Tetragon Financial Group Limited (TFG) Performance Report for Period Ended 30 September 2011

By Tetragon Financial Group Limited, PRNE
Thursday, October 27, 2011

LONDON, October 28, 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 September 30, 2011.(2)

  • Executive Summary:

Corporate-Level Results

  • Operating Results: TFG’s investment portfolio performed well in the third quarter of 2011. The company produced EPS of $0.57 (Q2 2011: $0.74) and consolidated net income of $67.3 million (Q2 2011: $88.1 million). Please see the Statement of Operations on page 18 for further details. Consolidated net assets grew to $1,413.6 million or $12.06 per share (Q2 2011: $1,368.3 million or $11.52 per share). Improvements in the credit quality and structural strength of TFG’s CLO investments, as well as nominal spread increases and the continuing benefit of LIBOR floors within the U.S. CLO portfolio, remain main drivers of TFG’s positive results. Please refer to Figure 1 below for a historical summary of TFG’s Consolidated Net Assets, NAV per share and share price.
  • Cash Receipts and Balances: TFG’s CLO investments continued to generate significant cash flows in the quarter. During Q3 2011, the CLO portfolio produced $105.1 million of gross cash from investments (Q2 2011: $102.4 million). The ending cash balance for the third quarter was $155.6 million, up from $67.7 million as of the end of the prior quarter. The majority of this increase is attributable to the receipt of payment on certain direct loan sales cited in the last quarterly update. In addition, as of the end of Q3 2011, TFG held approximately $110.3 million in market value of liquid U.S. leveraged loans, up from $96.7 million at the end of Q2 2011.

Investment Portfolio Performance Highlights

  • CLO Collateral Performance: The amount of underlying loan defaults and CCC-asset holdings in TFG’s CLO portfolio continued to decline throughout the quarter, largely in line with market-wide averages.

  • CLO IRRs: The weighted-average IRR of TFG’s CLO portfolio ended Q3 2011 at 16.8%, up from 16.3% 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.

  • New CLO Investments: TFG made no CLO purchases during the quarter. We continue to explore the possibility of making new CLO investments, whether managed by LCM Asset Management LLC (”LCM”) or by an unaffiliated third party.
  • Direct Loan Investments: TFG’s direct holdings of bank loans increased to a fair value of approximately $110.3 million as of the end of Q3 2011, up from $96.7 million as of the end of the prior quarter. The increase in fair value was primarily the result of additional investments, as market prices generally declined during the quarter. The direct loan portfolio nevertheless continued to perform well during this period, experiencing no defaults.

Asset Management Platform

  • LCM: LCM performance was strong during Q3 2011, with all LCM Cash Flow CLOs continuing to pay senior and subordinated management fees.(3) As of the end of the third quarter, total loan assets under management were approximately $3.4 billion, down from $3.5 billion at the end of Q2 2011. The reduction in AUM was a result of the continuing amortization of LCM I and LCM II.  As of the end of the quarter, total assets under management remaining in each of the two currently amortizing deals were approximately $104.0 million and $250.4 million, respectively.
  • GreenOak: GreenOak continues to build its team and execute on its business growth strategy.

Performance Fee

A performance fee of $19.2 million was accrued in Q3 2011 in accordance with TFG’s investment management agreement and based on a “Reference NAV” with respect to Q2 2011. The hurdle rate for the Q4 2011 incentive fee has been reset at 3.0255% (Q3 2011: 2.8936%) 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 Q3 2011. Since its public listing, TFG has distributed approximately $1.68 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 nine months of 2011, the company repurchased a total of 3,643,506 shares at an aggregate cost of approximately $26.3 million, or $7.22 per share. Since inception of the buy-back program, the company has repurchased a total of 14,668,668 shares, or over 11% of the total shares outstanding, at an aggregate cost of approximately $73.0 million, or $4.98 per share.  TFG has also announced a continuation of its share repurchase program, which will continue up to October 31, 2012, until 5% of the company’s shares have been repurchased under the updated program, or until terminated by the Board. (6) Please refer to Figure 3 and Figure 4 for a summary of TFG’s historical NAV per share, dividend distributions, and share buy-back program.

  • Investment Portfolio Performance Details:

  • CLO Portfolio Size: As of the end of Q3 2011, the estimated total fair value of TFG’s CLO investment portfolio was approximately $1,138.6 million, down from approximately $1,149.7 million as of the end of the prior quarter. This reduction in the total fair value primarily reflects the return of principal and not a loss of value. Please refer to the Outlook Summary section for a further discussion of amortization within TFG’s CLO portfolio. TFG’s total indirect leveraged loan exposure through its CLO portfolio was approximately $18.3 billion as ofthe end of Q3 2011.(7).
  • CLO Portfolio Composition: The number of transactions remained unchanged at 75 as of the end of Q3 2011. The total number of deals in the portfolio was 67, (8) while the number of external CLO managers was 27.(9)
  • CLO Collateral Performance: As of the end of Q3 2011, approximately 98% of TFG’s CLO investments were passing their junior-most O/C tests, weighted by fair value.(10)Similarly, 64 or approximately 96% were passing when weighted by the number of deals.  Both of the foregoing statistics were unchanged from the end of the prior quarter.

    TFG’s U.S. CLOs continued to perform well, with 100% of such deals passing their junior-most O/C tests (note that U.S. CLOs represented approximately 86% of the total fair value of TFG’s CLO investment portfolio as of September 30, 2011).(11)(12) 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 2011 was approximately 94.1% (when measured on a percentage of deals basis).(13) Please refer to Figure 5 below for a summary of TFG’s investments’ historical junior O/C test performance.

  • CLO Portfolio Credit Quality:  As of September 30, 2011, the weighted-average percentage of corporate obligors rated Caa1/CCC+ or below in TFG’s 75 CLO transactions was 7.0% compared to an approximate 7.8% weighted-average maximum level permitted under the terms of the investments.(14) By comparison, the market-wide median CCC asset holdings of U.S. CLOs was estimated to be approximately 7.4% as of the end of Q3 2011.(15) TFG’s weighted-average WARF stood at approximately 2,614 as of the end of Q3 2011. Each of these foregoing statistics represents a weighted-average summary of all of our 75 CLO transactions.(16) Each individual investment’s metrics will differ from this average and vary across the portfolio.

                                         Q2    Q1    Q4    Q3    Q2
                                Q3 2011 2011  2011  2010  2010  2010  Q1 2010
    Caa1/CCC+ or Below Obligors: 7.0%   7.2%  7.6%  8.3%  9.6%  10.5%  11.1%
    WARF:                        2,614  2,642 2,664 2,671 2,658 2,706  2,762

                                Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008 2008
    Caa1/CCC+ or Below Obligors: 12.0%   12.6%   11.6%   11.4%   7.6%   4.9%
    WARF:                        2,809   2,813   2,800   2,758   2,577  2,490
  • TFG and Market Default Rates: TFG’s lagging 12-month corporate loan default rate, which includes European CLO investments, fell to 0.6% at the end of Q3 2011 from 0.8% as of the end of Q2 2011.(17)The lagging 12-month U.S. institutional loan default rate, by comparison, declined to 0.3% by principal amount as of September 30, 2011.(18) Please refer to Figure 6 below for a summary of TFG’s CLO investments’ historical default performance.


