Tetragon Financial Group Limited (TFG) Release of Performance for Full Year 2009
By Tetragon Financial Group Limited, PRNESunday, February 28, 2010
LONDON, March 1, 2010 - Tetragon Financial Group Limited (TFG) today announced its
full year 2009 results and published its 2009 Annual Report, including
audited financial statements for the year ending December 31, 2009.
In this monthly update, unless otherwise stated, we report on the
consolidated business incorporating TFG and Tetragon Financial Group Master
Fund Limited.(1)
2009 Performance at a Glance
Investment Manager's 2009 Highlights:
In the context of a year that presented significant economic
and financial market challenges, TFG achieved the following:
- Cash Flow: The Company continued to generate significant cash flows
with $153.0 million being generated during 2009, despite very
difficult credit market conditions.
- Portfolio Management: The Company realized value from its
majority (or significant) positions in 12 CLO investments during 2009,
by positively affecting the outcome of certain corporate governance
actions or management changes within those transactions, and by
increasing our economics via upfront consent fees or long-term fee
sharing arrangements.
- CLO Investment Performance: The Company's portfolio of CLO
investments as a whole out-performed the market-wide average across
several key performance metrics, including:
- Defaults: TFG's 2009 corporate loan defaults were approximately
6.50%, an increase from the 2.81% default rate recorded during
2008, but approximately 30% below the 9.61% lagging 12-month
institutional U.S. loan default rate, based on the total par amount
outstanding, reported by S&P/LCD for the 12-months ending in
December 2009.(1)
- Collateral Coverage Test (O/C) Compliance: As of 31 December 2009,
approximately 68% of TFG's CLO investments were passing their most
junior O/C tests,(2) and comparing favorably with the U.S.
market-wide average of approximately 62.0% of U.S. CLOs estimated
to be in compliance with their junior O/C tests as of the end of
2009.(3)(4)
- Credit Quality: The weighted-average percentage of corporate
obligors rated Caa1/CCC+ or below in our 61 CLO investments ended
the year at 12.0% compared to an approximate 7.8% weighted-average
maximum level permitted under the terms of our investments.(5) This
statistic was considerably lower than the market-wide median level
of CCC-rated asset holdings among CLOs - estimated to be
approximately 16.5% as of the end of 2009.(6)
- Cash Reserves and Corporate-Level Borrowings: The Company
repaid all outstanding corporate-level borrowings in 2009 and increased
its net cash position to $151.6 million by year-end to, among other
things, help navigate a demanding and changing market environment.
- Counterparty and Financing Risk: Building on its success in avoiding
the Lehman Brothers bankruptcy, the Company continued to effectively
address counterparty and financing risks.
- Capital Distributions, Dividends and Share Repurchases: The
Company maintained dividends throughout 2009 and doubled its dividend
for Q4 2009 to $0.06 per share. The Company also updated its share
repurchase program to allow for significantly greater daily purchases
and overall in 2009 purchased 2,420,641 TFG shares at an average price
of $2.74 per share for a total value of over $6.5 million.
- LCM Acquisition: The Company agreed to purchase and now owns
75% of Lyon Capital Management LLC, since renamed LCM Asset Management
LLC, at what it believes was a very attractive price in an accretive
Transaction for the Company. LCM has been one of our top-performing CLO
managers to date and we are very pleased to have added the team onto
the TFG platform. We believe that this acquisition may add a new,
repeatable and high quality income stream to the Company and position
TFG well to take advantage of further manager consolidation in loan or
CLO management, the re-opening of the new issue CLO markets as well as
other strategic asset management opportunities.
Financial Results:
- Net Investment Income: Net investment income decreased to
$121.7 million in 2009, down from $163.5 million in 2008, primarily as
A result of a reduction in the top-line investment income generated by
the investment portfolio. This investment income reduction was
partially offset by lower interest expense for 2009.
- Realized/ Unrealized Losses from Investments: Against a back drop of
deteriorating credit conditions, the fair value of TFG's portfolio was
written down by $427.7 million of unrealized losses during 2009, of
which $208.0 million was an increase to the Accelerated Loss Reserve,
mainly taken in Q1 2009 to reflect the increased uncertainty of future
cash flows. Despite improvements in Q3 and Q4 2009, no amount of the
Accelerated Loss Reserve was released back into the NAV in 2009.
- Net Income: A consolidated net loss of $(315.1) million was
recorded in 2009 against a loss of $(46.6) million for 2008. Unrealized
losses incurred in the first half of 2009 that were driven primarily by
deterioration in the performance of certain CLO investments and
resulted in an overall loss for the year in spite of some recovery in
CLO investment performance in the second half of 2009.
- Earnings per Share (EPS): Consolidated EPS for 2009 was
$(2.50) compared to $(0.37) for 2008. The 2009 EPS is comprised of an
EPS loss of $(3.50) in the first half of the year against a gain of
Approximately $1.00 in the second half of the year.
