Tetragon Financial Group Limited (TFG): Performance Report for Period Ended 30 September 2010
By Tetragon Financial Group Limited, PRNEThursday, October 28, 2010
LONDON, October 29, 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 September 30, 2010.[2]
Executive Summary:
Corporate-Level Results
- Operating Results: TFG produced strong operating results during Q3
2010, with EPS of $1.03 (Q2 2010: $0.45 EPS), consolidated net income
of $125.0 million (Q2 2010: consolidated net income of $55.6 million)
and an increase in consolidated net assets to $1,018.6 million or $8.43
per share (Q2 2010: consolidated net assets of $909.4 million or $7.44
per share).
- Cash Receipts and Balances: Cash flows from TFG's CLO investments
continued to be robust during the quarter, totaling $71.8 million (Q2
2010: $60.9 million). The cash balance on September 30, 2010 was
$187.9 million, up from $156.2 million as of the end of the prior
quarter. Approximately $63.5 million was earmarked to pay certain
short-term liabilities. In addition, TFG held approximately $72.7
million in market value of liquid U.S. leveraged loans as of the end
of Q3 2010.
- Capital Distributions: On October 27, 2010, the Board approved a
dividend of $0.08 per share, with respect to Q3 2010, reflecting the
Company's continued strong cash generation during the quarter and our
growing confidence in its sustainability. In addition, TFG repurchased
over 1.8 million shares during Q3 for approximately $7.7 million
representing an average buy-back price of $4.27 per share. On October
1, 2010, the Board announced a continuation of TFG's share repurchase
program, which will continue up to October 31, 2011, until 5% of the
Company's shares have been repurchased under the updated program, or
until terminated by the Board.[3]
Executive Summary (continued):
Investment Portfolio Performance Highlights
- CLO Collateral Performance: TFG's CLO average portfolio statistics
continued to outperform market-wide default and CCC-asset holding
averages, as credit fundamentals improved during the quarter.
- CLO IRRs: The weighted-average IRR of TFG's CLO investments rose to
13.7% as of Q3 2010, up from 13.1% at the end of Q2 2010. This
reflected, among other factors, continued gains in the credit quality
of certain of our CLO's underlying investments as well as the impact
of widening asset spreads and LIBOR floors, which increased the excess
spread available for distribution to the equity tranches.
- Direct Loan Investments: TFG's direct holdings of loans increased to a
fair-market value of approximately $72.7 million as of the end of Q3
2010, up from $44.3 million in the prior quarter, as the Company made
additional purchases. The direct loan portfolio performed well during
this period, experiencing no defaults or downgrades and benefiting
from certain corporate events and market value gains.
Asset Management Platform
- LCM: LCM continued to perform well during Q3 2010, with all of LCM Cash
Flow CLOs [4] continuing to pay senior and subordinated management
fees. As October 8, 2010, total loan assets under management rose to
approximately $2.7 billion. This increase reflects the transition of
a CLO management contract from a third-party manager to LCM (please
see "CLO Corporate Actions").
Executive Summary (continued):
Asset Management Platform (continued)
- GreenOak: As reported earlier, TFG expanded its asset management
platform early in Q3 2010 through the acquisition of a 10% interest in
the GreenOak real estate venture.[5] GreenOak continues to build its
team in-line with budgeted expectations; however, we currently do not
expect to see operating income benefits from the venture in the
immediate future as it is a medium-term investment for TFG.
Corporate-Level Performance Details:
- Capital Distributions: TFG's Board approved a dividend of $0.08 per
share with respect to Q3 2010. Since its public listing, TFG has
distributed approximately $1.30 per share via quarterly dividends.[6]
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.