  • Investment Portfolio Performance Details (continued):

  • Direct Loan Investments: As of September 30, 2011, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $117.1 million and total fair value of $110.3 million. Although we believe the underlying businesses performed well during the quarter, the loan portfolio traded down alongside the overall loan market.  No defaults were registered in the portfolio during the period. For the quarter, no net realized gains were generated by the portfolio, leaving the year-to-date net realized gains at approximately $0.6 million. From inception through the end of Q3 2011, the portfolio generated approximately $1.7 million of net realized gains.  In addition, the portfolio earned $1.3 million of interest income and discount premium during the third quarter, bringing this year’s total to $4.3 million. Since inception, the portfolio has earned $7.0 million of interest income and discount premium.

  • Asset Management Platform Details:

  • LCM Developments: LCM’s operating results and financial performance remained strong throughout Q3 2011, with all senior and subordinated CLO management fees on LCM Cash Flow CLOs current as of September 30, 2011.Taking into account all LCM-managed vehicles, the gross income for Q3 2011 for LCM totaled $4.4 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 $2.2 million as of the same period (2010 quarterly average of $1.4 million). TFG continues to leverage and benefit from the LCM team’s expertise in the ongoing management of the company’s direct loan investment portfolio.
                    LCM Asset Management Performance Snapshot
                            Q3                     Q4             Q2
                           2011  Q2 2011 Q1 2011  2010  Q3 2010  2010 Q1 2010
    Gross Fee Income ($MM) $4.4   $3.9    $3.8    $3.4   $3.0    $2.9   $3.3
    Pre-tax Income ($MM)   $2.2   $1.9    $1.9    $1.1   $1.4    $1.4   $1.9
  • GORE Real Estate Developments: GreenOak continues to build its team and execute on its business growth strategy, including investment management and advisory engagements. TFG has funded a small portion of its investment capital commitments, approximately $1.5 million through quarter end in total for recent investments in Japan and the U.S.

  • Loan and CLO Market Developments:

  • Secondary loan market prices decline despite strong credit performance: Secondary loan prices fell during Q3 2011, in the midst of weakening technical market conditions and a deteriorating global macroeconomic outlook. The average price of the U.S. LCD’s Flow-Name Composite declined to approximately $91.8 at the end of Q3 2011, down from $96.8 as of the end of Q2 2011.(19)As a result, year-to-date returns for the S&P/LSTA U.S. Leveraged Loan Index turned negative as of the end of Q3 2011, falling to -1.34%.(20)In Europe, the average bid for LCD’s European Flow-Name Composite fell nearly six points from the prior quarter to €92.7 as of the end of Q3 2011,(21)and the year-to-date total return of the S&P European Leveraged Loan Index (”ELLI”) was also in negative territory totaling  -1.54% (including currency effects) as of September 30, 2011.(22) Generally, better-rated and shorter duration credits were better bid during the quarter than lower rated and longer maturity loans, potentially highlighting rising forward-looking liquidity or default concerns.(23)
  • U.S. leveraged loan default rate declines:  The U.S. lagged 12-month loan default rate fell to 0.32% by principal amount as of September 30, 2011,(24) down from 0.91% as of Q2 2011.(25) This low level of defaults stood in contrast to deteriorating loan market prices and widening spreads as current default rates remained well below the historical average annual default rate of 3.57%.(26) In contrast, the average spread to maturity of the S&P/LSTA Index stood at 668 bps of the end of the quarter, implying a 7.4% annual default rate according to S&P/LCD.(27) Furthermore, near-term U.S. default and credit distress indicators remained benign as of the end of Q3 2011 as the share of the S&P/LSTA Index that S&P downgraded to CCC+ or lower during the quarter remained below 1.0% and the percentage of performing S&P/LSTA Index loans trading at $70 or below moved up slightly to 2.1% in September, up from 1.2% in June 2011.(28) While this apparent disconnect between fundamentals and price appears stark given strong corporate performance, certain market participants believe that a portion of this quarter’s price declines may reflect heightened forward-looking default and loss expectations in light of reduced global growth expectations, remaining unresolved loan maturities of 2013-2014, as well as increased prospects for financial market disruption and liquidity concerns.(29) Additionally, the floating  rate nature of the loan asset class may have become relatively less attractive during the quarter given, among other things, the U.S. Federal Reserve’s August announcement that it currently intends to keep interest rates low through at least 2013.(30)
  • European leveraged loan default rates and distress metrics remain elevated:  The lagging 12-month default rate (by par amount) for the S&P European Leveraged Loan Index (ELLI) stood at 3.8% as of the end of Q3 2011, a level significantly above the 2010 year-end level of 2.0%.(31) Similarly, the percentage of performing loans trading below €80 rose to 28% at the end of Q3 2011, compared with 17.6% as of the end of 2010.(32) We believe that these relatively higher distress readings in Europe reflected, among other factors, the fundamental weakness of certain European economies, elevated concerns about systemic risks in the context of multiple sovereign and bank downgrades and the ongoing Greek debt crisis, as well as certain structural characteristics of the European loan market, such as its relatively small size, limited liquidity and less diversified investor base.


  • U.S. loan prepayments slow:  During Q3 2011, the U.S. S&P/LSTA Leveraged Loan Index quarterly prepayment rate declined to 7.0% from 10.9% during the prior quarter.(33) Despite a slow-down in refinancings and high yield bond take-outs during Q3 2011, the third quarter repayment rate remained robust by historical standards as a result of significant paydowns from pro-rata takeouts and corporate cash flows.(34)

  • Primary loan issuance volumes decline in the U.S. and Europe:  Q3 2011 U.S. institutional loan issuance totaled $28.0 billion, down approximately 63% from the end of Q2 2011.(35)This quarter-on-quarter deceleration reflected, among other things, declines in re-financings and new issuance activity, both of which became less attractive as secondary spreads and new issue clearing levels widened.(36) Despite this third quarter deceleration, U.S. institutional new issuance volume was up approximately 92% year-over-year to $206.0 billion - the largest level on record since the all time high reached in 2007.(37) European primary loan issuance volumes also fell during Q3 2011 to €9.3 billion, down from approximately €16.7 billion during Q2 2011.(38) 