- Cash Flows from Operations: Total cash receipts of
approximately $153.0 million (or $1.21 per weighted average share) in
2009 compared to $345.0 million in 2008 ($2.74 per weighted average
share) as certain CLO investments ceased to generate cash flow due to,
among other things, underlying loan defaults or negative rating
migration.(7)
- Dividend: Throughout 2009 TFG maintained the payment of a
quarterly dividend with $0.03 cents per share being paid with respect
to the first three quarters and $0.06 per share declared with respect
to Q4 2009.
- Leverage: TFG continued the corporate level de-leveraging
process which had begun in 2008 and had paid down all outstanding
borrowings by the end of Q1 2009.
- Net Asset Value (NAV) per Share: NAV per share at the end of
the year was $6.47, down from $9.06 at the end of 2008, reflecting
overall performance and distributions to shareholders.
Portfolio Summary:
- Portfolio Size: As of the end of 2009, the fair value of the
CLO investment portfolio totaled approximately $655.2 million with
exposure to approximately $17.0 billion of leveraged loans.
- Portfolio Composition: As of the end of 2009, TFG's
performing CLO portfolio consisted solely of 61 CLO investments managed
by 32 CLO managers.
- IRRs: The weighted-average IRR as of 2009 year-end declined
to approximately 11.9%, down from 13.8% at the end of 2008.
- Life-to-date Net Loss Reserve: Approximately $215.0 million
of net excess losses have been factored into our IRR calculations as of
the end of December 2009, up from approximately $115.0 million as of
the end of Q4 2008.(8)
- Accelerated Loss Reserve (ALR): The ALR totaled $349.0
million at the end of the year, up from $141.0 million at the end of
2008.(9)
- Performance Fee: No performance fees were paid for Q1, Q2 or
Q3 2009. A performance fee of $29.8 million was accrued in Q4 2009
in accordance with TFG's investment management agreement and based on a
"Reference NAV" of Q3 2009. The hurdle rate for Q1 2010 incentive fee
has been reset at 2.9022% (Q4: 2.9329%) as per the process outlined in
TFG's 2009 Audited Financial Statements and in accordance with TFG's
Investment management agreement.(10)
To our Shareholders
2009 was a year of significant economic and financial market
challenges and was, in many ways, a year of two contrasting halves. We
believe that TFG's results of operations and share price performance for 2009
are reflective of that. In 2009 and throughout the recent financial crisis,
the Investment Manager has sought to position the Company to withstand an
array of significant challenges, including a macro-economic downturn, rating
agency downgrades, a prolonged rise in leveraged loan defaults, suppressed
loan default recoveries, loan price declines, counterparty and financing
risks and general market volatility. By the middle of 2009, the economic and
market environment began to show signs of improvement and we believe that
TFG's performance both in the most difficult period and thereafter has
demonstrated the value of the steps the Investment Manager and TFG had taken
to address these challenges as well as the importance of the corporate
structure of the Company. We note in particular that despite these
challenges, TFG continued to return value to its shareholders in 2009 through
its dividend and increased share repurchase program and in the fourth quarter
took a step to diversify its income stream through the acquisition of LCM
Asset Management LLC ("LCM"). Having come through a period of significant
turbulence and despite a good measure of remaining market uncertainty, the
Board believes that TFG is well positioned to respond to future challenges
and opportunities.
We are pleased to report that an investment in TFG's shares on
31 December 2008 would have grown by approximately 50.5% during the year via
capital appreciation and dividend income.(1) Furthermore, the Company has
sought to continue to return value to its shareholders: in each of the first
three quarters of 2009, TFG declared a dividend of $0.03 per share and on 25
February 2010, the Company approved a doubling of the dividend to $0.06 per
share for Q4 2009, to be paid on 25 March 2010.(2) In addition, on 23 October
2009, TFG updated its share repurchase program to allow for a significantly
greater daily amount of purchases of the Company's shares. During 2009, the
Company purchased 2,420,641 TFG shares at an average price of $2.74 per share
for a total value of over $6.5 million.
This year of challenge and change was readily apparent in the
leveraged loan market. 2009 began with loan prices near historical lows as a
confluence of negative developments, including supply-demand imbalances, the
deleveraging of market-value sensitive investors and a dramatic increase in
defaults and ratings downgrades, exerted pressure on that market. In
addition, weakness in the financial institution sector reduced capital
markets activity and limited the ability of corporate borrowers to
effectively manage their balance sheets and financing requirements. As the
year progressed, however, loan fundamentals improved, as corporate borrowers
began to reduce their financial leverage, enhance their operating flexibility
and take advantage of the re-opening of the capital markets, leading to a
decline in default volumes and ratings downgrades. In addition, loan prices
rallied on a significant scale beginning in the second quarter of the year as
billions of dollars in government spending under the Troubled Assets Relief
Program ("TARP") and monetary easing by the U.S. Federal Reserve provided the
financial markets with significant incremental liquidity resulting in an
inflow of funds into various assets, including leveraged loans.
