Tetragon Financial Group Limited (TFG): Performance Report For Period Ended 30 June 2011
By Tetragon Financial Group Limited, PRNESunday, July 31, 2011
LONDON, August 1, 2011 -
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, 2011.[2]
- Executive Summary:
Corporate-Level Results
- Operating Results: TFG’s investment portfolio continued to perform well in the second quarter of 2011. The company produced EPS of $0.74 (Q1 2011: $1.46) and consolidated net income of $88.1 million (Q1 2011: $174.7 million). Please see the Statement of Operations on page 17 for further detail. Consolidated net assets grew to $1,368.3 million or $11.52 per share (Q1 2011: $1,298.0 million or $10.85 per share). These results were driven mainly by continued improvements in the credit quality and structural strength of TFG’s CLO investments, as well as nominal spread increases and a growing share of LIBOR floors within the U.S. CLO portfolio. Please refer to Figure 1 below for a historical summary of TFG’s Consolidated Net Assets, NAV per share and share price.
Figure 1: TFG Consolidated Net Assets ($MM) and NAV per Share[1]
FIGURE 1
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
Consolidated
Net Assets ($ MM) 1289 1319 1348 1142 723 693 721
NAV / Share 10.25 10.44 10.69 9.06 5.75 5.5 5.71
Price/ Share 5.2 4.75 5 2.87 1.01 1.18 1.9
Continued
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
Consolidated
Net Assets ($ MM) 807 867 909 1019 1138 1298 1368
NAV / Share 6.47 7.02 7.44 8.43 9.47 10.85 11.52
Price/ Share 3.91 4.5 4.14 4.39 5.7 7.6 8.3
- Source: NAV per share based on TFG’s financial statements as of the relevant quarter-end date; TFG’s closing share price data as per Bloomberg as of the last trading day of each quarter. Please note that the NAV per share reported as of each quarter-end date excludes any shares held in treasury as of that date.
- Cash Receipts and Balances: TFG’s CLO investments continued to generate meaningful cash flows in the quarter. In Q2 2011, the CLO portfolio produced $102.4 million of gross cash from investments (Q1 2011: $90.9 million). The ending cash balance for the second quarter was $67.7 million, down from $147.0 million as of the end of the prior quarter, although as of June 30, 2011 the Company had $53.9 million of pending receivables from the sales of certain direct loans, all of which had been received as of July 31, 2011. In addition, as of the end of Q2 2011, TFG held approximately $96.7 million in market value of liquid U.S. leveraged loans, down from $103.2 million at the end of Q1 2011.
- Executive Summary (continued):
Investment Portfolio Performance Highlights
- CLO Collateral Performance: In the context of improving fundamental credit conditions, TFG’s CLO portfolio’s underlying loan defaults and CCC-asset holdings continued to outperform market-wide averages.
- CLO IRRs: The weighted-average IRR of TFG’s CLO portfolio ended Q2 2011 at 16.3%, up from 15.8% at the end of the previous quarter. This reflected, among other factors, continued gains in the credit quality and increased excess interest availability among certain of TFG’s CLO investments. Please refer to Figure 2 below for a historical summary of the weighted-average IRR on TFG’s CLO investments.
Figure 2: Weighted-Average IRR on TFG’s CLO Investments[1]
FIGURE 2
Weighted-Average
IRR on TFG's CLO
Investments Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
16.0% 16.6% 16.9% 13.8% 10.6% 9.2% 10.3%
Continued
Weighted-Average
IRR on TFG's CLO
Investments Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
11.9% 12.3% 13.1% 13.7% 15.1% 15.8% 16.3%
- Source: TFG as of the outlined quarter-end date.
- New CLO Investments: During Q2 2011, the company invested approximately $32.7 million in a majority equity stake of a new issue CLO, LCM IX. The deal is managed by LCM Asset Management LLC (”LCM”) and closed at the end of June 2011.
- Direct Loan Investments: TFG’s direct holdings of bank loans decreased to a fair value of approximately $96.7 million as of the end of Q2 2011, down from $103.2 million as of the end of the prior quarter. The reduction in fair value was primarily the result of principal pay downs. The direct loan portfolio continued to perform well during this period, experiencing no defaults or downgrades.
- Executive Summary (continued):
Asset Management Platform
- LCM: LCM performance was strong during Q2 2011, with all LCM Cash Flow CLOs continuing to pay senior and subordinated management fees.[3]As of the end of the second quarter, total loan assets under management were approximately $3.5 billion, up from $2.9 billion at the end of Q1 2011. This increase was driven by the issuance of LCM IX, which added approximately $650.0 million in managed assets. The increase in assets under management resulting from the issuance of LCM IX was partially offset by the continued amortization of LCM I, which is currently past its reinvestment period.
- GreenOak: GreenOak continues to build its team and execute on its business growth strategy.
Performance Fee
A performance fee of $26.2 million was accrued in Q2 2011 in accordance with TFG’s investment management agreement and based on a “Reference NAV” with respect to Q1 2011. The hurdle rate for the Q3 2011 incentive fee has been reset at 2.8936% (Q2 2011: 2.9489%) as per the process outlined in TFG’s 2010 Audited Financial Statements and in accordance with TFG’s investment management agreement.[4]
- Corporate-Level Performance Details:
- Capital Distributions: TFG’s Board approved a dividend of $0.10 per share with respect to Q2 2011. Since its public listing, TFG has distributed approximately $1.58 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. Through the first six months of 2011, the Company repurchased a total of 1,948,814 shares at an aggregate cost of approximately $14.9 million. Please refer to Figure 3 and Figure 4 below for a historical summary of TFG’s NAV per share, dividend distributions, and share buy-back program.
Figure 3: Quarterly TFG NAV per Share and Cumulative Dividends per Share (DPS) ($)[1]
FIGURE 3
Q2 2007Q3 2007 Q4 2007Q1 2008 Q2 2008 Q3 2008Q4 2008 Q1 2009
NAV / Share 10.08 10.29 10.03 10.25 10.44 10.69 9.06 5.75
Cumulative DPS 0.15 0.30 0.45 0.60 0.75 0.90 0.93 0.96
Continued
Q2 2009Q3 2009 Q4 2009Q1 2010 Q2 2010 Q3 2010Q4 2010 Q1 2011
NAV / Share 5.50 5.71 6.47 7.02 7.44 8.43 9.47 10.85
Cumulative DPS 0.99 1.02 1.08 1.14 1.22 1.30 1.39 1.48
Continued
Q2 2011
NAV / Share 11.52
Cumulative DPS 1.58
- Source: NAV per share and Cumulative DPS as per TFG’s financial disclosures for each relevant quarter-end date. The cumulative dividends per share reflect dividends announced but not necessarily paid with respect to each relevant quarter (as well as prior quarters). Please note that the NAV per share reported as of each quarter-end date excludes any shares held in treasury as of that date.
- Corporate-Level Performance Details (continued):
- Capital Distributions (continued):
Figure 4: Quarterly TFG Share Repurchases (in ‘000s)[1]
FIGURE 4
Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
Quarterly #
of Shares
Repurchased 312 586 233 732 1000 484 94
Average Purchase
Price of Shares
Repurchased 6.95 6.44 4.79 5.62 3.37 1.60 1.10
Continued
Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011
Quarterly #
of Shares
Repurchased 85 1758 1378 1582 1815 967 662
Average Purchase
Price of Shares
Repurchased 1.25 3.22 3.87 4.67 4.27 5.23 7.25
Continued
Quarterly # Q2 2011
of Shares
Repurchased
Average Purchase 1287
Price of Shares
Repurchased 7.84
- The Average Purchase Price of Shares Repurchased is a weighted-average using the number of shares repurchased each quarter and including commissions.