  • “Maturity cliff” erosion continues albeit at a reduced pace: Difficult macroeconomic and financial market conditions during Q3 2011 also resulted in a reduction of the pace at which corporate borrowers were able to reduce the size of the so-called “maturity cliff.”  During the third quarter, issuers paid down or extended approximately $22.9 billion of U.S. S&P/LSTA Index loan maturities due by year-end 2014, down significantly from $47.0 billion during Q2 2011.(39) Lower volumes of high yield bond takeouts and amend-to-extend transactions were key drivers of this decline. Nonetheless, repayments from balance sheet cash holdings and acquisitions remained strong during the quarter totaling $25.8 billion during Q3 2011 (including visible transactions that have yet to be executed) versus $26.7 billion during Q2 2011.(40) As of September 30, 2011, year-to-date S&P/LSTA Index issuers reduced the amount of loans due before 2015 by $112.6 billion, or 43%, pro forma for announced repayments.(41)

  • U.S. loan re-pricing activity slows as new issue spreads widen: During Q3 2011, U.S. loan re-pricing volumes fell significantly to $225.0 million, down from $14.7 billion during Q2 2011, as loan spreads widened.(42) As of the end of September 2011, the average new issue clearing yield to maturity reached 7.82%, up from the 5.0-6.0% range seen in the first half of 2011.(43) Loan investors were also often able to extract better original issue discounts (”OIDs”) during the third quarter as well as improved deal terms such as stricter covenants, prepayment fees, and credit statistics, among other features.(44) We believe that these investor-friendly features may continue to find their way into transactions until market conditions, macroeconomic expectations and/or liquidity improve.

  • O/C ratios improve in both the U.S. and Europe but CCC asset holdings begin to show weakness: During Q3 2011, O/C ratios of U.S. and European CLOs strengthened on average. According to Morgan Stanley, the median junior O/C test cushion for U.S. CLOs increased to 3.75% as of September 30, 2011,up from 3.47% as of the end of the prior quarter.(45)(46) The median junior O/C test cushion for European CLOs also increased, ending Q3 2011 at 1.79%,up from 1.68% as of the end of Q2 2011.(47)(48)
  • However, the end of Q3 2011 began to see a reversal of positive credit trends as the number of downgrades into the CCC category exceeded the upgrades from the CCC level.(49) Furthermore, median CCC asset holdings in U.S. CLOs (based on the lower of Moody’s and S&P rating), increased slightly during the last month of the quarter ending Q3 2011 at 7.4%, down slightly from 7.5% as of the end of the prior quarter.(50)(51)

  • CLO new issuance slows: Year-to-date U.S. arbitrage-driven CLO issuance reached $8.3 billion as of the end of Q3 2011 as seven transactions totaling $2.6 billion priced during the third quarter.(52) This quarter’s issuance volume, however, fell below the $4.1 billion issued during Q2 2011 as CLO investors generally remained on the sidelines in the face of elevated market volatility and macroeconomic uncertainty.(53)(54) Looking forward toward the remainder of 2011, U.S. arbitrage cash flow primary issuance levels may likely remain below earlier expectations as key drivers of market volatility and economic uncertainty, such as the European sovereign debt crisis and U.S. budget negotiations, are likely to remain unresolved.

  • CLO secondary prices decline:Secondary CLO debt prices on average declined during the third quarter, with mezzanine tranches, originally rated BBB and BB, registering the larger quarter-on-quarter declines than AAA-rated tranches.(55)
  • Moody’s CLO liability upgrades continue:  At the time of its announcement of certain CLO rating methodology changes in June 2011, Moody’s also placed approximately 80% of all of all outstanding cash-flow CLO tranches on watch for upgrade. Since then, Moody’s has upgraded 2,837 CLO tranches including upgrades of 340 tranches originally rated Aaa, and previously downgraded below that level, back to their original Aaa rating.(56) Certain market participants believe that Moody’s may upgrade the bulk of remaining tranches currently on positive watch review overthe next 3-6 months.(57) As noted in our previous reports, we believe that these 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 extending the benefit of historically tight liabilities in the context of wide asset spreads and LIBOR floors.

  • Securitization regulatory changes clarified: As noted in earlier reports, 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. At the end of Q3 2011, the European Banking Authority (”EBA”) published a Q&A document on its implementation guidelines to Article 122a addressing certain aspects of its risk retention requirements with respect to managed CLOs. The EBA clarified, among other things, that existing CLOs will be able to continue to invest prepayment and recovery cash flows as per deal documents even after December 2013.(58) However, the Q&A response did not address many questions, including those regarding the nature and terms of originator SPV/sponsor requirements, leaving a substantial amount of uncertainty about the nature and impact of these regulations on the CLO market unresolved.

  • 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. Q2 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 2011, rating agency and investment bank research reports, as well as observable market data continued to indicate that the default environment for U.S. and European loans would remain benign.

  • 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 in the table and discussion on the following page.  

  • Forward-looking Cash Flow Modeling Assumptions Unchanged vs. Q2 2011 (continued):

                                        Assumptions as of September 30,
    Variable      Year              2011
                  2011              1.0x WARF-implied default rate
                  2012-2014         1.5x WARF-implied default rate
                  Thereafter        1.0x WARF-implied default rate
                  Until deal
                  maturity          71%
                  Until deal        20.0% p.a. on loans; 0.0% on
                  maturity          bonds
                  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 and into next year. That has continued to be the experience during Q3 2011, with the U.S. lagged 12-month loan default rate falling to 0.32% as of September 30, 2011.(59) Beyond 2011, TFG’s 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 third 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 303 bps on broadly syndicated U.S. loans, 320 bps on European loans, and 374 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 Rates to Projected Cash Flows and ALR:

  • In determining the applicable discount rates to use, an analysis of observable risk premium data points is undertaken. The third quarter witnessed a continuation of the widening of spreads in CLO tranches (including BB and BBB rated notes), a trend which had started in the second part of Q2. However, various investment bank research reports indicate that whilst spreads of the mezzanine tranches saw a meaningful increase, the impact on the risk premium on CLO equity was much less marked. The combination of high cash coupons and a low yield environment may support the view that CLO equity has weathered the recent market volatility better than the mezzanine tranches and we would, therefore, not see the risk premium on CLO equity increasing significantly at this time.  TFG’s discount rates have therefore been maintained at 20% for the stronger deals and 25% for the remainder of the portfolio, with a weighted average discount rate of approximately 21%.  We will continue to monitor these as well as other evidence of changes in risk premium as we move forward into Q4 2011.
  • In addition to the level of discount rates, the split of transactions between the two discount rate categories may 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, a net figure of four deals migrated into the stronger deal category. This migration had the effect of increasing the fair value of the CLO portfolio by approximately $2.7 million, which reflects the continued structural quality improvements referred to in the investment portfolio section.
  • Through the valuation process described above, as of the end of Q3 2011, the ALR has been reduced to approximately $118.0 million as compared to $133.8 million at the end of Q2 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 Q3 2011, unchanged from the end of Q2 2011.
  • As discussed in the last quarterly report, the applicable discount rate for the new vintage deals (post 2010) is determined with reference to the deal specific IRR, which, in the absence of other observable data points, is deemed to be the most appropriate indication of the current risk premium on these structures. At the end of Q3 2011, the weighted average discount rate (and IRR) on these deals was 12.8%, which represented approximately 4.6% of the CLO portfolio by Fair Value.  We will continue to monitor observable data on these newer vintage transactions to determine whether the IRR remains the appropriate discount rate.
  • With no recalibration of the modeling assumptions during Q3 2011 and the effective discount rate broadly unchanged, the key driver in the increase in fair value, which forms part of the $50.5 million of quarterly unrealized appreciation in investments was, therefore, the result of improvements in expected cash flows as deals strengthened, as described earlier in the report.  
  • Hedging Activity:
    As of September 30, 2011, TFG 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. 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:

A theme of Q3 2011 was elevated market uncertainty and volatility, stemming from, among other things, the continuation of the Greek sovereign debt crisis, multiple sovereign credit downgrades (including the United States), and concerns about the health of several key global economies.  Prices of most financial assets, including leveraged loans, fell during the quarter amidst fears of a renewed global macroeconomic downturn. Despite these price declines, TFG’s CLO and direct loan portfolios continued to generate significant cash flows and to perform well. The U.S. CLO portfolio, in particular, may potentially, all other things being equal, benefit from the current loan price declines. As we have previously noted, one may view CLO equity as a means of gaining leveraged exposure, via long-term matched CLO liabilities, to the bank loan asset class. Given CLOs long-term matched funding cost, an increase in the yield of a CLO’s underlying assets, without a corresponding increase in credit losses, absent other events, will result in incremental cash flows to CLO equity holders. Although we remain concerned about the potential for negative macroeconomic and financial shocks, we do not currently believe that near-term U.S. loan defaults will reach the high levels implied by current loan spreads. We, therefore, view the current loan spread widening, in the absence of a significant pick-up in credit losses, as a potential net positive for the future performance of TFG’s CLO equity investments.

CLO security prices were generally depressed during the quarter, as CLO spreads widened across all tranches. With widening CLO liability spreads, we may be less inclined to invest in new issue CLOs, whether managed by LCM or a third-party, until the sustainability of the equity arbitrage improves. Additionally, reduced levels of new issuance, may impact the near-term ability of LCM to continue to grow its CLO platform and lead it to further explore other loan asset management opportunities.  Finally, key regulatory requirements are yet to be resolved, bringing further uncertainty to the CLO new issue market.

The ability to invest in CLO securities and issue new CLOs has implications for the reinvestment of our capital, which will become increasingly important over the next few years. CLOs are amortizing instruments with reinvestment periods typically ending six to seven years before their legal final maturities. As such, the total size of the current investment portfolio will fall over time, holding all other factors constant.  Generally speaking, although we would expect the final payment for a CLO equity security to be significantly larger than a “normal” quarterly payment (due to the net liquidation proceeds from the underlying loan assets), cash flows should naturally decline as a CLO amortizes its liabilities and equity leverage is reduced. Given TFG’s majority ownership stakes in the greater part of our portfolio, we would expect to play an important role in determining the optimal time to exercise optional redemption rights in order to bring the value of that final payment forward. With a significant number of investments in the CLO portfolio reaching the end of their reinvestment periods over the next few years (see the first chart on page 23), we are mindful of the need to redeploy the company’s capital in order to maintain healthy returns for our shareholders. We expect to seek to do so by, among other things, investing in CLOs and loans as well as other asset classes across multiple geographies and growing our asset management businesses. We believe that the purchases of interests in LCM and GreenOak have opened new avenues for investment for the company.  As always, market conditions, opportunities and potential returns will inform how and where we invest TFG’s capital as we seek to continue to transition the company to a broadly diversified financial services firm.  We continue to believe that such a transition will strengthen and diversify TFG’s income streams and redound to the benefit of the company’s shareholders.

  • Quarterly Investor Call

We will host a conference call for investors on November 4, 2011 at 15:00 GMT/16:00 CET/11:00 EDST to discuss Q3 2011 results and to provide a company update.

The conference call may be accessed by dialing +44-(0)20-7162-0025 and +1-(334)-323-6201 (a passcode is not required). Participants may also register for the conference call in advance via the following link:


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 903974 and as an MP3 recording on the TFG website.


        Expected Upcoming Events                   Date
    Q3 Dividend Record Date                    November 1, 2011
    Quarterly Investor Call                    November 4, 2011
    October 2011 Monthly Report                November 18, 2011 (approx)
    Q3 Dividend Payment Date                   November 22, 2011


Financial Highlights

                                                      Q3 2011   Q2 2011   Q1 2011
    Net income ($MM)                              $ 67.30   $ 88.08  $ 174.69
    EPS ($)                                        $ 0.57    $ 0.74    $ 1.46
    CLO Cash receipts ($MM) (1)                  $ 105.10  $ 102.40   $ 90.90
    CLO Cash receipts per share ($)                $ 0.89    $ 0.86    $ 0.76
    Net Cash Balance ($MM)                       $ 155.60   $ 67.68  $ 147.04
    Net Assets ($MM)                            $1,413.60 $1,368.33 $1,298.00
    Number of Shares Outstanding (million)          117.2     118.8     119.6
    NAV per Share ($)                             $ 12.06   $ 11.52   $ 10.85
    DPS ($)                                        $ 0.10    $ 0.10    $ 0.09
    Weighted Average IRR on Completed Transactions
    (%)                                              16.8%     16.3%    15.8%
    Number of CLO Investments (2)                      75        75        74
    ALR Fair Value Adjustment ($MM)              $ -118.0  $ -133.8  $ -155.7


Table continues


                                               Q4       Q3        Q2    Quarterly
                                          2010     2010      2010    Average
    Net income ($MM)                   $ 132.00  $ 125.00  $ 55.63  $ 107.11
    EPS ($)                              $ 1.09    $ 1.03  $  0.45    $ 0.89
    CLO Cash receipts ($MM) (1)         $ 78.90   $ 71.79  $ 60.94   $ 85.02
    CLO Cash receipts per share ($)      $ 0.66    $ 0.59  $  0.50    $ 0.71
    Net Cash Balance ($MM)             $ 140.63  $ 187.90 $ 156.19  $ 142.50
    Net Assets ($MM)                  $1,137.55 $1,018.60 $ 909.29 $1,190.89
    Number of Shares Outstanding
    (million)                             120.1     120.8    122.2     119.8
    NAV per Share ($)                    $ 9.47    $ 8.43   $ 7.44    $ 9.96
    DPS ($)                              $ 0.09    $ 0.08   $ 0.08    $ 0.09
    Weighted Average IRR on Completed
    Transactions (%)                       15.1%     13.7%    13.1%     15.1%
    Number of CLO Investments (2)            70        68       68        72
    ALR Fair Value Adjustment ($MM)    $ -258.0  $ -274.7 $ -330.7  $ -211.8

(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.