The dramatic increase and subsequent deceleration in the
volume of defaults and ratings downgrades of loans were particularly
illustrative of the volatility which characterized 2009. TFG's financial
performance mirrored this rapidly changing credit environment, but TFG
nonetheless outperformed the overall market, including in certain key metrics
such as defaults, collateral coverage (O/C) compliance and credit quality. In
addition, TFG's overall collateralized loan obligation ("CLO") investment
portfolio continued to generate substantial cash in 2009, with approximately
$153.0 million received during the year.
Since its formation and public listing and throughout the
recent economic crisis, the Investment Manager has sought to preserve TFG's
investments and ensure the long-term prospects of the company. In 2008 and
2009, addressing counterparty and financing risks and maintaining liquidity
have been key prongs to achieving this goal. Based on the Investment
Manager's actions, TFG is pleased to have avoided the Lehman Brothers
bankruptcy as TFG repaid its repurchase borrowings and cleared its repurchase
account held at Lehman Brothers prior to that company's bankruptcy filing.
TFG also transferred all of its un-financed securities from a prime brokerage
account to a segregated custodial account with a U.S. financial institution
to help ensure their accessibility. Finally, TFG aggressively repaid all of
its corporate-level borrowings as financing lines generally looked
increasingly uncertain. As of 31 December 2009, TFG had no outstanding
borrowings and the net cash on balance sheet increased to $151.6 million at
the end of 2009.
In addition to the steps TFG and the Investment Manager have
taken with respect to corporate liquidity and counterparty risks, we believe
the Company's buy-and-hold strategy, majority (or significant) investment
positions and asset manager interaction have also helped TFG navigate the
challenges of 2009. In particular, the Investment Manager's decision to
eliminate all corporate level borrowings and utilize long-term funding
provided by its CLO investments combined with its buy-and-hold strategy
allowed TFG to take a long-term view on the expected cash flows from its CLO
investments and to avoid any forced sales. Furthermore, we believe TFG's
majority position strategy, allowing for "voting control" in certain
corporate actions, has also demonstrated significant value. For example, on
12 separate occasions it has helped the Company positively affect the outcome
of CLO management changes within its portfolio and to improve its investment
economics either via upfront consent fees or long-term fee sharing
arrangements, both of which increased the profitability of TFG's investments.
Finally, in Q4 2009 TFG entered into an agreement with Calyon
New York Branch and certain of its affiliates to purchase Lyon Capital
Management LLC, since renamed LCM Asset Management LLC, and certain CLOs with
an aggregate face amount of $39.0 million for a combined purchase price of
$10.0 million in an accretive transaction for the Company. As of 31 December
2009, LCM had approximately $2.5 billion of loan assets under management. The
purchase agreement provided that management fees earned by LCM and cash flows
received from the CLO securities from (and including) 16 August 2009, less
certain expenses of LCM, accrued for the benefit of TFG, significantly
reducing the net purchase price of the acquisition. LCM served as a manager
for two of TFG's CLOs prior to the acquisition and the Company has been
particularly impressed with their ability to perform in a tough market
environment. LCM is a profitable operating business that we believe may
provide the Company with a high quality, repeatable income stream and a
scalable business model which we expect should allow TFG to capitalize on
growth and consolidation opportunities in loan and CLO management.
We believe that the Company's success in navigating a
difficult economic environment and its resulting strong balance sheet places
TFG in a good position to take advantage of meaningful opportunities where
some of its peers may be more constrained. Our outlook for 2010 is generally
positive. Although, compared to 2009, we anticipate lower credit losses
potentially resulting in stronger cash flows on TFG's CLO investments, we
believe that a sustained economic recovery will require job growth and an
expansion in aggregate demand as government stimulus spending winds down.
Accordingly, there remains a good measure of uncertainty surrounding the
economic environment and the CLO and loan markets, which we believe demands
caution and prudence. In 2010, we will continue to seek ways to return value
to our shareholders and serve the Company's investment objective of
generating distributable income and capital appreciation. We will also
continue to explore a variety of opportunities in which to deploy our
resources, including dividends and share repurchases, investments within the
CLO and leveraged loan markets or in other assets, and further asset manager
acquisitions. We believe that the strength of TFG's cash flow generation
capacity, existing cash reserves and LCM's strong performance track record
position TFG well to take advantage of not only these prospects, but also
other strategic opportunities in asset management, both within and beyond the
leveraged loan market.