- Investment Portfolio Performance Details:
- CLO Portfolio Size: As of the end of Q2 2011, the estimated total fair value of TFG’s CLO investment portfolio was approximately $1,149.7 million, up from approximately $1,098.5 million as of the end of the prior quarter. TFG’s total indirect leveraged loan exposure through its CLO portfolio was approximately $18.4 billion as ofthe end of Q2 2011.[6]
- CLO Portfolio Composition: With the addition of one primary U.S. CLO equity investment, LCM IX, the CLO portfolio increased to 75 transactions during Q2 2011, up from 74 as of the end of Q1 2011. The total number of deals in the portfolio increased to 67 (up from 66 as of Q1 2011), while the number of external CLO managers declined to 27 as a result of further manager consolidation.[7]
- CLO Collateral Performance: As of the end of Q2 2011, approximately 98% of TFG’s CLO investments were passing their junior-most O/C tests, weighted by fair value.[8] Similarly, 64, or approximately 96%, were passing when weighted by the number of deals. As a comparison, at the end of Q1 2011, 98% of TFG’s CLO investments were passing their junior-most O/C tests by fair value, and 63, or approximately 95%, were passing based on the number of deals. The increase in the percentage of transactions passing their junior-most O/C tests based on the number of deals reflected the acquisition of LCM IX CLO at the end of Q2 2011.
The performance of TFG’s U.S. CLOs continued to be strong, with 100% of U.S. CLOs by fair value and by number passing their junior-most O/C tests (note that U.S. CLOs represented approximately 87% of the total fair value of TFG’s CLO investment portfolio as of June 30, 2011).[9,10] In comparison, the market-wide average of U.S. CLOs estimated to be passing their junior O/C tests as of the end of Q2 2011 was approximately 94.0% (when measured on a percentage of deals basis).[11] Please refer to Figure 5 below for a historical summary of TFG’s investments’ junior O/C test performance.
- Investment Portfolio Performance Details (continued):
Figure 5: TFG’s Gross Investment and Operating Cash Flows ($MM) vs. % of CLOs Passing Junior-Most O/C Tests[1,2]
FIGURE 5
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
Gross Cash
Receipts from
Investments ($MM) 74.0 118.0 77.7 75.6 47.1 31.9 35.3
% CLOs Passing
Junior-Most O/C
Test (# Deals) 100% 100% 100% 95% 60% 58% 60%
Cash Flows from
Operations ($MM) 63.5 90.1 102.0 67.5 42.2 36.6 27.7
Continued
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
Gross Cash Receipts
from Investments
($MM) 38.4 51.1 60.9 71.8 78.9 90.9 102.4
% CLOs Passing
Junior-Most O/C
Test (# Deals) 68% 80% 84% 88% 94% 95% 96%
Cash Flows from
Operations ($MM) 32.5 20.5 43.2 55.3 34.8 52.2 32.2
- The percentage of TFG’s CLOs passing their junior-most O/C tests has been calculated as the ratio of the number of deals passing their junior O/C tests to the total number of CLO deals held by TFG as of the applicable quarter-end date.
- Gross Cash Receipts from Investments refer to the actual cash receipts collected during each quarter from TFG’s CLO investments. Cash Flows from Operations refer to cash inflows from investments less expenses and net cash settlements on FX and credit hedges.
- CLO Portfolio Credit Quality: As of June 30, 2011, the weighted-average percentage of corporate obligors rated Caa1/CCC+ or below in TFG’s 75 CLO transactions was 7.2% compared to an approximate 7.8% weighted-average maximum level permitted under the terms of the investments.[12] By comparison, the market-wide median CCC asset holdings of U.S. CLOs was estimated to be approximately 7.5% as of the end of Q2 2011.[13] TFG’s weighted-average WARF stood at approximately 2,642 as of the end of Q2 2011. Each of these foregoing statistics represents a weighted-average summary of all of our 75 CLO transactions.[14]Each individual investment’s metrics will differ from this average and vary across the portfolio.
TFG Investment Weighted-Average Summary
Q2 Q1 Q4 Q3 Q2 Q1
2011 2011 2010 2010 2010 2010
Caa1/CCC+ or Below Obligors: 7.2% 7.6% 8.3% 9.6% 10.5% 11.1%
WARF: 2,642 2,664 2,671 2,658 2,706 2,762
Q3 Q2 Q1 Q4 Q3 Q2
continued Q4 2009 2009 2009 2009 2008 2008 2008
Caa1/CCC+ or Below
Obligors: 12.0% 12.6% 11.6% 11.4% 7.6% 4.9% 4.4%
WARF: 2,809 2,813 2,800 2,758 2,577 2,490 2,472
- Investment Portfolio Performance Details (continued):
- TFG and Market Default Rates: TFG’s lagging 12-month corporate loan default rate fell to 0.8% at the end of Q2 2011 from 1.1% as of the end of Q1 2011.[15]The lagging 12-month U.S. institutional loan default rate, by comparison, declined to 0.91% by principal amount as of June 30, 2011.[16] Please refer to Figure 6 below for a historical summary of TFG’s CLO investments’ default performance.
Figure 6: TFG and U.S. Market-Wide Trailing 12-Month Default Rates[i,ii]
FIGURE 6
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
TFG Trailing
12-Month Loan Rate 0.8% 1.3% 1.5% 2.5% 4.0% 5.1% 6.7%
S&P/LCD Trailing
12-Month Default Rate1.1% 1.7% 1.9% 3.8% 7.8% 9.2% 9.8%
Continued
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
TFG Trailing
12-Month Loan Rate 6.5% 4.9% 3.6% 2.2% 1.7% 1.1% 0.8%
S&P/LCD Trailing
12-Month Default Rate9.6% 5.8% 4.0% 3.6% 1.9% 1.1% 0.9%
(i) Source: TFG as of the outlined quarter-end date. 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 13% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG’s corporate default rate.
(ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date.
- Direct Loan Investments: As of June 30, 2011, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $98.4 million and total fair value of $96.7 million. This portfolio continued to perform well during the quarter, benefiting from improvements in credit quality as well as strong technical loan market conditions. No defaults or downgrades were registered in the portfolio during the period. From inception through the end of Q2 2011, the portfolio generated approximately $1.7 million of net realized gains. In addition, the portfolio earned $5.7 million of interest income and discount premium over the same time period.
Asset Management Platform Details:
- LCM Developments: LCM’s operating results and financial performance remained strong throughout Q2 2011, with all senior and subordinated CLO management fees on LCM Cash Flow CLOs current as of June 30, 2011.[17] The team was also able to successfully close the LCM IX CLO, which was upsized from $410.0 million to $666.25 million on the heels of strong investor demand. Taking into account all LCM-managed vehicles, the gross income for Q2 2011 for LCM totaled $3.9 million, compared to an average quarterly income in 2010 of approximately $3.2 million. Pre-tax profit for the entire LCM business, of which TFG owns 75%, was approximately $1.9 million as of the same period (2010 quarterly average of $1.4 million). TFG continues to leverage and benefit from the LCM team’s expertise in the ongoing management of the company’s direct loan investment portfolio.
LCM Asset Management Performance Snapshot
Q2 2011 Q1 2011 Q4 2010 Q3 2010 Q2 2010 Q1 2010
Gross Fee Income ($MM) $3.9 $3.8 $3.4 $3.0 $2.9 $3.3
Pre-tax Income ($MM) $1.9 $1.9 $1.1 $1.4 $1.4 $1.9
- GORE Developments: GreenOak continues to build its team and execute on its business growth strategy, including the first closing for its U.S. investment program, the launch of a Japanese investment program, and advisory work. TFG has recently funded a relatively small portion of its capital commitments to the U.S. fund in Q2 2011 and more recently an acquisition of a Japanese asset in July 2011.
- Loan and CLO Market Developments:
- U.S. leveraged loan default rate continues to decline: The U.S. lagged 12-month loan default rate fell to 0.91% by principal amount as of June 30, 2011, down from 1.1% as of Q1 2011, a level well-below the historical average of 3.62%.[18] This continued decline in the volume of defaults can be attributed to, among other things, strong EBITDA growth among certain leveraged loan borrowers, the successful execution of de-leveraging and restructuring programs to mitigate near-term default catalysts, as well as the fact that the weakest companies have already defaulted in the midst of the recent recession and credit crisis (so called “survivor bias”). While we believe that the aforementioned decline in defaults is mainly grounded in solid fundamental underpinnings, such as earnings growth and strong corporate balance sheets, many market participants remain cautious in their mid-term default outlook given the sluggish pace of economic recovery in the United States, presence of significant macroeconomic and geopolitical downside risks, and dependence of leveraged loan borrowers on continued access to well-functioning capital markets.