Corporate-Level Performance Details (continued):
- Capital Distributions (continued):
Investment Portfolio Performance Details:
- CLO Portfolio Size: As of the end of Q3 2010, the estimated total fair
value of TFG's CLO investment portfolio was approximately $820.4
million, up from approximately $720.2 million as of the end of the
prior quarter. TFG's indirect exposure to leveraged loans through its
CLO investments was approximately $17.5 billion as of the end of Q3
2010.[7]
- CLO Portfolio Composition: During Q3 2010, the CLO portfolio remained
stable with 68 investments managed by 31 external CLO managers.[8]
- CLO Collateral Performance: As of the end of Q3 2010, approximately 96%
of TFG's CLO investments were passing their junior-most O/C tests,
weighted by fair value, up from approximately 95% at the end of Q2
2010.[9] When measured on a number of transactions basis, 56, or
approximately 88%, of the Company's CLO investments were passing their
junior-most O/C tests, an increase from approximately 84% at the end
of Q2 2010.
- TFG's U.S. CLOs, representing approximately 90.9% of the fair value of
TFG's investment portfolio as of the end of September 30, 2010, performed
well during the quarter with approximately 99.7% of TFG's U.S. CLOs by
fair value and 98.2% by number passing their junior-most O/C
tests.([10])([11]) In comparison, the market-wide average of U.S. CLOs
estimated to be passing their junior O/C tests as of the end of Q3 2010
was approximately 89.5% (when measured on a percentage of transactions
basis).[12]
Investment Portfolio Performance Details (continued):
- CLO Collateral Performance (continued):
- CLO Portfolio Credit Quality: As of September 30, 2010, the
weighted-average percentage of corporate obligors rated Caa1/CCC+ or
below in TFG's 68 CLO investments was 9.6% compared to an approximate
7.9% weighted-average maximum level permitted under the terms of our
investments.[13] In comparison, the market-wide median CCC asset
holdings of U.S. CLOs was estimated to be approximately 9.9% as of Q3
2010.[14] TFG's weighted-average WARF stood at approximately 2,658.
Each of these foregoing statistics represents a weighted-average
summary of all of our 68 investments.[15] Each individual investment's
metrics will differ from this average and vary across the portfolio.
TFG Investment Weighted-Average Summary
Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2007 2007 2008 2008 2008 2008
Caa1/CCC+ or
Below Obligors: 2.8% 2.8% 3.0% 3.4% 4.4% 4.9% 7.6%
WARF: 2,415 2,237 2,439 2,443 2,472 2,490 2,577
(table continued)
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009 2009 2009 2009 2010 2010 2010
Caa1/CCC+ or
Below Obligors 11.4% 11.6% 12.6% 12.0% 11.1% 10.5% 9.6%
WARF: 2,758 2,800 2,813 2,809 2,762 2,706 2,658
Investment Portfolio Performance Details (continued):
- TFG and Market Default Rates: TFG's lagging 12-month corporate loan
default rate decreased to 2.2% during the third quarter.[16] The
lagging 12-month U.S. institutional loan default rate, by comparison,
fell to 3.6% by principal amount as of September 30, 2010, according
to S&P/LCD, down from approximately 4.0% during the prior quarter.[17]
- CLO Corporate Actions: TFG's current strategy, which includes the
acquisition of majority or significant equity positions and playing
an active role in the structuring of our investments, continued to
prove valuable during the quarter by allowing us to achieve certain
CLO corporate actions. Shortly after the end of Q3 2010, we were able
to effectuate a management change in one of TFG's U.S. CLO investments
by voting, along with certain debt investors in the transaction, to
remove the collateral manager of the CLO and to replace it with LCM.
We believe that this management change will have a positive effect on
the performance of the transaction and will therefore enhance the
value of our investment.
- After reflecting the transition of this CLO onto its platform, LCM's loan
assets under management rose to $2.7 billion as of October 8, 2010. We expect
that this transaction will contribute approximately $1.0 to $2.0 million to
LCM's gross fee income per year during the deal's reinvestment period, which
is scheduled to end in May 2012. We currently estimate that cumulative gross
fee income earned over the expected life of the CLO may exceed $6.0 million.