With regards,
Board of Directors
25 February 2010
Investment manager's report
Portfolio Overview
As of 31 December 2009, the fair value of the performing
investment portfolio totaled approximately $655.2 million and was 100%
invested in CLO transactions. TFG's CLO portfolio continued to be diversified
across underlying asset classes and geographies, with approximately 72.3% of
risk capital invested in CLOs with primary exposure to U.S. broadly
syndicated senior secured loans, 6.7% in CLOs with primary exposure to
European broadly syndicated senior secured loans and 21.0% in CLOs with
primary exposure to U.S. middle market senior secured loans.(1)(2)
TFG's portfolio ended the challenging year of 2009 on a
positive note with improvement in the condition of TFG's CLO investments
versus the prior quarter and continued outperformance of the market-wide
average in terms of, among other metrics, the percentage of transactions
passing their junior-most O/C tests. As of 31 December 2009 approximately 68%
of TFG's CLO investments were passing their most junior O/C tests, an
increase from 60% at the end of Q3 2009, and comparing favorably with the
U.S. market-wide average of approximately 62.0% of U.S. CLOs estimated to be
in compliance with their junior O/C tests as of the end of 2009. (3)(4)(5)
Measures of general credit quality of TFG's underlying investments also
improved during Q4 2009. For example, the weighted-average percentage of
corporate obligors rated Caa1/CCC+ or below in our 61 CLO investments ended
the year at 12.0% versus 12.6% at Q3 2009, compared to an approximate 7.8%
weighted-average maximum level permitted under the terms of our
investments.(6) Furthermore, this statistic was considerably lower than the
market-wide median level of CCC-rated asset holdings among CLOs - estimated
to be approximately 16.5% as of the end of 2009.(7) Each of these foregoing
TFG portfolio statistics represents a weighted-average summary of all of
TFG's 61 investments; each individual investment's metrics will differ from
this average and vary across the portfolio.(8)
The above mentioned improvements in the condition of TFG's CLO
portfolio at year-end nonetheless followed a very difficult beginning to the
year. In the first half of 2009, TFG's CLO portfolio was negatively impacted
by a continuation of the pressures evident in 2008, including, negative
economic growth in both the United States and Europe, stalled and weak credit
markets, declining corporate earnings, rising leveraged loan defaults,
declining loan recoveries and rating agency downgrades. The U.S. S&P/LSTA
Leveraged Loan Index price hit a 2009 low of $63.01 on 10 March 2009 as the
annualized quarterly default rate reached 19.54% as of Q1 2009, its highest
level on record since S&P/LCD has been collecting loan market data.(9) In
addition to increased default levels and low loan prices (particularly for
distressed assets), the CLO market was also negatively impacted by underlying
collateral rating downgrades to Caa1/CCC+ or below, as rating agencies took
an increasingly negative view of the prospects of many leveraged loan
issuers. Caa1/CCC+ or below rated asset exposure over pre-defined limits in
CLO investments may temporarily or permanently cause cash diversion away from
CLO equity tranches (TFG's investments) and at the extreme may cause senior
O/C test breaches potentially leading to "Events of Default" in certain
transactions and a complete liquidation of the investment's underlying
collateral as well as a complete cessation of cash flows. The confluence of
these pressures and the resulting realized and unrealized losses incurred by
CLOs across the market generally led to a deterioration of U.S. and European
CLO collateral coverage, or O/C, ratio levels. Numerous CLO transactions
(including, those owned by the Company) failed to comply with certain O/C
tests, and accordingly, ceased to generate cash flows to subordinated note
holders, or equity tranche holders (such as the Company).
In the context of these detrimental developments, the
condition of many of TFG's CLO investments deteriorated significantly in Q1
2009 and the majority of the ALR established at 2008 year-end ($141.0
million) was utilized during the quarter. Consequently, given the potential
for, and uncertainty surrounding, further deterioration in cash flows
(including negative impacts stemming from, among other things, rating agency
downgrades), TFG increased the ALR (with a corresponding reduction in the
fair value of TFG's CLO investments) in March 2009 by $290.0 million. As
described elsewhere in this report, many of TFG's investments started to
recover in the second half of 2009, during which time we have rebuilt the ALR
to stand at $ 349.0 million at the end of 2009.(10)
The latter half of the year fortunately witnessed some
stabilization and capital markets recovery. In the leveraged loan market,
this recuperation process was the result of multiple endeavors. Firstly,
potential defaults were averted via a variety of amendments and out-of-court
restructurings. These took the form of covenant-relief amendments, maturity
extensions, debt buy-backs, and distressed exchanges. To quantify the
significance of this theme, covenant-relief amendments were implemented by a
record $122.1 billion of loans in the U.S. in 2009, up from $54.3 billion in
2008, with "amend-to-extend" activity alone totaling $58.9 billion in 2009
(up from $0.0 in 2008).(11)
Loan investors often received amendment fees, spread
increases, and LIBOR floors, in exchange for their consent to these
amendments, thereby re-pricing the affected loans at wider levels. During
2009, U.S. S&P/LSTA Leveraged Loan Index issuers received approximately 8.8
bps of fee income and increased the average spread of the index by
approximately 27 bps.(12) TFG's CLO investments benefited from such spread
re-sets since wider asset spreads facilitate the generation of greater excess
interest income available for direct distribution to the equity tranches or
the cure of O/C tests (given the CLOs' locked-in liability spreads).