Quarterly Statement of Operations as at 30 September 2011

                                       Q3     Q2     Q1     Q4
                                      2011   2011   2011   2010
                                     ($MM)  ($MM)  ($MM)   ($MM)
    Interest income                   53.6   52.0   48.4   46.5
    CLO management fee income          4.4    3.9    3.8    3.4
    Other income                       0.8    1.5    1.5    1.4

    Investment income                 58.8   57.4   53.7   51.3

    Management and performance fees - 24.3 - 31.2 - 59.9 - 45.6
    Admin / custody and other fees   - 9.0  - 4.1  - 5.7  - 3.5

    Total operating expenses        - 33.3 - 35.3 - 65.6 - 49.1

    Net investment income             25.5   22.1 - 11.9    2.2

    Net change in unrealised
    in investments                    50.5   65.0  184.5  128.8
    Realised gain/(loss) on
    investments                          -      -    0.6    0.5
    Realised and unrealised gains/
    (losses) from hedging and FX     - 7.1    2.4    2.9    1.2

    Net realised and unrealised
    gains/(losses) from investments
    and FX                            43.4   67.4  188.0  130.5

    Income taxes                     - 1.1  - 1.0  - 1.0  - 0.4
    Noncontrolling interest          - 0.5  - 0.4  - 0.5  - 0.3

    Net increase/(decrease) in net
    assets from operations            67.3   88.1  174.7  132.0


Balance Sheet as at 30 September 2011


    Investments in securities, at fair value              1,256.0
    Intangible assets - CLO management contracts              0.1
    Cash and cash equivalents                               155.6
    Amounts due from brokers                                 11.2
    Derivative financial assets - interest rate swaptions    10.8
    Derivative financial assets - forward contracts          10.2
    Other receivables                                         2.7
    Total Assets                                          1,446.6
    Other payables and accruals                              29.3
    Amounts payable to Guernsey Feeder                        0.5
    Amounts payable on Share Options                          1.6
    Income and deferred tax payable                           1.4
    Total Liabilities                                        32.8

    Net Assets Before Non-controlling Interest            1,413.8

    Non-controlling interest                                  0.2

    Total Equity Attributable to TFG                      1,413.6


Statement of Cash Flows for the period ended 30 September 2011

                                                             $MM (YTD)

    Operating Activities
    Operating cash flows before movements in working capital
    after dividends paid
    to Guernsey feeder                                         155.10
    Increase / (decrease) in payables                            6.00

    Cash flows from operating activities                        161.1
    Investment Activities
    Proceeds on sales of investments
    - Proceeds from the sale of bank loans                       92.4

    Purchase of investments
    - Purchase of CLOs                                          -46.6
    - Purchase of bank loans                                  -129.20
    - Purchase derivatives - swaptions                         -17.80
    - Other purchases                                           -1.40

    Maturity and prepayment of investments                      20.00

    Cash flows from operating and investing activities          78.46

    Amounts due from broker                                     -6.91
    Net Purchase of shares                                     -20.60
    Dividends paid to shareholders                             -33.40
    Distributions paid to noncontrolling interest               -2.60

    Cash flows from financing activities                       -63.50

    Net decrease in cash and cash equivalents                   15.00
    Cash and cash equivalents at beginning of period           140.63

    Cash and cash equivalents at end of period                 155.63

CLO Portfolio Details

As of September 30, 2011

                                  Original               End of Wtd Avg
                              Invest. Cost  Year of  Reinv  Spread
    Transaction    Deal Type  ($MM USD)(1)  Maturity Period (bps) (2)
    Transaction 1  EUR CLO    37.5             2024   2014       300
    Transaction 2  EUR CLO    29.7             2023   2013       339
    Transaction 3  EUR CLO    22.2             2022   2012       353
    Transaction 4  EUR CLO    33.0             2023   2013       344
    Transaction 5  EUR CLO    36.9             2021   2012       333
    Transaction 6  EUR CLO    33.3             2022   2012       332
    Transaction 7  EUR CLO    38.5             2023   2013       328
    Transaction 8  EUR CLO    26.9             2021   2011       325
    Transaction 9  EUR CLO    41.3             2023   2013       341
    Transaction 10 EUR CLO    27.0             2022   2012       334
    EUR CLO Subtotal:        326.3                               332

    Transaction 11 US CLO     20.5             2018   2012       351
    Transaction 12 US CLO     22.8             2019   2013       355
    Transaction 13 US CLO     15.2             2018   2012       340
    Transaction 14 US CLO     26.0             2021   2014       338
    Transaction 15 US CLO     28.1             2021   2014       388
    Transaction 16 US CLO     23.5             2020   2013       408
    Transaction 17 US CLO     26.0             2021   2014       337
    Transaction 18 US CLO     16.7             2017   2011       329
    Transaction 19 US CLO     1.2              2017   2011       329
    Transaction 20 US CLO     26.6             2020   2012       403
    Transaction 21 US CLO     20.7             2020   2012       386
    Transaction 22 US CLO     37.4             2019   2013       417
    Transaction 23 US CLO     19.9             2021   2013       342
    Transaction 24 US CLO     16.9             2018   2012       370
    Transaction 25 US CLO     20.9             2018   2013       373
    Transaction 26 US CLO     27.9             2019   2013       366
    Transaction 27 US CLO     23.9             2021   2014       481
    Transaction 28 US CLO     7.6              2021   2014       481
    Transaction 29 US CLO     19.1             2018   2011       431
    Transaction 30 US CLO     12.4             2018   2012       434
    Transaction 31 US CLO     9.3              2017   2012       328
    Transaction 32 US CLO     24.0             2021   2014       314
    Transaction 33 US CLO     16.2             2020   2012       352
    Transaction 34 US CLO     22.2             2020   2012       350
    Transaction 35 US CLO     23.6             2018   2012       443
    Transaction 36 US CLO     28.4             2021   2013       423
    Transaction 37 US CLO     9.3              2017   2011       311
    Transaction 38 US CLO     23.7             2021   2013       322
    Transaction 39 US CLO     7.8              2017   2011       357
    Transaction 40 US CLO     13.0             2020   2011       371
    Transaction 41 US CLO     22.5             2020   2013       360
    Transaction 42 US CLO     22.4             2021   2014       357
    Transaction 43 US CLO     0.2              2021   2014       357
    Transaction 44 US CLO     22.3             2018   2012       313
    Transaction 45 US CLO     23.0             2018   2012       317
    Transaction 46 US CLO     21.3             2019   2013       320
    Transaction 47 US CLO     28.3             2021   2013       324
    Transaction 48 US CLO     23.0             2019   2013       353
    Transaction 49 US CLO     12.6             2017   2011       330
    Transaction 50 US CLO     12.3             2018   2012       340
    Transaction 51 US CLO     18.0             2020   2013       369
    Transaction 52 US CLO     0.3              2015   2008       283
    Transaction 53 US CLO     0.6              2016   2011       301
    Transaction 54 US CLO     0.5              2017   2012       328
    Transaction 55 US CLO     0.3              2017   2011       328
    Transaction 56 US CLO     23.0             2019   2014       361
    Transaction 57 US CLO     0.6              2019   2014       361
    Transaction 58 US CLO     21.8             2019   2014       357
    Transaction 59 US CLO     0.4              2019   2014       357
    Transaction 60 US CLO     18.8             2021   2014       414
    Transaction 61 US CLO     29.1             2021   2014       316
    Transaction 62 US CLO     25.3             2020   2013       349
    Transaction 63 US CLO     27.3             2021   2013       337
    Transaction 64 US CLO     15.4             2021   2013       418
    Transaction 65 US CLO     26.9             2021   2013       337
    Transaction 66 US CLO     21.3             2020   2013       321
    Transaction 67 US CLO     27.3             2022   2014       320
    Transaction 68 US CLO     19.3             2020   2013       405
    Transaction 69 US CLO     28.2             2019   2013       398
    Transaction 70 US CLO     24.6             2020   2013       294
    Transaction 71 US CLO     1.7              2018   2012       340
    Transaction 72 US CLO     4.8              2019   2014       361
    Transaction 73 US CLO     1.9              2019   2014       361
    Transaction 74 US CLO     5.5              2019   2014       356
    Transaction 75 US CLO     32.7             2022   2014       416
    US CLO Subtotal:          1,154.0                            364