Investment Portfolio Performance Details (continued):
- CLO Corporate Actions (continued): We believe that the assumption of
third-party originated CLO management contracts by LCM can serve as an
important value creator for TFG, especially as the Company seeks to
capitalize on economies of scale within its asset management platform.
We expect to continue to explore ways to leverage our ownership
positions for the benefit of TFG's shareholders.
- Direct Loan Investments: As of September 30, 2010, TFG owned liquid
U.S. bank loans with an aggregate par amount of $77.7 million and
total fair value of approximately $72.7 million. This direct loan
portfolio continued to perform well during the quarter, benefitting
from early prepayments, amend-and-extend spread increases as well as
an overall improvement in loan prices. No defaults or downgrades were
registered in the portfolio. Since inception through the end of
September 2010, the portfolio has realized approximately $0.5 million
of trading gains. In addition, the portfolio earned $0.8 million of
interest proceeds over the same period (inception to September 31,
2010). 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 Q3 2010. As of September 30, 2010, all senior and
subordinated CLO management fees on LCM Cash Flow CLOs[18] were
current and taking into account all LCM-managed vehicles, the gross
income year-to-date for LCM totaled $9.2 million. Pre-tax profit for
the entire LCM business, of which TFG owns 75%, reached approximately
$4.7 million as of the same period. On October 8, 2010, LCM assumed
the management of a U.S. CLO with the consent of TFG (as a majority
equity holder) and certain other debt investors (please see "CLO
Corporate Actions" for additional information). We continue to explore
the possibility of LCM serving as manager to a new arbitrage cash flow
CLO as well as to existing CLO transactions that could be transitioned
to the LCM platform.
LCM Asset Management Performance Snapshot
Q3 2010 Q2 2010 Q1 2010
Gross Fee Income ($MM) $3.0 $2.9 $3.3
Pre-tax Income ($MM) $1.4 $1.4 $1.9
Loan and CLO Market Developments:
- U.S. leveraged loan default rates decline: The U.S. lagged 12-month
loan default rate fell to 3.6% by principal amount as of September
30, 2010, down from 4.0% in the prior quarter and a high of 10.8%
recorded in November 2009, as credit fundamentals continued to
improve.[19]
Loan and CLO Market Developments (continued):
- U.S. CLO O/C ratios improve while European CLO O/C ratios remain
broadly unchanged: During Q3 2010, 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 2.55% as of September 30, 2010, up
from 2.25% as of the end of Q2 2010.[20][21] However, the
percentage of European CLOs passing their junior-most O/C tests
remained largely unchanged at approximately 50% as of the end of Q3
2010.[22]
- Secondary loan market prices rise: Secondary loan prices resumed their
ascent in Q3 2010, after falling in the prior quarter. Through the
first nine months of 2010, the U.S. S&P/LSTA Leveraged Loan Index
returned 6.77%. [23]
- U.S. loan prepayments slightly lower in Q3 2010: During Q3 2010, the
U.S. S&P/LSTA Leveraged Loan Index quarterly prepayment rate fell
slightly to 5.3%, down from 6.8% in the prior quarter.[24] This rate,
however, was significantly higher than last year's third quarter
prepayment rate of 2.9%.[25] This robust level of prepayments has
increased the amount of principal proceeds available for re-investment
within a number of CLOs, which may have allowed certain CLO managers
to increase the weighted-average spread of their transactions by
investing those prepayments into generally wider-spread new issue
loans.