Secondly, various types of distressed exchanges, where lenders
exchanged existing bonds for a lower notional of new bonds, equity, or a
combination of both, materially reduced the realized default rate for the
year.(13) According to S&P/LSTA, 18 distressed exchanges were completed
during 2009, which had they been included in the U.S.12-month rolling default
rate (by principal amount) would have raised this rate to 16.8% as of
year-end, as opposed to the 9.61% actually realized.(14) In addition to
reducing the volume of monetary defaults and bankruptcy filings, such
distressed exchanges improved the credit position of the senior secured bank
loans affected, which comprise the vast majority of TFG's underlying assets,
by reducing the overall leverage and interest burden of the companies
involved.
Finally, as the high yield capital markets opened up,
approximately $19.5 billion of loans in 2009 were repaid via bond-for-loan
take outs, increasing the average loan prepayment rate to approximately 14.3%
for 2009, up from 8.8% in 2008, and providing an important source of cash for
reinvestment into the loan market.(15) Greater prepayment inflows are also a
positive development for TFG's CLO investments in the current spread
environment since prepayment proceeds can be reinvested by our CLO managers
at wider spreads and/or lower purchase prices. All in all, by the end of the
year, the U.S. S&P/LSTA Index posted a 44% gain(16) and the European
Leveraged Loan Index ("ELLI") was up 35.8%.(17)
In the U.S. CLO market the improvement in loan prices,
moderation of default rates and rating agency downgrades to Caa1/CCC+ or
below, led to, among other things, improved O/C levels via the gradual
restoration of previously incurred unrealized O/C losses and a corresponding
improvement in CLO investment performance and cash distributions to
subordinated note holders, such as TFG. While the initial stages of the loan
market rally affected primarily highly-rated, "blue-chip" credits, the
positive price momentum shifted to stressed credits during the second half of
the year. For example, the return of CCC-rated U.S. S&P/LSTA Loan Index
credits shifted from (-7.6%) as of Q1 2009 to 88.6% for all of 2009.(18) In
addition, the average price of defaulted S&P/LSTA Loan Index issuers rose
from an all-time low of $37.0 in Q1 2009 to $66.0 as of the end of the fourth
quarter.(19) The pace of U.S. CLO market recovery, therefore, accelerated
during the latter half of 2009, particularly for CLO investments that were
primarily negatively affected by unrealized O/C losses as improving market
values of Caa1/CCC+ assets, and other stressed assets required to be
discounted for O/C test purposes and declining defaults led to increased O/C
levels and the return of cash generation to equity tranche and other note
holders.(20) Similarly, declining defaulted asset holdings led to improved
O/C levels and the return of cash generation to equity tranche and other
holders, such as TFG.(21) Furthermore, a number of CLO managers were able to
sell certain stressed holdings as their prices recovered, further improving
investment performance. Finally, the triggering of CLO reinvestment and/or
de-leveraging O/C tests earlier in the year, in and of themselves, also
worked to correct O/C test breaches as, for example, diverted cash flows paid
down a CLO's debt thereby curing the O/C breach through deleveraging.
It is important to note, however, that the European CLO market
lagged the U.S. CLO market's recovery in 2009, as continuing downgrades,
defaults, and lengthier restructurings, among other factors, contributed to a
greater level of persistence of O/C test breaches as compared with U.S. CLOs.
Furthermore, European CLOs' transaction-specific haircut requirements
generally limited the deals' ability to immediately benefit from loan price
increases, leaving them more dependent on actual upgrades, default
recoveries, and/or asset sales. As a result, notwithstanding modest par value
gains, the vast majority of European CLOs (including the vast majority of
European CLOs owned by the Company) remain in breach of certain O/C tests as
of the end of 2009 and continue to face an arduous path to recovery and a
return to cash generation for equity tranche holders, such as TFG.
KEY BASE CASE MODELING ASSUMPTIONS
As has historically been the case, the IRR of each TFG CLO
investment, which determines the rate at which income is recognized on such
investment, is determined by applying certain modeling assumptions to derive
its expected future cash flows. The weighted-average IRR of TFG's CLO
investments ended the year at approximately 11.9%, a recovery of
approximately 2.7% from the end of Q2 2009 but down approximately 1.9% from
13.8% at the end of 2008. This IRR level incorporates, among other things,
the life-to-date performance of our investments as well as certain IRR
modeling assumptions impacting future expected cash flows. These assumptions
are intended to factor in historic, current, and potential market
developments on the performance of TFG's CLO investments. These December 2009
assumptions are unchanged from December 2008 and are summarized below (listed
in no particular order):(1)
- Constant Annual Default Rate: The assumed constant annual
default rate is approximately 6.4%, which is 3.0x the original
base-case WARF-implied default rate, for the period to year-end 2011,
followed by a return to 1.0x (the original base-case WARF-implied
default rate) thereafter until maturity.