    Total CLO Portfolio:      1,480.3                            357

Table continues

                                      Wtd Avg       Current Jr-
                              Funding Cost   Most O/C
    Transaction    Deal Type  (bps) (3)      Cushion (4)
    Transaction 1  EUR CLO    55                 -3.07%
    Transaction 2  EUR CLO    52                  1.46%
    Transaction 3  EUR CLO    58                  5.26%
    Transaction 4  EUR CLO    48                  4.02%
    Transaction 5  EUR CLO    60                  3.17%
    Transaction 6  EUR CLO    51                 -0.55%
    Transaction 7  EUR CLO    46                 -1.40%
    Transaction 8  EUR CLO    53                  1.27%
    Transaction 9  EUR CLO    50                  0.75%
    Transaction 10 EUR CLO    50                  1.49%
    EUR CLO Subtotal:         52                  1.00%

    Transaction 11 US CLO     45                  5.25%
    Transaction 12 US CLO     46                  5.58%
    Transaction 13 US CLO     47                  6.26%
    Transaction 14 US CLO     49                  4.03%
    Transaction 15 US CLO     52                  2.61%
    Transaction 16 US CLO     46                  2.82%
    Transaction 17 US CLO     40                  4.14%
    Transaction 18 US CLO     45                  4.46%
    Transaction 19 US CLO     45                  4.46%
    Transaction 20 US CLO     52                  3.24%
    Transaction 21 US CLO     53                  2.77%
    Transaction 22 US CLO     53                  3.07%
    Transaction 23 US CLO     66                  3.38%
    Transaction 24 US CLO     46                  4.59%
    Transaction 25 US CLO     46                  5.45%
    Transaction 26 US CLO     43                  3.31%
    Transaction 27 US CLO     51                  9.42%
    Transaction 28 US CLO     51                  9.42%
    Transaction 29 US CLO     66                  3.64%
    Transaction 30 US CLO     67                  1.99%
    Transaction 31 US CLO     52                  2.98%
    Transaction 32 US CLO     59                  4.17%
    Transaction 33 US CLO     56                  4.15%
    Transaction 34 US CLO     50                  4.55%
    Transaction 35 US CLO     52                  2.75%
    Transaction 36 US CLO     46                  2.70%
    Transaction 37 US CLO     50                  3.39%
    Transaction 38 US CLO     42                  3.91%
    Transaction 39 US CLO     70                  3.02%
    Transaction 40 US CLO     39                   N/A
    Transaction 41 US CLO     48                  6.01%
    Transaction 42 US CLO     47                  6.02%
    Transaction 43 US CLO     54                  4.78%
    Transaction 44 US CLO     54                  2.03%
    Transaction 45 US CLO     46                  2.19%
    Transaction 46 US CLO     51                  2.43%
    Transaction 47 US CLO     47                  3.46%
    Transaction 48 US CLO     46                  2.69%
    Transaction 49 US CLO     40                  2.11%
    Transaction 50 US CLO     40                  2.42%
    Transaction 51 US CLO     53                  3.75%
    Transaction 52 US CLO     93                  4.81%
    Transaction 53 US CLO     61                  9.82%
    Transaction 54 US CLO     56                  4.66%
    Transaction 55 US CLO     39                  4.23%
    Transaction 56 US CLO     42                  4.50%
    Transaction 57 US CLO     42                  4.50%
    Transaction 58 US CLO     49                  3.43%
    Transaction 59 US CLO     49                  3.43%
    Transaction 60 US CLO     198                 4.60%
    Transaction 61 US CLO     45                  2.70%
    Transaction 62 US CLO     42                  3.58%
    Transaction 63 US CLO     53                  2.66%
    Transaction 64 US CLO     38                   N/A
    Transaction 65 US CLO     47                  2.84%
    Transaction 66 US CLO     49                  3.45%
    Transaction 67 US CLO     46                  4.20%
    Transaction 68 US CLO     48                  6.06%
    Transaction 69 US CLO     44                  7.05%
    Transaction 70 US CLO     52                  6.50%
    Transaction 71 US CLO     40                  2.42%
    Transaction 72 US CLO     42                  4.50%
    Transaction 73 US CLO     42                  4.50%
    Transaction 74 US CLO     49                  3.43%
    Transaction 75 US CLO     168                 4.58%
    US CLO Subtotal:          55                  3.91%