- Primary loan issuance volumes remain strong in the U.S. and Europe:
Institutional U.S. loan issuance during the third quarter totaled $35.1
billion compared with approximately $42.7 billion in Q2 2010, with
September registering the largest monthly issuance since the bankruptcy
of Lehman Brothers.[26] Year-to-date, institutional U.S. new issuance
activity totaled $108 billion, a significant increase from the $21
billion brought to market during the same period in 2009.[27] European
primary loan issuance also increased quarter-over-quarter, with EUR11.5
billion loans issued in Q3 2010, compared with EUR8.9 billion during Q2
2010.[28]
- Corporate activity continues to pick-up: Approximately $28 billion of
U.S. loans due through 2014 were either extended, repaid or defaulted
during Q3 2010.[29] This reduced the amount of debt that issuers will
need to repay by the end of 2014 to an estimated $324 billion, down
from approximately $418 billion as of the end of 2009, diminishing the
size the so called "maturity cliff".[30] In addition, high yield debt
takeouts and deleveraging through equity offerings and other types of
M&A activity have started to become more common, with companies such
as Graham Packaging, NXP Semiconductor and Noranda Aluminum taking
advantage of the recovery in the capital markets to improve their
balance sheets during the third quarter.
- CLO new issuance market recovery continues: Global CLO issuance totaled
approximately $40.3 billion through the first three quarters of 2010
with the majority of this volume consisting of European balance sheet
CLOs.[31] Nonetheless, a number of arbitrage-driven U.S. CLO
transactions appear to be in the works, with six new transactions
totaling approximately $2.55 billion reported in the forward calendar
by S&P/LCD.[32] Although the deals' issuance motivations and amount of
equity raised are difficult to confirm at this point, we believe that
a meaningful share of the cited transactions will involve a partial,
third-party equity raise.
Loan and CLO Market Developments (continued):
- CLO new issuance market recovery continues (continued): As secondary
CLO debt and equity prices continue to rise, we believe that new CLO
transactions will continue to gain traction during the remainder of
2010, so long as, among other factors, fundamental economic and credit
conditions remain stable. Although we believe the arbitrage cash flow
CLO issuance levels of 2006-2007 are not likely to return in the
near-term, we do expect that equity and debt financing will be
available for top-tier CLO asset managers.
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
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 seek
to benchmark our inputs and resulting outputs to observable market data
when available and appropriate. Fundamentally, the valuation process
may be viewed as a two stage process: (1) projecting future cash flows
and (2) adjusting them at an appropriate discount rate to reflect the
perceived level of risk. Under this view, a modeling approach which
involves two main steps is utilized. First, future cash flows for each
deal in the CLO portfolio are modeled, using our base case assumptions.
This generates both the investment IRRs, which are used to drive the
recognition of income, and the associated amortized cost. Second, a
discount rate is applied to those future cash flows to generate a fair
value for each investment. Due to elevated market risk premiums over
the last two years, among other factors, this effective discount rate
has typically been higher than the deal's IRR and therefore, in such
instances, has resulted in a fair value which is lower than the deal'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".[33]
Forward-looking cash flow modeling assumptions unchanged in Q3 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 believe that such improvements have generally continued through Q3
2010, as reflected in TFG's strong third quarter results described
earlier in this report. We are also pleased that the magnitude of the
"maturity cliff" appears to have been reduced. However, with mixed
economic and corporate results reported year-to-date and a continuing
uncertain outlook, we have not recalibrated our forward looking
assumptions at September 30, 2010 pending, among other things, further
sustained evidence of ongoing improvements.
Application of discount rate to projected cash flows / ALR
- Over the past few quarters, the effective discount rate applied to the
portfolio has typically been in the 28%-30% range, which represented a
significant spread over the prevailing BB-rated CLO tranche yields.
- During Q3 2010 we have observed two important developments:
- Evidence of a significant decline in risk premium demanded by market
participants across the entire rating spectrum of CLO tranches,
including debt originally rated BB/Ba2. Furthermore, indicative
evidence, such as "price runs" from large financial institutions
active in the trading of CLO securities, of trading levels in certain
CLO equity in transactions that TFG does not own, also lent support to
the notion of a reduction in the risk premium or discount rate that a
market participant would apply to value CLO equity tranches.
- Improvements in the credit quality and structural strength of many of
TFG's CLO investments, as evidenced by reduced Caa1/CCC asset holdings
and increased O/C ratio levels, among other measures, resulting in the
generation of sufficient cushion to potentially reduce the variability
of projected cash flows such investments.