- Recovery Rate: We have modeled recovery rates to be
approximately 55%, or approximately 0.8% of the original base-case
assumed weighted-average recovery rate, until year-end 2011, followed
by a return to 71% (the original base-case recovery rate) thereafter
until maturity.(2)
- Prepayment Rate: Loan prepayments are assumed to be 7.5%
p.a. until year-end 2011, followed by a return to 20% p.a. (the
original base-case prepayment rate) thereafter until maturity; we have
also assumed a 0% prepayment rate on bonds throughout the life of each
transaction as in the original base-case assumptions.
- Reinvestment Price and Spread: The assumed reinvestment
price is 87%, a level that generates an effective spread over LIBOR
of approximately 724 bps on broadly syndicated U.S. loans, 739 bps on
European loans, and 806 bps on U.S. middle market loans, until year-end
2011, followed by a return to a par reinvestment price (the original
base case reinvestment price) thereafter until maturity.
Despite some improvements in the outlook for certain of the
above modeling inputs going into 2010, including anticipated reductions in
the levels of 2010 loan defaults reported by applicable ratings agencies, TFG
has not modified or recalibrated its IRR modeling assumptions to reflect
these expected improvements, pending further evidence of the sustainability
of such improvements during the course of early 2010. The Investment Manager
reviews, and adjusts in consultation with the Company's audit committee, the
CLO investment portfolio's IRR modeling assumptions on a regular basis.
Based upon the IRR's of TFG's CLO investments, TFG recognized
$165.5 million of interest income from investments during 2009. TFG received
$153.0 million of cash from investments during the year.
ACCELERATED LOSS RESERVE
In December 2008, in order to better reflect the deteriorating
environment in the fair value of its CLO investment portfolio, TFG
established a balance sheet reserve (the "Accelerated Loss Reserve" or "ALR")
calculated on a deal-by-deal basis.
The ALR was determined by applying a more pessimistic set of
short-term assumptions to the CLO investment portfolio and sought to reflect,
among other things, a near-term rating agency driven phenomenon of an
increase in negative loan ratings migration that may persist for a period
materially less than the expected life of a CLO investment as well as other
potential losses, which in each case may not be appropriate for inclusion in
TFG's long-term base case IRR modeling assumptions, but which may have a
significant impact on the fair value of TFG's CLO investments. As at 31
December 2008, the ALR totaled approximately $141.0 million. In Q1, 2009 the
anticipated deterioration in performance of TFG's deals was evident and the
majority of the ALR was utilized.
In addition, as the outlook for its CLO investments'
underlying collateral performance and loan ratings migration deteriorated
further in Q1 2009, following consultation with TFG's audit committee, TFG
deemed it appropriate to apply an even more pessimistic view in order to
reflect further market deterioration in its fair value through an increased
ALR, again calculated on a deal-by-deal basis, by $290.0 million giving a
gross amount of $431.0 million.
The following table sets out the evolution of the ALR between
December 2008 and December 2009.
(All Amounts in $MM) Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
ALR Brought Forward n/a (141.0) (315.0) (254.1) (333.8)
Addition of New ALR in
Anticipation
of Potential Investment
Deterioration (141.0) (290.0) n/a n/a n/a
Utilization of ALR as
Investment Performance
Deteriorated n/a 116.0 60.9 n/a n/a
Reinstatement of ALR
as Investment
Performance Improved n/a n/a n/a (79.7) (15.2)
Cumulative Fair Value
/ NAV Impact
of ALR (141.0) (315.0) (254.1) (333.8) (349.0)
Release of ALR in TFG's NAV n/a n/a n/a n/a n/a
The second half of 2009 saw a general recovery in many of
TFG's CLO investments, which resulted in an increase in fair values and a
reinstatement of $94.9 million of ALR to $349.0 million at year end. Neither
the improvement in CLO investment performance, nor the positive earnings per
share generated by TFG, in the second half of 2009 was caused by a
restoration, or release, of the ALR or a change in the TFG modeling
assumptions described above.