- U.S. loan prepayments remain strong: During Q2 2011, theU.S. S&P/LSTA Leveraged Loan Index quarterly prepayment rate declined to 10.6% from 17.7% the prior quarter.[19]Whilst this level remains above historical average levels, the quarter-on-quarter reduction in repayment rate primarily reflects a slower pace of refinancing activity during Q2 2011 versus the first quarter.
- Loan and CLO Market Developments (continued):
- Secondary loan market prices retreat: Secondary loan prices declined at the end of Q2 2011, reflecting broader negative market trends in the context of the Greek sovereign debt crisis and disappointing U.S. economic indicator readings. The average price of the U.S. S&P/LSTA Leveraged Loan Index declined approximately $1.3 to $96.8 from the end of Q1 2011.[20]Nonetheless, year-to-date returns for the S&P/LSTA U.S. Leveraged Loan Index were positive, reaching 2.66% as of June 30, 2011.[21]Similarly, the S&P European Leveraged Loan Index (ELLI), lost 1.51% for the month of June, while remaining in positive territory for the year with a total year-to-date return of 2.83%. [22]
- “Maturity cliff” erosion continues: During Q2 2011, corporate borrowers continued to reduce the size of the so-called “maturity cliff”via a mix of amendments, pay downs and high-yield bond take-outs. During Q2 2011, issuers paid down or extended approximately $49.3 billion of S&P/LSTA Index loan maturities due by year-end 2014, up from $39.6 billion during Q1 2011, bringing the total reduction to approximately $89.9 billion for the year.[23]As the high yield markets cooled during the second quarter, maturity reductions were accomplished primarily via amendments as well as traditional, “straight repayments” from companies’ existing cash reserves, as opposed to bond-for-loan take-outs, reflecting the strong cash flows profiles of these borrowers.[24]
- Primary loan issuance volumes decline in the U.S. but rise in Europe: Q2 2011 U.S. institutional loan issuance totaled $76.5 billion, down approximately 26% from the end of Q1 2011.[25]This quarter-on-quarter deceleration reflected a notable decline in re-pricing activity during Q2 2011, which became less attractive and feasible as secondary loan prices and new issue clearing levels widened.[26] Nonetheless, excluding re-pricings, arrangers launched $61.8 billion of new issue loans, which is the highest level recorded since Lehman’s bankruptcy.[27] Similarly, the volume of U.S. M&A-related issuance rose to $35.0 billion, the highest total since the final three months of 2007.[28] European primary loan issuance volumes, where re-pricing activity never reached the pace of the United States, also rose to €16.0 billion during Q2 2011, up from approximately €11.8 billion in Q1 2011.[29]
- U.S. loan re-pricing activity slows: The elevated fundamental uncertainty and financial market volatility which characterized the second quarter translated to a marked reduction in the Q2 2011 volume of institutional loan re-pricings in the United States, as loan issuers reduced spreads on only $14.8 billion of loans during the quarter versus approximately $61.1 billion during Q1 2011.[30]Amend-to-extendactivity, however, picked-up with maturities pushed-out on $23.4 billion of U.S. loans during Q2 2011.[31]With the supply of loans exceeding demand, overall market conditions became more favorable to loan investors during this quarter and many market participants anticipate that the tone of the market will remain more balanced in the near-term.[32]
- O/C ratios improve in both the U.S. and Europe: During Q2 2011, O/C ratios of U.S. CLOs strengthened on average. According to Morgan Stanley, the median junior O/C test cushion for U.S. CLOs increased to 3.47% as of June 30, 2011,up from 3.25% as of the end of the prior quarter.[33,34] The median junior O/C test cushion for European CLOs also increased, ending Q2 2011 at 1.68%,up from 1.32% as of the end of Q1 2011.[35,36]
- Loan and CLO Market Developments (continued):
- CLO new issuance market gains momentum: U.S. arbitrage-driven CLO issuance reached $5.7 billion as of the end of Q2 2011 as twelve transactions were priced during the quarter, including four in June alone.[37]In addition to this growth in issuance volumes, AAA-rated new issue liability spreads continued to tighten throughout the quarter (to LIBOR+ 120-125 bps) providing further evidence of increased investor appetite for CLO credit risk.[38]The combination of tighter senior liability pricing, widening asset spreads, rating agency methodology changes, and increased mezzanine demand has allowed for greater CLO leverage, and thereby potentially improving expected CLO equity economics. Market participants continue to expect that 2011 arbitrage-driven CLO volumes are on track to reach $10-15 billion.[39]
- CLO secondary price rally cools amidst greater volatility: Despite continued improvements in the structural and credit quality of U.S. and European CLOs, evidenced by improving O/C ratios and declining CCC-asset holdings, CLO debt spreads widened at the end of Q2 21011 in the context of poor macroeconomic news, the Greek sovereign debt crisis and elevated financial market volatility. Originally AAA-rated CLO tranches lost approximately one point in the last month of the quarter, while mezzanine tranches declined by approximately $2-$5 points.[40]BWIC (”Bid Wanted in Comp”) volume, however, remained substantial, with approximately $15.0 billion trading year-to-date versus $10.0 billion over the same period in 2010.[41]
- Moody’s new CLO rating methodology: In June 2011, Moody’s finalized changes to its modeling framework for global CLOs. According to Moody’s, the key changes were: (1) the removal of a temporary 30% macro stress to default probabilities, (2) higher liability stress factors, and (3) an increase in assumed first-lien loan recovery rates.[42]Following the publication of the revised methodology, Moody’s placed on review for possible upgrade 4,220 tranches then rated Aa1 or below, with an outstanding balance totaling $237.0 billion, representing 782 separate transactions or approximately 80% of all outstanding cash-flow CLO tranches.[43] Moody’s estimates that these changes will result in upgrades to “nearly all of these tranches,” ranging from 1-3 notches on the senior tranches and 1-5 notches on the mezzanine tranches. [44]The review process is expected to be completed within the next six months.[45]
Based on a preliminary analysis, RBS estimates that Moody’s upgrades may permit approximately 42% of outstanding CLOs to continue to reinvest prepayments post their reinvestment periods by turning-off the so called “restricted trading conditions” triggered by prior downgrades.[46] While “restricted trading condition” provisions vary across CLOs, they typically require that senior tranches maintain their original ratings and mezzanine tranches remain within 1-2 notches of original ratings, by Moody’s and/or S&P. CLOs with Moody’s-only based rating requirements and those with the greatest permitted rating differentials between original and current ratings will benefit the most from Moody’s upgrades. As noted in our Q1 2011 report, we continue to believe that Moody’s upgrade actions may have a positive effect on TFG’s CLO investments, by allowing certain of our CLO managers to continue to reinvest unscheduled repayments post their reinvestment periods, thus slowing the process of de-leveraging and potentially extending the benefit of historically tight liabilities in the context of wide asset spreads and LIBOR floors.
- Loan and CLO Market Developments (continued):
- Securitization regulatory changes: In the U.S., the Notice of Proposed Rulemaking (”NPR”) period during which regulations are expected to clarify risk-retention requirements applicable to CLOs pursuant to the Dodd-Frank Act is expected to conclude in August 2011.[47] As noted in our Q1 2011 report, European risk retention rules Article 122a of the Capital Requirements Directive have been effective for new securitizations since January 2011, but are in early stages of implementation. Market participants believe that the current regulatory uncertainty may have a dampening effect on the new issue CLO market, permitting only large, well-capitalized CLO managers to issue new transactions and providing impetus for further CLO manager consolidation.