- In order to reflect the aforementioned and other relevant developments
our discount rates have been modified in the following way:
- For the stronger portion of TFG's CLO investment portfolio, the
effective discount rate has been reduced to 23%, which represents a 5%
haircut to the bottom of the range that has been applied in recent
quarters, but which still includes a significant spread over observable
yields on BB-rated tranches. These deals have generally been
characterized by historically strong performance such as maintaining
equity payments through the financial crisis, among other factors, and
which currently enjoy the benefits of relatively high O/C cushions and
excess spreads, which provide protection against further collateral
losses resulting in O/C test breaches and the subsequent cessation of
cash flow payments to equity holders, such as TFG.
- For the remaining deals in the CLO investment portfolio, for which
there is a perceived heightened variability of future cash flows, the
effective discount rate has been maintained at 30%, or the higher end
of the recent 28-30% band, which we believe to be an appropriate rate
at this time. The appropriateness of this rate will continue to be
assessed in the context of, among other considerations, the overall
market risk premium and each deal's structural strength and credit
quality over the coming quarters.
- The direct result of this adjustment to the discount rates described
above was to increase the carrying value of certain CLO investments
and the aggregate portfolio Fair Value by approximately $43.0 million.
- As of the end of Q3 2010, the ALR has been reduced to approximately
$274.7 million as compared to $330.7 million at the end of Q2 2010.
Outlook Summary:
We believe that the recovery of the global financial markets witnessed
through Q3 2010 has led to improvements in the credit quality and structural
strength of TFG's investments. We also believe that these improvements are
likely to be sustainable, at least in the short to medium-term, and therefore
take a positive view of both our investment portfolio and asset management
platform. At the end of Q3 2010, nearly all of our U.S. CLO investments were
passing their junior O/C tests, which significantly outperformed the general
market average.[34] Perhaps equally importantly, the excess spread of these
CLOs, namely the difference between the interest income generated by a CLO's
assets and the cost of financing through the CLO's debt as well as certain
fees (which are locked-in at closing), has increased substantially from
original levels. We believe that this combination of improving O/C ratios and
increasing excess spread availability should continue to lead to increased
payments to TFG's CLO equity over the next few quarters. Furthermore, these
cushions are expected to insulate TFG's CLO investments from potential future
credit losses, implying that our performance should remain strong even in the
absence of a significant improvement in macroeconomic conditions, so long as
we avoid another dramatic fundamental downturn or financial market crisis.
Despite our optimism, a number of hurdles for successful long-term
performance remain. As we have highlighted before, the sizable amount of
leveraged loan maturities coming due over the next three to four years will
need to be further reduced. We expect that corporate borrowers will continue
to seek to address this "maturity cliff", whether through amend-to-extend
activity, corporate bond take-outs, or M&A activity. Furthermore, European
CLOs continue to generally perform poorly, typically lagging the recovery of
the U.S. CLO investments. We believe that these challenges may often make our
majority position strategy ever more valuable, as it may allow us to improve
the profitability of underperforming investments in certain situations. For
example, as was described previously in TFG's Q2 2010 performance report, we
were able to provide support for certain CLO management changes for three
European investments in return for a long-term fee sharing arrangement.
We expect to continue evolving TFG's strategy to one of a broader
financial services firm with ownership of operating business that is capable
of pursuing attractive investment opportunities across multiple geographies
and asset classes. With respect to our asset management platform, we will
seek to focus on supporting the expansion of LCM's asset management business,
whether by transitioning existing CLO management contracts to LCM or by
exploring the issuance of a new arbitrage cash flow CLO. 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 $39.3 million was accrued in Q3 2010 in accordance
with TFG's investment management agreement and based on a "Reference NAV" of
Q2 2010. The hurdle rate for Q4 2010 incentive fee has been reset at 2.9385%
(Q3: 3.1812%) as per the process outlined in TFG's 2009 Audited Financial
Statements and in accordance with TFG's investment management agreement.[35]
Capital Distributions
The dividend of $0.08 per share with respect to Q3 2010 will be payable
on November 24, 2010. Please refer to the website (www.tetragoninv.com) for
additional information regarding the dividend, including the Optional Stock
Dividend Plan.