When assessing the reasonableness of the fair value of TFG's
CLO investment portfolio after taking into account the ALR, the Investment
Manager may utilize several benchmarks, including:
1 The effective discount rate implied by the ALR: Instead of re-modeling
TFG's CLO investments using more pessimistic assumptions to derive the ALR,
an alternative but more generic method to reflect the increased risk or
uncertainty around future cash flows would have been to apply a more
pessimistic discount rate to the future cash flows used in TFG's base case
model. As at December 2009, TFG's CLO investment portfolio fair value, which
is the sum of the modeled fair value plus the ALR, was the equivalent of
applying a discount rate to the base case cash flows based on current
assumptions that was a significant spread above the then-current spread on
the BB tranches of similar CLOs (which are typically the junior-most class of
rated debt in a CLO directly senior to the equity tranche); and
2 The change in TFG's CLO investments' (equity tranches) fair value
relative to more senior CLO tranches: With very little observable secondary
market activity in equity tranches of CLOs during 2009 and widely dispersed
performance across deals, it would be inappropriate to use sparsely available
market prices to value TFG's portfolio. However, there are more observable
data points in the more senior debt tranches as reported by various financial
institutions and these can help assess the reasonableness of the movement in
TFG's CLO investments' fair value. TFG believes that the relatively sharp
decline in value of more senior tranches in Q1 and Q2, 2009 and the
corresponding more dramatic write up of more senior tranches in the second
half of 2009 reflects, among other things, the influence of forced sellers on
the value of such tranches.
As part of the ongoing review of reserves, at year end 2009 it
was determined that, while the total amount of the ALR should remain
unchanged, it was appropriate to re-allocate a larger proportion of the ALR
to the euro-denominated deals, which have tended to lag behind the U.S. deals
in terms of improved performance during the second half of 2009.
The outlook for CLO equity tranches (TFG's primary investment)
remains uncertain and potentially volatile, as evidenced by, among other
things, the broad range of default assumptions for the period 2010 to 2012
from applicable rating agencies and financial institutions. We are,
therefore, likely to maintain an ALR for the remainder of 2010 and
potentially beyond, although we will review the reasonableness of the overall
ALR on an ongoing basis, including in consultation with TFG's audit
committee. It is important to note, however, that if the underlying cash
flows within the majority of TFG's CLO investments continue to improve it
would be reasonable to assume that the fair value of those investments will
increase, even in the absence of any release of the ALR or change in TFG's
modeling assumptions. If at some stage it is determined, when looking at the
CLO investment portfolio valuation against appropriate benchmarks, including
those described above, that TFG's CLO investment positions are in total
overly conservatively valued, the Investment Manager may consider
recommending the release of some of the ALR. Such release of the ALR would be
done in consultation with TFG's audit committee.
PORTFOLIO MANAGEMENT
We continue to utilize our strategy of majority (or
significant) positions which allows us to engage in active dialogue and
collaboration with TFG's 32 CLO collateral managers to evaluate the
performance of TFG's CLO investments, monitor credit quality, analyze
underlying obligor exposures, review credit "watch lists," and share insights
on best practices. We have sought to assist our managers in addressing the
year's challenges and taking advantage of the market dislocation evident
during the first half of 2009.
We believe that this management strategy has served us well
through the financial crisis, as it has allowed us to help TFG's managers
respond more effectively to rapidly changing market conditions. In 2009, we
consulted with a number of TFG's managers on a variety of matters, including
various deal amendments. The amendments ranged from deal structure issues to
collateral management agreement changes to allow more investment flexibility
for CLO managers. We have also aimed to assist TFG's managers in efforts to
improve O/C levels and cash generation of its CLO investments. Finally, we
believe that TFG's acquisition of LCM may provide the Company with additional
insight into the leveraged loan market and may allow us to more effectively
manage TFG's CLO investments. Notwithstanding the acquisition of LCM, the
Company expects to continue to seek and enjoy diversification asset managers.
We have found that TFG's majority (or significant) positions
within the equity tranche of its CLO investments have also generated
meaningful value for the Company, including in the context of asset manager
consolidation. Most noteworthy, TFG's majority CLO equity tranche investments
with LCM were a significant factor in influencing discussions leading to the
successful acquisition of LCM. On several other occasions the Company was a
key voting constituency for the approval of a collateral manager
change-of-control or collateral management agreement assignment. In such
instances, TFG was able to obtain significant and long running fee
concessions, immediate cash payments or other consideration, including deal
amendments. We will continue to seek opportunities to benefit from these
majority positions.
FINANCING SOURCES AND INITIATIVES
Our response to the challenging financing conditions of 2009 has been to
preserve TFG's operating flexibility given a heightened level of uncertainty
and the limited availability and impracticable nature of existing financing
alternatives. To that end, we were focused on completely repaying outstanding
corporate-level leverage of the Company, which was achieved during Q1 2009.
As of 31 December 2009, TFG had no outstanding debt and the net cash on
balance sheet increased to $151.6 million, from $60.0 million at the end of
2008. A significant balance sheet cash position can be found in many of the
world's best run companies and we believe should serve the Company well going
forward. We were also focused on ensuring that the Company maintained
adequate liquidity to take advantage of certain deal protection terms which
we built into our CLO investments. We continue to evaluate and improve our
financing and custodial arrangements with prime brokers and counterparties
building on our success in 2008 of avoiding the Lehman Brothers bankruptcy.
As of year-end all of TFG's CLO investments were held in a segregated
custodial account with a U.S. financial institution.