- FairValue 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 using a third-party cash flow modeling tool. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in historic, current and potential market developments on the performance of TFG’s CLO investments. Since this involves 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, the company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark our inputs and resulting outputs to observable market data when available and appropriate. Fundamentally, the valuation process involves two stages. In stage one, future cash flows for each transaction in the CLO portfolio are modeled, using our base case assumptions. In stage two, a discount rate reflecting the perceived level of risk is applied to those future cash flows to generate a fair value for each transaction. Prior to the financial crisis, with TFG’s CLO portfolio performing well in a generally benign credit environment, the IRRs on TFG’s CLO investments were considered to adequately reflect the relative risk to their applicable cash flows and therefore, amortized cost reflected fair value. Due to elevated market risk premia over the last couple of years, among other factors, this effective discount rate used to derive fair value has typically been higher than each transaction’s IRR since the financial crisis and therefore, in such instances, has resulted in a fair value which is lower than the transaction’s amortized cost. The difference between these two figures, on an aggregate basis across the CLO portfolio, has been characterized as the “ALR Fair Value Adjustment” or “ALR.”
- Forward-looking Cash Flow Modeling Assumptions Unchanged vs. Q1 2011
- The Investment Manager reviews, and adjusts in consultation with the Company’s audit committee, as appropriate the CLO investment portfolio’s modeling assumptions to factor in historic, current and potential market developments on the performance of TFG’s CLO investments. At the end of Q4 2010, certain assumptions were recalibrated, focusing in particular on improvements in near-term projections for default rates. As we have moved through Q2 2011, rating agency and investment bank research reports, as well as observable market data continued to indicate that the default environment for U.S. loans would remain benign.
Forward-looking Cash Flow Modeling Assumptions Unchanged vs. Q1 2011
- Although these data points suggest that TFG’s near-term assumptions may potentially be viewed to be at the conservative end of the range, we have continued to hold the assumptions unchanged vs. Q4 2010. The key assumption variables have been summarized on the following page and are discussed below the assumptions table.
Variable Year Assumptions as of June 30, 2011
CADR
1.0x WARF-implied default rate
2011 (2.2%)
1.5x WARF-implied default rate
2012-2014 (3.2%)
1.0x WARF-implied default rate
Thereafter (2.2%)
Recovery Rate
Until deal
maturity 71%
Prepayment Rate
Until deal 20.0% p.a. on loans; 0.0% on
maturity bonds
Reinvestment Price
2011 99%
Thereafter 100%
- Constant Annual Default Rate (”CADR”): The CADR for 2011 is equivalent to 1.0x the WARF-implied default rate or approximately 2.2%. Consensus market expectations continue to be that defaults will remain significantly below their long-term average over the remainder of the year. That has continued to be the experience during Q2 2011, with the U.S. lagged 12-month loan default rate falling to 0.91% as of June 30, 2011.[48] Beyond 2011, the default assumption remains elevated at 1.5x the WARF-implied default rate for 2012-2014, followed by 1.0x the WARF-implied default rate thereafter, reflecting, among other things, heightened risks in the mid-term as a result of macro-economic uncertainty and the so-called “maturity cliff.” As mentioned earlier in the report, progress is being made in tackling near and mid-term maturities and we will continue to monitor our medium-term assumptions in light of these developments.
- Recovery Rate: We retain our long-term assumption of an average recovery rate of approximately 71% for the life of each CLO transaction.
- Prepayment Rate: Observable loan prepayment rates remained above average historical levels in the second quarter of 2011, as detailed earlier in the report. However, mindful of the fact that prepayment rates can experience significant volatility, we have maintained our long-term prepayment rate assumption of 20% p.a. on loans and 0% p.a. on bonds, throughout the life of each CLO transaction.
- Reinvestment Price and Spread: The reinvestment price assumption is 99% for the remainder of 2011, which generates an effective spread over LIBOR of approximately 289 bps on broadly syndicated U.S. loans, 329 bps on European loans, and 358 bps on middle market loans. From 2012, the reinvestment price assumption remains at 100% of par until the maturity of each of our investments.
- Application of Discount Rate to Projected Cash Flows and ALR
- We have noted in the 2010 TFG Annual Report and other reports that over the course of the second half of 2010 and beginning of 2011, certain observable data and research, covering both CLO equity and more senior tranches (including BB and BBB-rated notes), suggested that the risk premium for CLOs in general and CLO equity in particular has been declining. In response to this evidence TFG’s discount rates were reduced at the end of Q1 2011 to 20% for the stronger deals and 25% for the remainder of the portfolio, giving a weighted-average discount rate of approximately 21%, which still represented a significant spread over the aforementioned BB and BBB - rated CLO liability spreads. Although over the course of this last quarter BB and BBB- spreads fluctuated and ended the period slightly wider than at the end of Q1 2011, TFG’s discount rate levels were unchanged. We will continue to monitor these as well as other evidence of changes in risk premium as we move forward into Q3 2011.
- In addition to the level of discount rates, the split of transactions between the two discount rate categories can also change in the context of each deal’s actual structural strength measured by actual O/C ratios compared to expected O/C ratios for performing transactions. During the course of the quarter, six deals migrated into the stronger deal category, which had the effect of increasing the fair value of the CLO portfolio by approximately $8.4 million. This reflected the continued structural quality improvements referred to in the investment portfolio section.
- Through the valuation process described above, as of the end of Q2 2011, the ALR has been reduced to approximately $133.8 million as compared to $155.7 million at the end of Q1 2011.
- The average carrying value of TFG’s U.S. CLOs, which accounted for approximately 86% of the investment portfolio by fair value, was approximately 76% of par as of the end of Q1 2011, up marginally from approximately 75% of par at the end of Q1 2011.
- We believe that TFG has played a leading role in the re-opening of the primary CLO market with the launch of LCM VIII in Q4 2010 and LCM IX in Q2 2011. Such post-crisis CLO transactions differ from pre-crisis transactions in several ways, including, among other features, generally having potentially better quality pools of collateral, shorter non-call periods, shorter maturities and lower leverage. An important relevant observable piece of data when assessing the perceived risk of such new issue transactions is the price of the CLO equity position and resultant IRR at the time of acquisition. Consequently, the IRR is in these cases a more appropriate discount rate to use in discounting the applicable cash flows and therefore, amortised cost reflects fair value. In sum, for post-crisis vintage CLOs, such as LCM VIII and LCM IX, the application of the 20% or 25% discount rates described above is unwarranted. We will continue to monitor observable data on such post-crisis transactions to determine whether the IRR remains the appropriate effective discount rate.
- With no recalibration of the modeling assumptions during Q2 and the effective discount rate broadly unchanged, the key driver in the increase in fair value which forms part of the $65.0 million of quarterly unrealized appreciation in investments and Net Income of $88.1 million per the Statement of Operations, was, therefore, the result of improvements in expected cash flows as deals strengthened, as described earlier in the report.
- Hedging Activity
As of June 30, 2011, the Company had no direct credit hedges in place, but employed certain foreign exchange rate and “tail risk” interest rate hedges to seek to mitigate its exposure to Euro-USD foreign exchange risk and a potential significant increase in U.S. inflation and/or nominal interest rates, respectively. Any potential losses on the above-mentioned interest rate hedges would be limited to the loss of premium paid, totaling approximately $17.8 million as of the end of Q2 2011. We review our hedging strategy on an on-going basis as we seek to address identified risks to the extent practicable and in a cost-effective manner. In the future, our hedging strategy may include the use of single name or index credit hedges, foreign exchange rate hedges, and interest rate hedges, among others.
- Outlook Summary:
Q2 2011 witnessed incremental improvements in CLO credit fundamentals and structural strength, realized despite heightened asset price volatility and macroeconomic uncertainty. During this quarter, TFG’s CLO and direct loan portfolios continued to generate significant cash flows, benefiting from wide loan spreads, LIBOR floors, and low credit losses and downgrades to Caa1/CCC+ or below. Given the progress achieved to date in shoring up both corporate balance sheets and CLO O/C test cushions, we remain constructive in our near-term outlook for the performance of the company’s investments. While we remain concerned about a number of potential negative shocks, including among others, sovereign credit distress, geopolitical unrest, and rising commodity prices, we believe that the headroom achieved by underlying leveraged loan borrowers and the structural cushion built by CLO managers to date, may allow TFG’s investments to withstand a greater amount of stress than may have been possible only a few quarters before.