Quarterly Investor Call
We will host a conference call for investors on November 5, 2010 at 15:00
GMT/16:00 CET/11:00 EDST to discuss Q3 2010 results and to provide a company
update. Please note there is only a four hour time difference between London
and New York on this day.
The conference call may be accessed by dialing +44-(0)20-7162-0025 and
+1-334-323-6201 (a passcode is not required). Participants may also register for
the conference call in advance via the following link
https://eventreg1.conferencing.com/webportal3/reg.html?Acc=697363&Conf=175320
.
A replay of the call will be available for 30 days by dialing
+44(0)20-7031-4064 and +1-954-334-0342, access code 876111 and as an MP3
recording on the TFG website.
Unaudited Financial Statements
Full unaudited consolidated quarterly reports for the period ended
September 30, 2010 can be found on our website, www.tetragoninv.com.
Expected Upcoming Events Date
Q3 Ex-Dividend Date November 1, 2010
October 2010 Monthly Report November 18, 2010 (approx.)
Q3 Dividend Payment Date November 24, 2010
November 2010 Monthly Report December 20, 2010 (approx.)
TETRAGON FINANCIAL GROUP
Financial Highlights
Q3 2010 Q2 2010 Q1 2010 Q4 2009
Net income ($MM) $125.1 $55.6 $72.5 $94.7
EPS ($) $1.03 $0.45 $0.58 $0.76
CLO Cash receipts
($MM) (1) $71.8 $60.9 $51.1 $38.4
CLO Cash receipts
per share ($) $0.59 $0.50 $0.41 $0.31
Net cash balance
($MM) $187.9 $156.2 $172.6 $174.4
Net assets ($MM) $1019 $909 $867 $807
Number of shares
outstanding
(million) 120.8 122.2 123.6 124.8
NAV per share ($) 8.43 7.44 7.02 6.47
DPS ($) $0.08 $0.08 $0.06 $0.06
Weighted average IRR
on completed
transactions (%) 13.70% 13.1% 12.3% 11.9%
Number of CLO
investments (2) 68 68 68 61
ALR Fair Value
Adjustment ($MM) ($274.7) ($330.7) ($339.5) ($349.0)
(1) Gross cash receipts from CLO portfolio.
(2) Excludes CDO-squared and ABS CDO transactions written off in
October 2007. TFG continues to hold the economic rights to 3 of
these written-off transactions.
(table continued)
TETRAGON FINANCIAL GROUP
Financial Highlights
Q3 2009 Q2 2009 Q1 2009 Q4 2008
Net income ($MM) $31.2 ($26.7) ($414.3) ($187.1)
EPS ($) $0.25 ($0.21) ($3.29) ($1.48)
CLO Cash receipts
($MM) (1) $35.3 $31.9 $47.1 $75.3
CLO Cash receipts
per share ($) $0.28 $0.25 $0.37 $0.60
Net cash balance
($MM) $149.7 $123.8 $94.3 $59.9
Net assets ($MM) $721 $693 $723 $1142
Number of shares
outstanding
(million) 126.2 125.9 125.7 126.0
NAV per share ($) 5.71 $5.50 $5.75 $9.06
DPS ($) $0.03 $0.03 $0.03 $0.03
Weighted average IRR
on completed
transactions (%) 10.3% 9.2% 10.6% 13.8%
Number of CLO
investments (2) 61 61 61 61
ALR Fair Value
Adjustment ($MM) ($333.8) ($254.1) ($315.0) ($141.0)
(1) Gross cash receipts from CLO portfolio.