    Total CLO Portfolio:      54                  3.27%

Table continues

                                  Jr-Most O/C Annualized             ITD Cash
                              Cushion at  (Loss) Gain            Received as
    Transaction    Deal Type  Close (5)   of Cushion (6) IRR (7) % of Cost (8)
    Transaction 1  EUR CLO          3.86%         -1.63%    1.0%         29.6%
    Transaction 2  EUR CLO          3.60%         -0.44%    9.7%         46.8%
    Transaction 3  EUR CLO          5.14%          0.02%   13.6%         84.4%
    Transaction 4  EUR CLO          5.76%         -0.38%   13.3%         52.5%
    Transaction 5  EUR CLO          5.74%         -0.62%    8.1%         32.6%
    Transaction 6  EUR CLO          4.70%         -0.98%    5.8%         49.7%
    Transaction 7  EUR CLO          3.64%         -1.12%    5.3%         31.9%
    Transaction 8  EUR CLO          4.98%         -0.60%   12.7%         73.4%
    Transaction 9  EUR CLO          6.27%         -1.23%    7.4%         32.7%
    Transaction 10 EUR CLO          4.54%         -0.59%    8.9%         32.7%
    EUR CLO Subtotal:               4.84%         -0.82%                 44.1%

    Transaction 11 US CLO           4.55%          0.14%   19.4%        115.3%
    Transaction 12 US CLO           4.45%          0.23%   20.1%        108.2%
    Transaction 13 US CLO           4.82%          0.28%   19.5%        117.8%
    Transaction 14 US CLO           5.63%         -0.35%   16.1%         82.3%
    Transaction 15 US CLO           4.21%         -0.38%   25.9%        125.1%
    Transaction 16 US CLO           4.44%         -0.31%   19.7%        110.8%
    Transaction 17 US CLO           4.24%         -0.02%   21.6%        107.1%
    Transaction 18 US CLO           4.77%         -0.05%   18.2%        132.3%
    Transaction 19 US CLO           4.77%         -0.05%   21.8%        126.5%
    Transaction 20 US CLO           5.28%         -0.41%   20.2%        131.4%
    Transaction 21 US CLO           4.76%         -0.39%   17.1%        105.7%
    Transaction 22 US CLO           5.00%         -0.43%   18.8%         95.4%
    Transaction 23 US CLO           4.98%         -0.37%   17.6%        102.8%
    Transaction 24 US CLO           4.17%          0.08%   16.5%         85.5%
    Transaction 25 US CLO           4.13%          0.28%   21.0%        110.3%
    Transaction 26 US CLO           4.05%         -0.17%   17.1%         83.3%
    Transaction 27 US CLO           6.11%          0.70%   30.2%        151.4%
    Transaction 28 US CLO           6.11%          0.70%   36.0%         65.7%
    Transaction 29 US CLO           4.82%         -0.20%   17.9%        118.2%
    Transaction 30 US CLO           5.16%         -0.60%   16.0%         92.4%
    Transaction 31 US CLO           5.02%         -0.32%   15.3%        125.8%
    Transaction 32 US CLO           5.57%         -0.34%   18.3%         87.7%
    Transaction 33 US CLO           6.99%         -0.51%   13.2%         97.1%
    Transaction 34 US CLO           6.66%         -0.44%   16.3%         96.3%
    Transaction 35 US CLO           5.00%         -0.43%   21.7%        123.7%
    Transaction 36 US CLO           5.18%         -0.55%   19.3%         94.0%
    Transaction 37 US CLO           4.34%         -0.16%   15.2%        110.4%
    Transaction 38 US CLO           5.07%         -0.25%   25.4%        140.1%
    Transaction 39 US CLO           3.15%         -0.02%    7.3%         70.6%
    Transaction 40 US CLO            N/A            N/A    20.4%        119.7%
    Transaction 41 US CLO           4.71%          0.26%   21.0%        112.2%
    Transaction 42 US CLO           3.92%          0.47%   19.3%         91.4%
    Transaction 43 US CLO           3.75%          0.25%   22.1%         21.7%
    Transaction 44 US CLO           4.16%         -0.39%   11.3%         85.1%
    Transaction 45 US CLO           4.46%         -0.47%    9.7%         61.5%
    Transaction 46 US CLO           4.33%         -0.44%    6.8%         45.2%
    Transaction 47 US CLO           4.34%         -0.18%   19.8%        113.5%
    Transaction 48 US CLO           5.71%         -0.62%   16.3%         77.3%
    Transaction 49 US CLO           3.94%         -0.31%   11.0%         77.4%
    Transaction 50 US CLO           4.25%         -0.34%   12.1%         73.4%
    Transaction 51 US CLO           4.47%         -0.16%   20.0%         99.1%
    Transaction 52 US CLO           3.20%          0.19%  278.6%        681.4%
    Transaction 53 US CLO           4.00%          0.84%   37.6%        208.3%
    Transaction 54 US CLO           3.69%          0.15%   57.3%        457.1%
    Transaction 55 US CLO           3.59%          0.10%   60.8%        409.2%
    Transaction 56 US CLO           4.53%         -0.01%   21.6%        111.2%
    Transaction 57 US CLO           4.53%         -0.01%   46.1%        428.3%
    Transaction 58 US CLO           4.04%         -0.14%   23.6%        112.8%
    Transaction 59 US CLO           4.04%         -0.14%   49.3%        584.4%
    Transaction 60 US CLO           4.50%          0.12%   10.1%          8.1%
    Transaction 61 US CLO           4.04%         -0.30%   15.8%         71.8%
    Transaction 62 US CLO           5.20%         -0.36%   19.1%        105.3%
    Transaction 63 US CLO           4.78%         -0.50%   16.4%         86.0%
    Transaction 64 US CLO            N/A            N/A    19.6%         67.7%
    Transaction 65 US CLO           4.96%         -0.44%   12.2%         63.4%
    Transaction 66 US CLO           4.05%         -0.12%   19.8%        113.3%
    Transaction 67 US CLO           4.38%         -0.04%   18.1%         87.9%
    Transaction 68 US CLO           4.41%          0.34%   25.7%        132.6%
    Transaction 69 US CLO           5.61%          0.32%   24.2%        114.5%
    Transaction 70 US CLO           6.21%          0.06%   17.6%         92.8%
    Transaction 71 US CLO           4.25%         -0.34%   23.2%         19.0%
    Transaction 72 US CLO           4.53%         -0.01%   15.8%         15.8%
    Transaction 73 US CLO           4.53%         -0.01%   15.8%         15.8%
    Transaction 74 US CLO           4.04%         -0.14%   16.7%         16.5%
    Transaction 75 US CLO           4.05%          1.94%   13.9%          0.0%
    US CLO Subtotal:                4.66%         -0.10%                 96.0%