We also believe that ratings upgrades, driven by Moody’s methodology changes, improving credit quality, and the structural robustness of CLOs, may create further positive tail-winds for TFG’s CLO portfolio by allowing certain of our CLOs to potentially extend the benefits of their historically-tight liabilities beyond their reinvestment periods. Furthermore, Moody’s rating upgrades may help broaden the CLO investor base by reducing the regulatory capital holding requirements of these investments for certain investors, thus potentially providing support for CLO debt demand and prices. On the new issue CLO front, we are encouraged by the pick-up in issuance volumes this quarter, as well as the accompanying tightening of AAA-rated liability spreads and the return of structural leverage closer to levels achievable before the credit crisis. We anticipate that these developments bode well for our ability to continue to invest in new issue CLO equity with attractive risk-adjusted returns and structural characteristics, managed by LCM as well as select third-party managers. While uncertainty around the implementation of risk-retention regulations in the U.S. and Europe remains significant, we continue to believe that TFG’s strong financial position and permanent capital base, may allow the company to weather any adverse changes more easily than other participants in the CLO market.
As we look toward the remainder of the year, we expect to focus on taking advantage of attractive investment opportunities in varied asset classes, including the CLO and leveraged loan markets, and expanding our burgeoning asset management business. We believe that the successful issuances of LCM VIII and LCM IX demonstrate LCM’s ability to attract investment capital. The other component of our asset management platform, GreenOak, also continues to make progress in executing on its business growth strategy. We expect GreenOak to continue to look for attractive real estate investments around the world and we will report on any future developments. Over the long-term, we expect to continue the company’s transition to a broadly diversified financial services firm. We believe that doing so will strengthen TFG’s income streams and ultimately create value for TFG shareholders.
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 2011 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 2011 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 4, 2011 at 15:00 GMT/16:00 CET/10:00 EDST to discuss Q2 2011 results and to provide a company update.
The conference call may be accessed by dialing +44(0)20-7162-0025 and +1(877)491-0064 (a passcode is not required). Participants may also register for the conference call in advance via the following link:
https://eventreg1.conferencing.com/webportal3/reg.html?Acc=247751&Conf=179214
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 876111 and as an MP3 recording on the TFG website.
Expected Upcoming Events Date
Q2 Dividend Record Date August 03, 2011
Quarterly Investor Call August 04, 2011
July 2011 Monthly Report August 18, 2011 (approx)
Q2 Dividend Payment Date August 26, 2011
TETRAGON FINANCIAL GROUP
Financial Highlights
Q2 2011 Q1 2011 Q4 2010 Q3 2010
Net income ($MM) 88.1 174.7 132.0 125.0
EPS ($) 0.7 1.5 1.1 1.0
CLO Cash receipts ($MM) [(1)] 102.4 90.9 78.9 71.8
CLO Cash receipts per share ($) 0.9 0.8 0.7 0.6
Net cash balance ($MM) 67.7 147.0 140.6 187.9
Net assets ($MM) 1368.0 1298.0 1137.6 1018.6
Number of shares outstanding
(million) 118.8 119.6 120.1 120.8
NAV per share ($) 11.5 10.9 9.5 8.4
DPS ($) 0.1 0.1 0.1 0.1
Weighted average IRR on completed
transactions (%) 0.2 0.2 0.2 0.1
Number of CLO transactions [(2)] 75.0 74.0 70.0 68.0
ALR Fair Value Adjustment ($MM) -133.8 -155.7 -258.0 -274.7
Continued
Q2 2010 Q1 2010 Quarterly Average
Net income ($MM) 55.6 72.5 108.0
EPS ($) 0.5 0.6 0.9
CLO Cash receipts ($MM) [(1)] 60.9 51.1 76.0
CLO Cash receipts per share ($) 0.5 0.4 0.6
Net cash balance ($MM) 156.2 172.6 145.3
Net assets ($MM) 909.3 867.4 1099.9
Number of shares outstanding (million) 122.2 123.6 120.9
NAV per share ($) 7.4 7.0 9.1
DPS ($) 0.1 0.1 0.1
Weighted average IRR on completed
transactions (%) 0.1 0.1 0.1
Number of CLO transactions [(2)] 68.0 68.0 70.5
ALR Fair Value Adjustment ($MM) -330.7 -339.5 -248.7
[(1)] Gross cash receipts from CLO portfolio.
[(2)] Excludes CDO-squared and ABS CDO transactions written off in October 2007. TFG continues to hold the economic rights to 3 of these written-off transactions.
TETRAGON FINANCIAL GROUP
Quarterly Statement of Operations as at 30 June 2011
Statement of
Operations Q2 2011 ($MM) Q1 2011 ($MM) Q4 2010 ($MM) Q3 2010 ($MM)
Interest income 52.0 48.4 46.5 45.8
CLO management
fee income 3.9 3.8 3.4 3.0
Other income 1.5 1.5 1.4 0.5
Investment income 57.4 53.7 51.3 49.3
Management and
performance fees -31.2 -59.9 -45.6 -42.7
Admin/ custody and
other fees -4.1 -5.7 -3.5 -2.7
Total operating expenses -35.3 -65.6 -49.1 -45.4
Net investment income 22.1 -11.9 2.2 3.9
Net change in
unrealised appreciation/
(depreciation) in
investments 65.0 184.5 128.8 121.3
Realised gain/(loss)
on investments 0.0 0.6 0.5 0.3
Realised and unrealised
gains/(losses) from
hedging and fx 2.4 2.9 1.2 0.2
Net realised and
unrealised gains/(losses)
from investments and fx 67.4 188.0 130.5 121.8
Income taxes -1.0 -1.0 -0.4 -0.4
Noncontrolling interest -0.4 -0.5 -0.3 -0.3
Net increase/(decrease)
in net assets from
operations 88.1 174.7 132.0 125.0
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 June 2011
Jun-11
$MM
Assets
Investments in securities, at fair value 1252.1
Intangible assets - CLO management contracts 0.2
Cash and cash equivalents 67.7
Amounts due from brokers 11.2
Derivative financial assets - interest rate swaptions 18.9
Amounts receivable on sale of investments 53.9
Coupons receivable on CLOs 2
Other receivables 2
Total Assets 1408
Liabilities
Other payables and accruals 30.7
Unrealised loss on forward contracts
Bank Overdraft
Amounts payable to feeder fund
Amounts payable to Guernsey Feeder 0.5
Amounts payable on Share Options 3.7
Income and deferred tax payable 1.2
Derivative financial assets - forward contracts 1.3
Dividend Payable 0.0
Total Liabilities 37.4
Net Assets Before Noncontrolling Interest 1370.6
Noncontrolling Interest 2.3
Total Equity Attributable to TFG 1368.3
