and will generally fluctuate due to a
variety of factors that are inherently difficult to predict, including, but
not limited to, changes in interest rates, prevailing credit spreads, general
economic conditions, financial market conditions, domestic and international
economic or political events, developments or trends in any particular
industry, and the financial condition of the obligors of the Fund's assets.
The Fund's assets include securities or other financial instruments or
obligations which are very thinly traded or for which no market exists or
which are restricted as to their transferability under applicable securities
laws. The valuation of equity tranche investments in securitization vehicles
is determined utilizing a financial model that reflects numerous variables
including, among other things, the Investment Manager's assessment of the
nature of the investment and the relevant collateral, security position, risk
profile, expected default rates and the originator and servicer of the
position.
As each of these factors involves subjective judgments and
forward-looking determinations by the Investment Manager, the Investment
Manager's experience and knowledge is instrumental in the valuation process.
Further, because of overall size or concentration in particular markets of
positions held by the Fund, the value at which its investments can be
liquidated may differ, sometimes significantly, from the interim valuations
arrived at.
The majority of the Fund's investments consist of interests in and/or
economic exposures to limited recourse securities that are subordinated in
right of payment and ranked junior to other securities that are secured by
the same pool of assets. In the event of default by an issuer in relation to
such investments holders of the issuer's more senior securities will be
entitled to payments in priority to the Fund.
Some of the Fund's investments may also have structural features that
divert payments of interest and/or principal to more senior classes secured
by the same pool of assets when the delinquency or loss experience of the
pool exceeds certain levels. This may lead to interruptions in the income
stream that the Fund anticipates receiving from its investment portfolio. To
the extent that actual losses on the underlying collateral exceed the level
of assumed losses used to determine the fair value of the investment, the
value of the investment may be reduced.
Some of the Fund's Assets are held by a custodian and the Fund is exposed
to the credit risk of this counterparty. The Fund has also entered into
derivative transactions which results in exposure to counterparty credit
risk. The counterparty to these derivative transactions are major financial
institutions.
Note 5 Financial Instruments with Off-Balance Sheet Risk and
Concentration of Credit Risk (continued)
As part of the Fund's current investment strategy it may employ hedging
strategies and leverage in seeking to provide attractive returns from the
portfolio while managing risk. The hedging strategy may include the use of
single name or index credit hedges when and where appropriate as well as
foreign exchange rate hedges. This is reviewed on an on-going basis in order
to seek to address identified risks to the extent practicable and in a cost
effective manner. As at 30 June 2010 and 31 December 2009 there were no
credit hedges in place.
The Fund's investments that are denominated in currencies other than US
Dollars are subject to the risk that the value of such currency will decrease
in relation to the US Dollar. The Fund currently uses foreign exchange rate
forwards and foreign exchange rate options to seek to hedge this currency
risk, in whole or in part, to the extent practicable and in a cost effective
manner. As described above, the hedging strategy (including, these currency
hedges) are reviewed on an on-going basis.
Details of the Fund's investment portfolio at the reporting date are
disclosed in the Schedule of Investments on pages 7 and 8.
Forward contracts
The following foreign exchange forward contracts were
unsettled at 30 June 2010:
Maturity Date Amount Bought Amount Sold Unrealized Gain
US$
12 July 2010 US$ 47,944,800 EUR 36,000,000 3,920,122
12 July 2010 US$ 10,881,480 EUR 8,000,000 1,098,218
12 July 2010 US$ 6,463,250 EUR 5,000,000 348,711
5,367,051
The following foreign exchange forward contracts were
unsettled at 31 December 2009:
Maturity Date Amount Bought Amount Sold Unrealized Gain
US$
11 January 2010 US$ 66,105,000 EUR 45,000,000 1,595,601
1,595,601
Note 6 Amounts Due From Brokers
The amounts due from brokers is cash pledged as collateral on the forward
contracts. At 30 June 2010 the collateral cash balance with UBS AG was US$
1,880,657 (31 December 2009: US$ 5,677,691). US$ Nil is due to coupons not
yet received as at 30 June 2010 (31 December 2009: US$ 192,906).