(2) Excludes CDO-squared and ABS CDO transactions written off in
October 2007. TFG continues to hold the economic rights to 3 of
these written-off transactions.
TFG QUARTERLY STATEMENT OF OPERATIONS
Statement of Operations
Q3 2010 Q2 2010 Q1 2010 Q4 2009
($MM) ($MM) ($MM) ($MM)
Interest income 45.8 43.4 43.22 41.1
CLO management fee
income 3 2.9 3.3 -
Other income 0.5 0.3 0.3 0.3
Investment income 49.3 46.6 46.82 41.4
Management and
performance fees (42.7) (19.8) (25.4) (32.7)
Admin/ custody and
other fees (2.6) (2.6) (1.9) (0.8)
Total operating
expenses (45.3) (22.4) (27.3) (33.5)
Net investment income 4.0 24.2 19.52 7.9
Net change in in
unrealised
appreciation/
(depreciation) in
investments 121.3 31.4 54.5 91.8
Realised gain/
(loss) on investments 0.3 0.26 - -
Realised and
unrealised gains/
(losses) from hedging
and fx 0.3 0.8 - (5.0)
Net realised and
unrealised gains/
(losses) from
investments and fx 121.9 32.4 54.5 86.8
Income taxes (0.4) (0.4) (1.3) -
Noncontrolling interest (0.3) (0.6) (0.2) -
Net increase/(decrease)
in net assets from
operations 125.2 55.6 72.5 94.7
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 September 2010
TFG Total
($MM)
Assets
Investments in securities, at fair value 893.1
Intangible assets - CLO management contracts 0.2
Cash and cash equivalents 187.9
Amounts due from brokers 8.3
Accrued fee income 1.2
Other receivables 0.3
Total Assets 1091.0
Liabilities
Unrealised loss on forward contracts 4.8
Other payables and accrued expenses 42.5
Amounts payable on securities purchased 23.9
Total Liabilities 71.2
Net Assets Before Noncontrolling Interest 1019.9
Noncontrolling Interest 1.1
Total Equity Attributable to TFG 1018.8
TETRAGON FINANCIAL GROUP LIMITED (TFG)
PORTFOLIO COMPOSITION
Portfolio Held By Tetragon financial Group Master Fund Limited
(Unless Otherwise Stated)
As Of September 30, 2010
Report Date TFG Share TFG TFG group No. of Closed
Price ($) group Net Assets CLO
Market Cap ($MM) Transactions
($MM)(1)
30 September 2010 $4.39 $574.6 $1,018.6 68(2)
Capital Allocation by Risk Capital Investment -
Asset Class Allocation Fair Value
($MM)(3)(4)
Broadly Syndicated Senior Secured
Loans: US 74.8% $667.8
Broadly Syndicated Senior Secured
Loans: Europe 8.3% $74.3
Middle Market Senior Secured
Loans: US 16.9% $151.0
CDOs Squared: US 0.0% $0.0
ABS and Structured Finance: US 0.0% $0.0
Total 100.0% $893.1
Geographic Allocation
by Asset Class USA Europe Asia Total
Pacific
Broadly Syndicated Senior
Secured Loans 90.0% 10.0% 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%
91.7% 8.3% 0.0% 100.0%
Top 15 Underlying Bank Loan Credits Bank Loan
Exposure
(5)
Community Health 0.96%
Charter Communications 0.95%
Univision Communications 0.87%
TXU Corp 0.86%
Georgia Pacific Corp 0.76%
HCA Inc 0.75%
First Data Corp 0.71%
Aramark Corp 0.69%
Cablevision Systems Corp 0.66%
SunGard Data Systems Inc 0.65%
Sabre Holdings Corp 0.63%
UPC Broadband 0.62%
Celanese US Holdings LLC 0.61%
Health Management Associates 0.58%
Nielsen Company 0.58%
Tetragon Financial Group Limited (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(unless otherwise stated)
As of September 30, 2010
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
Investment Manager
Tetragon Financial Management LP
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Investor Relations
David Wishnow / Yuko Thomas
ir@tetragoninv.com
Press Inquiries
Citigate Dewe Rogerson
Michael Berkeley/Justin Griffiths/Clare Simonds
tetragon@citigatedr.co.uk
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
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
Legal Advisor (as to Guernsey law)
Ogier
Ogier House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GYI 1WA
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam, The Netherlands
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
[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 Tetragon Financial Management LP, TFG's investment manager.