    Total CLO Portfolio:            4.70%         -0.26%                 84.6%


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*
Rupert Dorey*
David Jeffreys*
Greville Ward*
*Independent Director
Shareholder Information
Registered Office of TFG and the Master Fund  Issuing Agent, Dutch Paying and
Tetragon Financial Group Limited               Transfer Agent
Tetragon Financial Group Master Fund Limited  Kas Bank N.V.
1st Floor Dorey Court                         Spuistraat 172
Admiral Park                                  1012 VT Amsterdam,
St. Peter Port, Guernsey                      The 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)
General Partner of Investment Manager         Ogier House
Tetragon Financial Management GP LLC          St. Julian's Avenue
399 Park Avenue, 22nd Floor                   St. Peter Port, Guernsey
New York, NY 10022                            Channel Islands GYI 1WA
United States of America
                                              Legal Advisor (as to Dutch law)
Investor Relations                            De Brauw Blackstone Westbroek
David Wishnow / Yuko Thomas                   N.V.
ir@tetragoninv.com                            Claude Debussylaan 80
                                              1082 MD Amsterdam,
                                              The Netherlands
Press Inquiries
Brunswick Group                                Stock Listing
Andrew Garfield/Gill Ackers/Pip Green         Euronext Amsterdam by NYSE
polygon@brunswickgroup.com                    Euronext

                                              Administrator and Registrar
                                              State Street Guernsey Limited
Auditors                                      1st Floor Dorey Court
KPMG Channel Islands Ltd                      Admiral Park
20 New Street                                 St. Peter Port, Guernsey
St. Peter Port, Guernsey                      Channel Islands GYI 6HJ
Channel Islands GYI 4AN
Sub-Registrar and Transfer Agent
BNY Mellon
One Wall Street
New York, NY 10286
United States of America


(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 interim management statement as required pursuant to Section 5:25e 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 October 27, 2011 with respect to Q3 2011.
(6) Please refer to the TFG press release from October 28, 2010, “Tetragon Financial Group Limited (“TFG”) Announces Continuation of its Share Repurchase Program.”
(7) Includes only look-through loan exposures through TFG’s CLO investments.
(8) The number of deals refers to the number of unique CLO vehicles to which TFG has investment exposure. The number of transactions refers to the number of trades, which may involve multiple investments in the same CLO vehicle and tranche but which occurred at different points in time and/or at different acquisition prices.
(9) 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.
(10) Based on the most recent trustee reports available for both our U.S. and European CLO investments as of September 30, 2011. 
(11) As of September 30, 2011, European CLOs represented approximately 14% of TFG’s investment portfolio; approximately 85% 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.
(12) 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.  
(13) Morgan Stanley CDO Market Tracker, October 5, 2011; based on a sample of 471 U.S. CLO transactions.
(14) 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.
(15) Morgan Stanley CDO Market Tracker, October 5, 2011; based on the lower of Moody’s and S&P rating. Furthermore, TFG’s investment portfolio includes approximately 14% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG’s average CCC asset holdings.
(16) Weighted by the original USD cost of each transaction.
(17) 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 in the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed in this report. Additionally, TFG recognizes defaults as they are reflected as such within each of TFG’s CLO investments. This methodology may result in disparities in the timing of default recognition as compared with the S&P/LCD index, the recognition of names which are not captured as defaults by the S&P/LCD index, and vice versa. Furthermore, TFG’s investment portfolio includes approximately 14% of CLOs with primary exposure to European senior secured loans and approximately 16% of CLOs with primary exposure to U.S. Middle Market Loans and the assets of such CLOs are included in the calculation of TFG’s corporate default rate, while being largely excluded from the calculation of the S&P/LCD lagging 12-month U.S. institutional loan default rate. As a result of the aforementioned differences, the S&P/LCD index statistics cited herein may not be perfectly comparable to TFG’s portfolio.
(18) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.
(19) S&P/LCD News, “Loan prices slide in listless secondary despite burst of repayments,” September 29, 2011.
(20) S&P/LSTA Leveraged Lending Review 3Q 2011.
(21) S&P/LCD News, “(EUR) Volatility returns in 3Q11, loan issuance at €9.3B,” October 5, 2011.
(22) S&P/LCD News, “(EUR) S&P ELLI posts negative return in September,” October 6, 2011.
(23) S&P/LSTA Leveraged Lending Review 3Q 2011.
(24) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.
(25) S&P/LSTA Leveraged Lending Review 2Q 2011.
(26) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.
(27) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.
(28) S&P/LSTA Leveraged Lending Review 3Q 2011.
(29) S&P/LSTA Leveraged Lending Review 3Q 2011.
(30) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.
(31) S&P/LCD News, “(EUR) S&P ELLI: Default rate unchanged at 3.8%,” October 10, 2011.
(32) S&P/LCD News, “(EUR) S&P ELLI: Default rate unchanged at 3.8%,” October 10, 2011.
(33) S&P/LSTA Leveraged Lending Review 3Q 2011; repayments are estimated for the last week of September 2011.
(34) S&P/LSTA Leveraged Lending Review 3Q 2011.
(35) S&P/LSTA Leveraged Lending Review 3Q 2011.
(36) S&P/LSTA Leveraged Lending Review 3Q 2011.
(37) S&P/LSTA Leveraged Lending Review 3Q 2011.
(38) S&P/LSTA Leveraged Lending Review 3Q 2011.
(39) S&P/LSTA Leveraged Lending Review 3Q 2011.
(40) S&P/LSTA Leveraged Lending Review 3Q 2011.
(41) S&P/LSTA Leveraged Lending Review 3Q 2011.
(42) S&P/LSTA Leveraged Lending Review 3Q 2011.
(43) S&P/LSTA Leveraged Lending Review 3Q 2011.
(44) S&P/LSTA Leveraged Lending Review 3Q 2011.
(45) Morgan Stanley CDO Market Tracker, October 5, 2011; based on a sample of 471 U.S. CLO transactions.
(46) Morgan Stanley CDO Market Tracker, July 5, 2011; based on a sample of 475 U.S. CLO transactions.
(47) Morgan Stanley CDO Market Tracker, October 5, 2011; based on a sample of 195 Euro CLO transactions.
(48) Morgan Stanley CDO Market Tracker, July 5, 2011; based on a sample of 475 U.S. CLO transactions.
(49) Morgan Stanley CDO Market Tracker, October 5, 2011.
(50) Morgan Stanley CDO Market Tracker, October 5, 2011.
(51) Morgan Stanley CDO Market Tracker, July 5, 2011.
(52) Morgan Stanley CDO Market Tracker, October 5, 2011.
(53) Morgan Stanley CDO Market Tracker, October 5, 2011.
(54) Morgan Stanley CDO Market Tracker, July 5, 2011.
(55) Morgan Stanley CDO Market Tracker, October 5, 2011.
(56) Morgan Stanley CDO Market Tracker, October 5, 2011.
(57) Morgan Stanley CDO Market Tracker, October 5, 2011.
(58) Morgan Stanley CDO Market Tracker, October 5, 2011.
(59) S&P/LCD News, “Leveraged loan default rate falls in September, but anxiety returns,” October 3, 2011.

    For further information, please
    David Wishnow/Yuko Thomas         Press Inquiries:
    Investor Relations                Brunswick Group
    ir@tetragoninv.com                Andrew Garfield/Gill Ackers/Pip Green


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