Note 7 Other Receivables
30 Jun 2010 31 Dec 2009
US$ US$
Bank interest receivable 1,844 1,097
Prepaid insurance 6,754 185,296
Other receivables 75,709 -
84,307 186,393
Note 8 Other Payables and Accrued Expenses
30 Jun 2010 31 Dec 2009
US$ US$
CLO loan manager operating expense accrual 1,278,411 -
Audit fee accrual 182,506 311,228
Legal and professional fees accrual 390,377 20,398
Directors' fee accrual 50,000 50,000
Custodian fee accrual 16,800 16,800
Miscellaneous fee accrual 8,000 -
1,926,094 398,426
Note 9 Share Capital
Authorized
The Fund has an authorized share capital of US$ 1,000,000
divided into 10 Voting Shares, having a par value of US$ 0.001 each and
999,999,990 Non-Voting Shares (which are the "Shares" referred to herein),
having a par value of US$ 0.001 each.
Voting Shares
All of the Funds Voting Shares are issued at par and are
beneficially owned by the Voting Shareholder, a non-U.S. affiliate of the
Investment Manager. The Voting Shares will be the only shares entitled to
vote for the election of Directors and on all other matters put to a vote of
shareholders, subject to the limited rights of the Shares described below.
The Voting Shares are not entitled to receive dividends.
Non-Voting Shares
The Shares carry a right to any dividends or other
distributions declared by the Fund. The Shares are not entitled to vote on
any matter other than limited voting rights in respect of variation of their
own class rights.
Dividend Rights
Dividends may be paid to the holders of Shares at the sole and
at the absolute discretion of the Directors. The Voting Shares carry no
rights to dividends. Through the Optional Stock Dividend Plan, shareholders
can elect to receive dividends in the form of new Shares in the Fund instead
of cash dividends. The new Shares are of the same class and type and will
rank equally with the existing issued Shares in all respects.
Share transactions
Non-Voting Non-Voting
Voting Shares Shares Shares
No. No. US$
Shares in issue at 31 December 2008 10 125,979,883 125,980
Issued - 1,209,442 1,210
Treasury shares - (2,420,641) (2,421)
Shares in issue at 31 December 2009 10 124,768,684 124,769
Issued - 425,211 425
Treasury shares - (2,959,759) (2,960)
Shares in issue at 30 June 2010 10 122,234,136 122,234
Note 9 Share Capital (continued)
Treasury shares
On 30 November 2007, the Guernsey Feeder, an investor in the
Fund, announced the implementation of a share repurchase program of their
outstanding Shares. This program was subsequently updated and will now
continue from 26 October 2009 until 31 October 2010 or until 5% of the
Guernsey Feeder's outstanding shares have been repurchased under the updated
program or until terminated by the Board. In conjunction with this the Fund
has undertaken to repurchase an identical number of its own Shares from the
Guernsey Feeder as and when it makes these repurchases in the open market.
The Fund will match the price per share paid by the Guernsey Feeder. The
shares are held in a Treasury Account which allows them to be resold back to
the Guernsey Feeder if it resells its own shares back into the market at a
later date. Whilst they are held in the Treasury Account the shares are
neither eligible to receive dividends nor are they included in the Shares
outstanding on the Consolidated Statements of Assets and Liabilities.
Noncontrolling Interest
The Fund adopted "Noncontrolling Interests in Consolidated Financial
Statements" which requires noncontrolling interests to be classified in the
consolidated statements of income as part of consolidated net earnings
($787,733 for the period ended 30 June 2010) and to include the accumulated
amount of noncontrolling interests in the consolidated balance sheets as part
of shareowners' equity ($809,442 at 30 June 2010). If a change in ownership
of a consolidated subsidiary results in loss of control and deconsolidation,
any retained ownership interests are remeasured with the gain or loss
reported in net earnings.