TETRAGON FINANCIAL GROUP
Statement of Cash Flows for the Period Ended 30 June 2011
Jun-11
$MM (YTD)
Operating Activities
Operating cash flows before movements
in working capital after dividends paid
to Guernsey feeder 83.8
Increase / (decrease) in payables -1.4
Cash flows from operating activities 82.4
Investment Activities
Proceeds on sales of investments
- Proceeds from the sale of bank loans 36.5
Purchase of investments
- Purchase of CLOs -46.6
- Purchase of bank loans -107.9
- Purchase derivatives - swaptions -17.8
- Other purchases -0.7
Maturity and prepayment of investments 20.0
Cash flows from operating and investing activities -34.1
Amounts due from broker -6.9
Net purchase of shares -10.4
Dividends paid to shareholders -21.5
Cash flows from financing activities -38.8
Net decrease in cash and cash equivalents -72.9
Cash and cash equivalents at beginning of period 140.6
Cash and cash equivalents at end of period 67.7
CLO Portfolio Details
As of June 30, 2011
Tetragon Financial Group Limited (TFG)
CLO Portfolio Details
As of June 30, 2011
Original End of Wtd Avg Wtd Avg
Invest. Cost Year of Reinv Spread Funding
Cost
Transaction Deal Type ($MM USD)[(1)] Maturity Period (bps) [(2)] (bps)
[(3)]
Transaction 1 EUR CLO 37.5 2024 2014 290 55
Transaction 2 EUR CLO 29.7 2023 2013 326 52
Transaction 3 EUR CLO 22.2 2022 2012 338 58
Transaction 4 EUR CLO 33.0 2023 2013 334 48
Transaction 5 EUR CLO 36.9 2021 2012 314 60
Transaction 6 EUR CLO 33.3 2022 2012 315 51
Transaction 7 EUR CLO 38.5 2023 2013 305 46
Transaction 8 EUR CLO 26.9 2021 2011 319 53
Transaction 9 EUR CLO 41.3 2023 2013 323 50
Transaction 10 EUR CLO 27.0 2022 2012 322 50
EUR CLO Subtotal: 326.3 317 52
Transaction 11 US CLO 20.5 2018 2012 343 45
Transaction 12 US CLO 22.8 2019 2013 341 46
Transaction 13 US CLO 15.2 2018 2012 328 47
Transaction 14 US CLO 26.0 2021 2014 326 49
Transaction 15 US CLO 28.1 2021 2014 377 52
Transaction 16 US CLO 23.5 2020 2013 392 46
Transaction 17 US CLO 26.0 2021 2014 332 40
Transaction 18 US CLO 16.7 2017 2011 319 45
Transaction 19 US CLO 1.2 2017 2011 319 45
Transaction 20 US CLO 26.6 2020 2012 396 52
Transaction 21 US CLO 20.7 2020 2012 373 53
Transaction 22 US CLO 37.4 2019 2013 405 53
Transaction 23 US CLO 19.9 2021 2013 343 66
Transaction 24 US CLO 16.9 2018 2012 353 46
Transaction 25 US CLO 20.9 2018 2013 358 46
Transaction 26 US CLO 27.9 2019 2013 348 43
Transaction 27 US CLO 23.9 2021 2014 412 51
Transaction 28 US CLO 7.6 2021 2014 412 51
Transaction 29 US CLO 19.1 2018 2011 447 66
Transaction 30 US CLO 12.4 2018 2012 447 67
Transaction 31 US CLO 9.3 2017 2012 334 52
Transaction 32 US CLO 24.0 2021 2014 307 59
Transaction 33 US CLO 16.2 2020 2012 351 56
Transaction 34 US CLO 22.2 2020 2012 348 50
Transaction 35 US CLO 23.6 2018 2012 423 52
Transaction 36 US CLO 28.4 2021 2013 389 46
Transaction 37 US CLO 9.3 2017 2011 302 50
Transaction 38 US CLO 23.7 2021 2013 311 42
Transaction 39 US CLO 7.8 2017 2011 356 70
Transaction 40 US CLO 13.0 2020 2011 373 39
Transaction 41 US CLO 22.5 2020 2013 330 48
Transaction 42 US CLO 22.4 2021 2014 338 47
Transaction 43 US CLO 0.2 2021 2014 340 54
Transaction 44 US CLO 22.3 2018 2012 312 54
Transaction 45 US CLO 23.0 2018 2012 306 46
Transaction 46 US CLO 21.3 2019 2013 309 51
Transaction 47 US CLO 28.3 2021 2013 316 47
Transaction 48 US CLO 23.0 2019 2013 330 46
Transaction 49 US CLO 12.6 2017 2011 328 40
Transaction 50 US CLO 12.3 2018 2012 332 40
Transaction 51 US CLO 18.0 2020 2013 350 53
Transaction 52 US CLO 0.3 2015 2008 265 93
Transaction 53 US CLO 0.6 2016 2011 292 61
Transaction 54 US CLO 0.5 2017 2012 327 56
Transaction 55 US CLO 0.3 2017 2011 320 39
Transaction 56 US CLO 23.0 2019 2014 345 42
Transaction 57 US CLO 0.6 2019 2014 345 42
Transaction 58 US CLO 21.8 2019 2014 342 49
Transaction 59 US CLO 0.4 2019 2014 342 49
Transaction 60 US CLO 18.8 2021 2014 414 198
Transaction 61 US CLO 29.1 2021 2014 305 45
Transaction 62 US CLO 25.3 2020 2013 332 42
Transaction 63 US CLO 27.3 2021 2013 324 53
Transaction 64 US CLO 15.4 2021 2013 406 38
Transaction 65 US CLO 26.9 2021 2013 320 47
Transaction 66 US CLO 21.3 2020 2013 315 49
Transaction 67 US CLO 27.3 2022 2014 309 46
Transaction 68 US CLO 19.3 2020 2013 397 48
Transaction 69 US CLO 28.2 2019 2013 388 44
Transaction 70 US CLO 24.6 2020 2013 292 52
Transaction 71 US CLO 1.7 2018 2012 332 40
Transaction 72 US CLO 4.8 2019 2014 345 42
Transaction 73 US CLO 1.9 2019 2014 345 42
Transaction 74 US CLO 5.5 2019 2014 342 49
Transaction 75 US CLO 32.7 2022 2014 416 168
US CLO Subtotal: 1154.0 352 55
Total CLO Portfolio: 1480.3 345 54
CLO Portfolio Details (continued) As of June 30, 2011
Current Jr- Jr-Most O/C Annualized ITD Cash
Most O/C Cushion at (Loss) Gain Received as
Transaction Deal Type Cushion Close of Cushion IRR % of Cost
[(4)] [(5)] [(6)] [(7)] [(8)]
Transaction 1 EUR CLO -2.80% 3.86% -1.66% 3.0% 29.6%
Transaction 2 EUR CLO 1.76% 3.60% -0.40% 9.4% 35.7%
Transaction 3 EUR CLO 3.53% 5.14% -0.29% 13.2% 76.3%
Transaction 4 EUR CLO 4.25% 5.76% -0.35% 12.6% 52.5%
Transaction 5 EUR CLO 3.45% 5.74% -0.58% 8.0% 32.6%
Transaction 6 EUR CLO -3.63% 4.70% -1.63% 2.6% 49.7%
Transaction 7 EUR CLO -3.69% 3.64% -1.72% 3.0% 31.9%
Transaction 8 EUR CLO 2.72% 4.98% -0.38% 12.7% 73.4%
Transaction 9 EUR CLO 1.50% 6.27% -1.13% 7.7% 24.1%
Transaction 10 EUR CLO 0.93% 4.54% -0.74% 8.7% 31.5%
EUR CLO Subtotal: 0.58% 4.84% -0.95% 41.4%
Transaction 11 US CLO 5.24% 4.55% 0.14% 19.6% 106.9%
Transaction 12 US CLO 5.55% 4.45% 0.24% 19.7% 99.8%
Transaction 13 US CLO 6.12% 4.82% 0.26% 19.0% 109.2%
Transaction 14 US CLO 4.26% 5.63% -0.32% 15.5% 74.5%
Transaction 15 US CLO 2.46% 4.21% -0.44% 25.4% 114.9%
Transaction 16 US CLO 2.74% 4.44% -0.34% 19.2% 101.1%
Transaction 17 US CLO 3.86% 4.24% -0.09% 21.1% 97.4%
Transaction 18 US CLO 4.09% 4.77% -0.12% 17.8% 124.1%
Transaction 19 US CLO 4.09% 4.77% -0.12% 21.3% 118.3%
Transaction 20 US CLO 3.13% 5.28% -0.46% 20.1% 122.5%
Transaction 21 US CLO 2.93% 4.76% -0.37% 16.5% 98.9%
Transaction 22 US CLO 3.48% 5.00% -0.36% 18.7% 87.1%
Transaction 23 US CLO 3.28% 4.98% -0.41% 17.5% 94.7%
Transaction 24 US CLO 4.57% 4.17% 0.08% 15.8% 76.7%
Transaction 25 US CLO 5.44% 4.13% 0.29% 20.7% 101.0%
Transaction 26 US CLO 3.23% 4.05% -0.19% 16.6% 75.1%
Transaction 27 US CLO 9.03% 6.11% 0.65% 29.9% 142.1%
Transaction 28 US CLO 9.03% 6.11% 0.65% 34.8% 55.1%