[2] This Performance Report constitutes TFG's interim management
statement as required pursuant to Section 5:25e of the FMSA. Pursuant to
Section 5:25e 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 Marketen) and also made available to
the public by way of publication on the TFG website (www.tetragoninv.com).
[3] Please see the TFG press release from October 1, 2010, "Tetragon
Financial Group Limited ("TFG") Announces Continuation of its Share
Repurchase Program."
[4] 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.
[5] Please see the TFG press release from August 2, 2010, "Tetragon
Financial Group Limited ("TFG") To Pursue Real Estate Venture."
[6] This figure includes the dividend of $0.08 per share announced on
October 27, 2010 with respect to Q3 2010.
[7] Includes only look-through loan exposures through TFG's CLO
investments.
[8] 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.
[9] Based on the most recent trustee reports available for both our
U.S. and European CLO investments as of September 30, 2010.
[10] As of September 30, 2010, European CLOs represented approximately
8.3% of TFG's investment portfolio; approximately 54% 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.
[11] 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.
[12] Morgan Stanley CDO Market Tracker, October 8, 2010; based on a
sample of 478 U.S. CLO transactions.
[13] 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.
[14] Morgan Stanley CDO Market Tracker, October 8, 2010; based on the
lower of Moody's and S&P rating. Furthermore, TFG's investment portfolio
includes approximately 8.3% CLOs with primary exposure to European senior
secured loans and such loans are included in the calculation of TFG's average
CCC asset holdings.
[15] Weighted by the original USD cost of each investment.
[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 8.3% CLOs with primary exposure
to European senior secured loans and such loans are included in the
calculation of TFG's corporate default rate.
[17] S&P/LCD News, "Default rates edge lower in September; further
declines likely in 4Q," October 1, 2010.
[18] 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.
[19] S&P/LCD News, "Default rates edge lower in September; further
declines likely in 4Q," October 1, 2010.
[20] Morgan Stanley CDO Market Tracker, October 8, 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, October 8, 2010; based on a
sample of 197 European CLO transactions.
[23] S&P/LCD News, "Index preview: loans return 1.41% in September,
6.77% YTD," October 1, 2010.
[24] S&P/LSTA Leveraged Lending Review 3Q 2010.
[25] S&P/LSTA Leveraged Lending Review 3Q 2010.
[26] S&P/LCD Quarterly Review, Third Quarter 2010.
[27] S&P/LCD Quarterly Review, Third Quarter 2010.
[28] S&P/LCD Quarterly Review, Third Quarter 2010.
[29] S&P/LCD Quarterly Review, Third Quarter 2010.
[30] S&P/LCD Quarterly Review, Third Quarter 2010.
[31] Morgan Stanley CDO Market Tracker, October 8, 2010.
[32] S&P/LCD News, "CLO calendar grows despite dearth of open-market
equity," October 18, 2010.
[33] 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.
[34] Morgan Stanley CDO Market Tracker, October 8, 2010; based on a
sample of 478 U.S. CLO transactions.
[35] 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.
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
+44-20-7638-9571
tetragon@citigatedr.co.uk
For further information, please contact: TFG: David Wishnow/Yuko Thomas, Investor Relations, ir at tetragoninv.com; Press Inquiries: Citigate Dewe Rogerson, Michael Berkeley/Justin, Griffiths/Clare Simonds, +44-20-7638-9571, tetragon at citigatedr.co.uk.
Tags: London, October 29, Tetragon Financial Group Limited, United Kingdom