Note 10 Share Premium
30 Jun 2010 31 Dec 2009
US$ US$
Balance at start of period/year 1,136,554,698 1,141,455,539
Discount arising from net transactions of
Shares (10,789,902) (4,900,841)
Balance at end of period/year 1,125,764,796 1,136,554,698
Note 11 Dividends
30 Jun 2010 31 Dec 2009
US$ US$
Quarter ended 31 December 2008 of US$ 0.03 per
share - 3,770,136
Quarter ended 31 March 2009 of US$ 0.03 per share - 3,771,974
Quarter ended 30 June 2009 of US$ 0.03 per share - 3,775,617
Quarter ended 30 September 2009 of US$ 0.03 per
share - 3,781,939
Quarter ended 31 December 2009 of US$ 0.06 per
share 7,442,348 -
Quarter ended 31 March 2010 of US$ 0.06 per share 7,373,866 -
14,816,214 15,099,666
The second quarter dividend of US$ 0.08 cents was proposed by
the Directors on 29 July 2010 and has not been included as a liability in
these financial statements.
The Fund also pays a dividend to the Guernsey Feeder that is
sufficient to pay their incentive fee liability which in the period to 30
June 2010 was US$ 52,047,896 (period to 30 June 2009: US$ Nil).
Note 12 Earnings
30 Jun 2010 31 Dec 2009
US$ US$
Balance at start of period/year (300,050,790) 368,675
Net increase / (decrease) in net assets
resulting from operations for the period/year 166,842,194 (285,319,799)
Dividends paid to shareholders (14,816,214) (15,099,666)
Dividends paid to Feeder Fund (52,047,896) -
Balance at end of period/year (200,072,706) (300,050,790)
Note 13 Income Tax
Income tax attributable to income from continuing operations consists of:
Current Deferred Total
Period ended 30 June 2010:
US federal (TCM) 803,488 348,312 1,151,800
State and local (TCM) 398,671 - 398,671
State (LCM) 131,289 - 131,289
1,333,448 348,312 1,681,760
LCM is a partnership for US tax purposes and it only incurs
certain state taxes. TCM is a corporation for US tax purposes and has
federal, state and city taxes levied upon its taxable income.
A deferred tax liability of $348,312 has been recognized with
respect to undistributed earnings of TCM.
Note 14 Interest Income
30 Jun 2010 30 Jun 2009
US$ US$
Debt securities - CLO debt equity 85,935,736 97,185,834
Debt securities - Leveraged loans 621,069 -
Cash and short-term funds 108,185 109,066
86,664,990 97,294,900
Note 15 Acquisition
On 31 January 2010, after giving effect to the transaction,
the Fund held 75% of the outstanding membership interests of LCM. The results
of LCM's operations have been included in the consolidated financial
statements since that date. LCM is a US based asset manager which currently
manages six performing CLO vehicles for which it receives management fees.
LCM was purchased for cash consideration of $302,834.
The following table summarizes the consideration paid for LCM and the
amounts of estimated fair value of the assets acquired and liabilities
assumed at the acquisition date.
Note 15 Acquisition (continued)
30 Jun 2010
US$
Consideration
Cash
Fair value of total consideration transferred 302,834
302,834
Recognized amounts of identifiable assets acquired
Intangible assets - CLO management contracts 302,834
Total identifiable net assets assumed 302,834
The acquired intangible assets, which are CLO management agreements, are
being amortized over a period of three years.
Note 16 Related Party Transactions
The Guernsey Feeder, a Guernsey based closed-ended investment
company, invests substantially all of its assets in the Fund and has the same
Investment Manager as the Fund.
All fees and expenses of the Guernsey Feeder and the Fund
(including management fees), except for the incentive fees, are paid by the
Fund and allocated to the Guernsey Feeder. An incentive fee may be paid to
the Investment Manager by the Guernsey Feeder.
The remuneration for Directors shall be determined by
resolution of the Voting Shareholder. The Directors' annual fee should be US$
50,000 in compensation for service on the Boards of Directors of both the
Guernsey Feeder and the Fund. The Fund will pay the Directors' fees. Patrick
Dear, Reade Griffith and Alex Jackson have waived their entitlement to a fee.
The Directors are entitled to be repaid by the Fund for all
travel, hotel and other expenses reasonably incurred by them in the discharge
of their duties. None of the Directors has a contract with the Guernsey
Feeder or the Fund providing for benefits upon termination of employment.
The Voting Shareholder is an affiliate of Polygon Investment
Partners LLP and Polygon Investment Partners LP (the "Service Providers") and
the Investment Manager and holds all of the Voting Shares. As a result of its
ownership and the degree of control that it exercises, the Voting Shareholder
will be able to control the appointment and removal of the Guernsey Feeder's
Directors. Affiliates of the Service Providers also control the Investment
Manager and, accordingly, control the Fund's business and affairs.