Transaction 29 US CLO 3.62% 4.82% -0.21% 19.0% 110.5%
Transaction 30 US CLO 2.41% 5.16% -0.55% 16.8% 83.8%
Transaction 31 US CLO 2.79% 5.02% -0.37% 15.2% 116.9%
Transaction 32 US CLO 4.03% 5.57% -0.40% 17.5% 77.9%
Transaction 33 US CLO 4.45% 6.99% -0.48% 13.6% 88.6%
Transaction 34 US CLO 4.59% 6.66% -0.45% 16.1% 87.9%
Transaction 35 US CLO 2.55% 5.00% -0.49% 19.9% 115.2%
Transaction 36 US CLO 2.44% 5.18% -0.64% 17.8% 85.8%
Transaction 37 US CLO 2.80% 4.34% -0.27% 14.5% 102.2%
Transaction 38 US CLO 3.65% 5.07% -0.33% 24.7% 129.4%
Transaction 39 US CLO 1.96% 3.15% -0.21% 6.9% 66.0%
Transaction 40 US CLO N/A N/A N/A 20.2% 107.1%
Transaction 41 US CLO 5.80% 4.71% 0.23% 20.4% 102.2%
Transaction 42 US CLO 5.76% 3.92% 0.44% 19.3% 81.5%
Transaction 43 US CLO 4.44% 3.75% 0.18% 20.6% 13.6%
Transaction 44 US CLO 1.96% 4.16% -0.43% 10.5% 78.9%
Transaction 45 US CLO 2.06% 4.46% -0.53% 8.4% 55.6%
Transaction 46 US CLO 2.30% 4.33% -0.50% 6.4% 39.2%
Transaction 47 US CLO 3.39% 4.34% -0.20% 19.3% 105.1%
Transaction 48 US CLO 2.63% 5.71% -0.66% 15.5% 69.6%
Transaction 49 US CLO 2.18% 3.94% -0.31% 10.9% 69.8%
Transaction 50 US CLO 2.00% 4.25% -0.44% 11.2% 66.4%
Transaction 51 US CLO 3.72% 4.47% -0.18% 19.2% 90.9%
Transaction 52 US CLO 2.98% 3.20% -0.03% 278.6% 635.5%
Transaction 53 US CLO 7.61% 4.00% 0.54% 38.5% 177.1%
Transaction 54 US CLO 4.46% 3.69% 0.12% 56.7% 383.9%
Transaction 55 US CLO 4.08% 3.59% 0.08% 58.5% 334.5%
Transaction 56 US CLO 4.48% 4.53% -0.01% 21.2% 102.7%
Transaction 57 US CLO 4.48% 4.53% -0.01% 44.7% 357.7%
Transaction 58 US CLO 3.43% 4.04% -0.15% 23.2% 103.9%
Transaction 59 US CLO 3.43% 4.04% -0.15% 47.8% 488.8%
Transaction 60 US CLO 4.74% 4.50% 0.39% 11.1% 4.0%
Transaction 61 US CLO 2.54% 4.04% -0.36% 15.0% 64.5%
Transaction 62 US CLO 3.84% 5.20% -0.32% 18.7% 96.3%
Transaction 63 US CLO 2.65% 4.78% -0.54% 16.1% 78.9%
Transaction 64 US CLO N/A N/A N/A 19.2% 59.6%
Transaction 65 US CLO 2.66% 4.96% -0.50% 11.6% 56.5%
Transaction 66 US CLO 3.40% 4.05% -0.14% 19.0% 103.3%
Transaction 67 US CLO 4.03% 4.38% -0.08% 17.3% 78.8%
Transaction 68 US CLO 5.29% 4.41% 0.19% 25.4% 119.6%
Transaction 69 US CLO 5.88% 5.61% 0.06% 23.6% 102.2%
Transaction 70 US CLO 6.20% 6.21% 0.00% 17.4% 87.0%
Transaction 71 US CLO 2.00% 4.25% -0.44% 20.0% 9.4%
Transaction 72 US CLO 4.48% 4.53% -0.01% 14.6% 7.6%
Transaction 73 US CLO 4.48% 4.53% -0.01% 14.6% 7.6%
Transaction 74 US CLO 3.43% 4.04% -0.15% 15.2% 8.2%
Transaction 75 US CLO 4.05% 4.05% 0.00% 13.9% 0.0%
US CLO Subtotal: 3.78% 4.66% -0.19% 87.6%
Total CLO Portfolio: 3.07% 4.70% -0.36% 77.4%
CLO Portfolio Details (continued)
As of June 30, 2011
Reinvestment End Date
Based on Original Investment Size ($ Millions
Amount
Date Amortizing
2010 or Earlier 0.3
2011 107.5
2012 362.6
2013 648.6
2014 361.3
CLO Deal Maturities
Based on Original Investment Cost ($ Millions)
Amount
Date Maturing
2015 0.3
2016 0.6
2017 57.7
2018 187.7
2019 218.6
2020 253.2
2021 439.6
2022 142.5
2023 142.5
2024 37.5
Current Junior-Most O/C Test Cushion Distribution [(4)]
(by Number of Transactions)
Number of
Investments
<= 0% 3
0% to 2% 7
2% to 4% 33
4% to 6% 25
Over 6% 5
Notes
[(1)] The USD investment cost fixes the USD-EUR exchange rate of European CLOs at the same rate to avoid the impact of skewed weightings and FX volatility.
[(2)] Par weighted average spread over LIBOR or EURIBOR (as approproate) of the underlying loan assets in each CLO’s portfolio.
[(3)] Notional weighted average spread over LIBOR or EURIBOR (as appropriate) of the debt tranches issued by each CLO, as of the closing date of each transaction.
[(4)] The current junior-most O/C cushion is the excess (or deficit) of the junior-most O/C test ratio over the test requirement, as of the latest trustee report available as of the report date.
[(5)] The junior-most O/C cushion at close is the excess (or deficit) of the junior-most O/C test ratio over the test requirement that was expected on each deal’s closing date. Please note that two of TFG’s investments are so so called “par structures” which don’t include a junior O/C test. They have been marked by an “N/A” in the relevant junior-most O/C test columns.
[(6)] Calculated by annualizing the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion.
[(7)] Calculated from TFG’s investment date. Includes both historical cash flows received to-date and prospective cash flows expected to be received, based on TFG’s base case modeling assumptions.
[(8)] Inception to report date cash flow received on each transaction as a percentage of its original cost.
Tetragon Financial Group Limited (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(unless otherwise stated)
As of June 30, 2011
Report Date TFG Share Price ($) TFG group Market Cap ($MM)[(1)]
30-Jun-11 8.3 1093.4
TFG group Net Assets ($MM) No. of Closed CLO Transactions
1368.3 75[(2)]
Capital Allocation by Asset Class Risk Capital Investment
Allocation - Fair Value
($MM)[(3)(4)]
Broadly Syndicated Senior Secured Loans: US 72.5% 903.7
Broadly Syndicated Senior Secured Loans: Europe 12.8% 159.8
Middle Market Senior Secured Loans: US 14.7% 182.8
CDOs Squared: US 0.0% 0.0
ABS and Structured Finance: US 0.0% 0.0
Total 100.0% 1246.4
Geographic Allocation by Asset Class USA Europe Asia Total
Pacific
Broadly Syndicated Senior Secured Loans 85.0% 15.0% 0.0% 100.0%
Middle Market Senior Secured Loans 100.0% 0.0% 0.0% 100.0%
CDOs Squared 0.0% 0.0% 0.0% 0.0%
ABS and Structured Finance 0.0% 0.0% 0.0% 0.0%
87.2% 12.8% 0.0% 100.0%
Top 15 Underlying Bank Loan Credits Bank Loan Exposure [(5)]
Univision Communications 0.91%
HCA Inc 0.83%
Community Health 0.81%
First Data Corp 0.77%
SunGard Data Systems Inc 0.72%
Aramark Corp 0.71%
Cablevision Systems Corp 0.70%
TXU Corp 0.67%
Las Vegas Sands 0.65%
Federal-Mogul 0.64%
Charter Communications 0.63%
Sabre Holdings Corp 0.63%
Nielsen Company 0.61%
UPC Broadband 0.60%
Health Management Associates 0.56%
TOP 10 INDUSTRY
Healthcare, Education & Childcare 12.2%
Broadcasting & Entertainment 7.4%
Diversified/Conglomerate Service 6.8%
Telecommunications 6.6%
Retail Stores 5.5%
Chemicals, Plastics & Rubber 5.2%
Printing & Publishing 4.0%
Finance 3.8%
Personal, Food & Miscellaneous 3.7%
Leisure, Amusement, Motion Pictures & Entertainment 3.5%
EUR-USD FX: 1.450149655
[(1)] Calculated using TFG shares outstanding and month end exchange price.
[(2)] Excludes CDO-squared and ABS CDO transactions which were written off in October 2007. TFG continues to hold the economic rights to 3 of these written-off transactions.
[(3)] Excludes TFG’s investments in LCM Asset Management LLC and GreenOak Real Estate LP.
[(4)] Equivalent to Investment in Securities at Fair Value in the US GAAP Financial Statements.
[(5)] Includes par amount of loans held directly by TFG and also loan exposures via TFG’s investments in CLOs. With respect to CLO investments, calculated as a percentage of total corporate loan assets that TFG has exposure to based on its equity-based pro-rata share of each CLO’s total portfolio. All calculations are net of any single name CDS hedges held against that credit.
An investment in TFG involves substantial risks. Please refer to the Company’s website at www.tetragoninv.comfor 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*
Rupert Dorey* David Jeffreys* Greville Ward*
*Independent Director
SHAREHOLDER INFORMATION
Registered Office of TFG and the Master Fund Issuing Agent, Dutch
Paying and Transfer
Tetragon Financial Group Limited Agent
Tetragon Financial Group Master Fund Limited Kas Bank N.V.
1st Floor Dorey Court Spuistraat 172
Admiral Park 1012 VT Amsterdam, The
St. Peter Port, Guernsey Netherlands
Channel Islands GYI 6HJ
Legal Advisor (as to
U.S. law)
Cravath, Swaine & Moore
LLP
Investment Manager One Ropemaker Street
Tetragon Financial Management LP London EC2Y 9HR
399 Park Avenue, 22nd Floor United Kingdom
New York, NY 10022
United States of America Legal Advisor (as to
Guernsey law)
Ogier
General Partner of Investment Manager Ogier House
Tetragon Financial Management GP LLC St. Julian's Avenue
399 Park Avenue, 22nd Floor St. Peter Port,
New York, NY 10022 Guernsey
United States of America Channel Islands GYI 1WA
Legal Advisor (as to
Dutch law)
Investor Relations De Brauw Blackstone
David Wishnow / Yuko Thomas Westbroek N.V.
ir@tetragoninv.com Claude Debussylaan 80
1082 MD Amsterdam, The
Netherlands
Press Inquiries Stock Listing
Brunswick Group Euronext Amsterdam by
Andrew Garfield/Gill Ackers/Pip Green NYSE Euronext
polygon@brunswickgroup.com
Administrator and
Auditors Registrar
KPMG Channel Islands Ltd State Street Guernsey
20 New Street Limited
St. Peter Port, Guernsey First Floor Dorey Court
Channel Islands GYI 4AN Admiral Park
St. Peter Port,
Guernsey
Channel Islands GYI 6HJ
Sub-Registrar and Transfer Agent
BNY Mellon
One Wall Street
New York, NY 10286
United States of America
ENDNOTES
(1) TFG invests substantially all of 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 Tetragon Financial 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 Financiële 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, LCM VI, LCM VIII, and LCM IX 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) The hurdle rate is reset each quarter using 3M USD LIBOR plus a spread of 2.647858% in accordance with TFG’s investment management agreement. Please visit www.tetragoninv.com/tfg/about/investmentmanagerima/ for more details of the calculation of the hurdle rate and the performance fee.
(5) This figure includes the dividend of $0.10 per share announced on July 29, 2011 with respect to Q2 2011.
(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, 2011.
(9) As of June 30, 2011, European CLOs represented approximately 13% of TFG’s investment portfolio; approximately 88% of the fair value of TFG’s European CLOs and 70%, when measured as a percentage of the total number of European deals, 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 5, 2011; based on a sample of 475 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 5, 2011; based on the lower of Moody’s and S&P rating. Furthermore, TFG’s investment portfolio includes approximately 13% 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 transaction.
(15) 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 13% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG’s corporate default rate.
(16) S&P/LCD News, “With no Defaults in June, Rate Holds at Historical Low,” July 5, 2011.
(17) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, LCM VIII, and LCM IX 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) S&P/LCD News, “With no Defaults in June, Rate Holds at Historical Low,” July 5, 2011.
(19) S&P/LSTA Leveraged Lending Review 2Q 2011.
(20) S&P/LCD News, “Loan prices rise with stocks & HY, but end month & quarter in red,” June 30, 2011.
(21) S&P/LCD News, “LCD Loan Index: Loans gain 0.04%; YTD return is 2.66%,” July 1, 2011.
(22) S&P/LCD News, “S&P ELLI: Loans lose 0.39%; YTD return is 2.83%,” July 7, 2011.
(23) S&P/LSTA Leveraged Lending Review 2Q 2011, as of June 24, 2011.
(24) S&P/LSTA Leveraged Lending Review 2Q 2011.
(25) S&P/LSTA Leveraged Lending Review 2Q 2011.
(26) S&P/LSTA Leveraged Lending Review 2Q 2011.
(27) S&P/LSTA Leveraged Lending Review 2Q 2011.
(28) S&P/LSTA Leveraged Lending Review 2Q 2011.
(29) S&P/LSTA Leveraged Lending Review 2Q 2011.
(30) S&P/LSTA Leveraged Lending Review 2Q 2011.
(31) S&P/LSTA Leveraged Lending Review 2Q 2011.
(32) S&P/LSTA Leveraged Lending Review 2Q 2011.
(33) Morgan Stanley CDO Market Tracker, July 5, 2011; based on a sample of 475 U.S. CLO transactions.
(34) Morgan Stanley CDO Market Tracker, April 6, 2011; based on a sample of 477 U.S. CLO transactions.
(35) Morgan Stanley CDO Market Tracker, July 5, 2011; based on a sample of 195 Euro CLO transactions.
(36) Morgan Stanley CDO Market Tracker, April 6, 2011; based on a sample of 196 Euro CLO transactions.
(37) RBS CLO Market Review - July 2011, July 8, 2011.
(38) RBS CLO Market Review - July 2011, July 8, 2011.
(39) S&P/LSTA Leveraged Lending Review 2Q 2011.
(40) Morgan Stanley CDO Market Tracker, July 5, 2011.
(41) Morgan Stanley CDO Market Tracker, July 5, 2011.
(42) “Moody’s Approach to Rating Collateralized Loan Obligations,” June 2011.
(43) Moody’s CLO Interest, June 30, 2011.
(44) Moody’s CLO Interest, June 30, 2011.
(45) Moody’s CLO Interest, June 30, 2011.
(46) RBS CLO Market Review - July 2011, July 8, 2011.
(47) J.P. Morgan US Fixed Income Markets Weekly, “Collateralized Debt Obligations,” July 8, 2011.
(48) S&P/LCD News, “With no Defaults in June, Rate Holds at Historical Low,” July 5, 2011
For further information, please contact:
TFG:
David Wishnow/Yuko Thomas
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Brunswick Group
Andrew Garfield/Gill Ackers/Pip Green
polygon@brunswickgroup.com
PRN NLD
.
Tags: August 1, London, Tetragon Financial Group Limited, United Kingdom