The Fund, through its 100% owned U.S. subsidiary TCM,
purchased from CLCM Limited Partnership, an affiliate of Calyon New York
Branch, 100% of LCM on 29 January 2010. As of the same date it subsequently
sold 25% of LCM at cost to Polygon Management L.P. ("PM"), an affiliate of
the Voting Shareholder. The Service Providers have an agreement to provide
certain operating, infrastructure and administrative services to LCM.
Note 17 Recent changes to US GAAP
Improving Disclosures about Fair Value Measurements (ASC 820). In January
2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820)- Improving Disclosures about Fair Value
Measurements." ASU No. 2010-06 provides amended disclosure requirements
related to fair value measurements. Certain disclosure requirements of ASU
No. 2010-06 were effective for the Fund beginning in the first half of 2010,
while other disclosure requirements of the ASU are effective for financial
statements issued for reporting periods beginning after December 15, 2010.
Since these amended principles require only additional disclosures concerning
fair value measurements, adoption did not and will not affect the Fund's
financial condition, results of operations or cash flows.
Transfers of Financial Assets and Interests in Variable
Interest Entities (ASC 860 and 810). In June 2009, the FASB issued amended
accounting principles that changed the accounting for securitizations and
VIEs. These principles were codified as ASU No. 2009-16, "Transfers and
Servicing (Topic 860)-Accounting for Transfers of Financial Assets" and ASU
No. 2009-17, "Consolidations (Topic 810)-Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities" in December 2009.
ASU No. 2009-16 eliminates the concept of a qualifying special-purpose entity
(QSPE), changes the requirements for derecognizing financial assets, and
requires additional disclosures about transfers of financial assets,
including securitization transactions and continuing involvement with
transferred financial assets. ASU No. 2009-17 changes the accounting and
requires additional disclosures for VIEs. Under ASU No. 2009-17, the
determination of whether to consolidate a VIE is based on the power to direct
the activities of the VIE that most significantly impact the VIE's economic
performance together with either the obligation to absorb losses or the right
to receive benefits that could be significant to the VIE, as well as the
VIE's purpose and design. Additionally, entities previously classified as
QSPEs are now required to be evaluated for consolidation and disclosure as
VIEs. Previously, QSPEs were not consolidated and not considered for
disclosure as VIEs and the determination of whether to consolidate a VIE was
based on whether an enterprise had a variable interest, or combination of
variable interests, that would absorb a majority of the VIE's expected
losses, receive a majority of the VIE's expected residual returns, or both.
ASU Nos. 2009-16 and 2009-17 were effective for fiscal years beginning after
November 15, 2009. In February 2010, the FASB issued ASU No. 2010-10,
"Consolidations (Topic 810) - Amendments For Certain Investment Funds," which
defers the requirements of ASU No. 2009-17 for certain interests in
investment funds and certain similar entities.
The Fund adopted ASU Nos. 2009-16 and 2009-17 as of 1 January
2010 and reassessed whether it was the primary beneficiary of any VIEs in
which it had variable interests (including VIEs that were formerly QSPEs) as
of that date. Adoption did not have a material impact on the Company's
results of operations or cash flows as all investments are carried at fair
value in accordance Financial Services - Investment Companies (ASC 946) and
as the Fund has determined that it does not have control over the significant
operating, financial and investing decisions of the CLO securities that it
invests.
Note 18 Approval of Financial Statements
The Directors approved the financial statements on 29 July 2010.
For further information, please contact:
TFG:
David Wishnow/Yuko Thomas
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Citigate Dewe Rogerson
Michael Berkeley/Justin
Griffiths/Clare Simonds
tetragon@citigatedr.co.uk
PRN NLD
TFG: David Wishnow/Yuko Thomas, Investor Relations, ir at tetragoninv.com; Press Inquiries: Citigate Dewe Rogerson, Michael Berkeley/Justin, Griffiths/Clare Simonds, tetragon at citigatedr.co.uk
Tags: August 2, Inception, London, Tetragon Financial Group Limited, United Kingdom