As of 31 December 2009, the Company had no credit hedges in place having
unwound then-existing single name and index credit hedges based on the
assessed cost-effectiveness of the hedges, potential counterparty risk and
the desire to continue to improve the Company's liquidity position by
monetizing such gains. Going forward, our hedging strategy may continue to
include the use of single name or index credit hedges when and where
appropriate as well as foreign exchange rate hedges. 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.
The Investment Manager continues to examine ways to improve
liquidity for TFG shares through, for example, improved analyst and broker
coverage, investor communication and "non-deal" road shows. In 2009, the
average daily trading volume for TFG shares (of approximately 150,000) on
Euronext Amsterdam by NYSE Euronext increased over five times from 2008. The
Company currently expects to continue to publicly list its shares solely on
Euronext Amsterdam by NYSE Euronext as it believes that exchange is favorably
suited to address relevant legal, regulatory, liquidity and other commercial
considerations.
CAPITAL DISTRIBUTIONS 2009: DIVIDENDS AND SHARE REPURCHASES
The Company has sought to continue to return value to its shareholders.
Despite the challenging circumstances of 2009, TFG maintained a quarterly
dividend throughout the year, doubled its dividend in Q4 2009 and updated its
share repurchase program to significantly increase the amount of shares the
Company may purchase on each trading day.
In each of the first three quarters of 2009, the Board of
Directors of TFG declared a dividend of $0.03 per share. The dividend for Q4
2009 of $0.06 per share was approved on 25 February 2010 and will be paid on
25 March 2010. This will result in a total dividend of $0.15 for the year.(1)
During 2009, the Company purchased 2,420,641 shares at an average price of
$2.74 per share, which brought the total number of shares purchased under the
share repurchase program to 5,283,043 at an average price of $4.00 per share.
On 23 October 2009, TFG extended its share repurchase through 31 October 2010
to allow for purchases of up to an additional 5% of the Company's outstanding
shares.
We continue to be confident in the long-term prospects of TFG
and believe that the purchase of shares in the market may, at appropriate
price levels below Net Asset Value (NAV), represent an attractive use of
TFG's free cash. TFG remains focused on exploring methods of returning
capital to its shareholders in a manner consistent with preserving its CLO
investments, protecting the prospects of the Company and pursuing other
investment opportunities.
LCM ACQUISITION
In November 2009, TFG entered into an agreement to acquire LCM
and certain CLO securities with an aggregate face amount of $39 million for a
combined purchase price of $10.0 million in an accretive transaction for the
Company. The purchase agreement provided that management fees earned by LCM
and cash flows received from the CLO securities from (and including) 16
August 2009, which in aggregate were approximately $9.4 million, less certain
expenses of LCM, totaling approximately $2.4 million, accrued for the benefit
of TFG. Accordingly, the cash payment made by TFG for the LCM business and
the CLO securities to consummate the transaction totaled approximately $3.0
million.
LCM was established by Calyon, the Corporate and Investment
Bank of Credit Agricole Group, as an asset manager in 2001 and as of 31
December 2009 had approximately $2.5 billion of loan assets under management
across six active CLOs - all of which were in compliance with applicable
collateral coverage (O/C) tests and generating fee income as of the end of
the year. The entire existing LCM management team is continuing in their
roles.
Besides adding an attractive asset management fee income
stream and CLO investments to the Company's investment portfolio, we believe
that the purchase of LCM positions TFG well for continued consolidation in
the CLO asset management market and potential recovery in CLO new issuance
volumes.
We, therefore, will seek to grow LCM's business in a way that
capitalizes on the available opportunities (including, manager consolidation,
primary CLO issuance, strategic opportunities, and managed accounts) and
leverages LCM's expertise, investment style, and exceptional performance
track record.
After closing the transaction in January 2010, Lyon Capital
Management LLC was renamed LCM Asset Management LLC and Polygon Management
L.P. was sold a 25% equity position in the company at a price proportionate
to TFG's overall cost for the purchase of the business. Certain Polygon
Management L.P. affiliates also entered into an agreement with LCM to provide
operating, infrastructure and administrative services to LCM, including
services that have historically been provided to LCM by Calyon.
SUMMARY, OUTLOOK AND STRATEGY
The Investment Manager has sought to design and manage TFG as
a long-term enterprise that would be able to withstand an array of economic
and financial market challenges. 2008 and 2009 were years marked by the
failure of many financial institutions. TFG, in contrast, has withstood the
challenges of the past two years due to, among other things, the performance
of the Investment Manager and the corporate structure and governance of TFG.
Beginning in late 2008 and continuing through the first half
of 2009, the Company faced an extremely challenging and uncertain operating
environment with significant risks posed to its CLO investments which
represented the vast majority of the Company's revenue producing assets.
Accordingly, it was appropriate to expect the Company's CLO investment
portfolio to produce less cash flow than it had in prior periods. A
combination of this prospect and the impracticality, if not impossibility, of
reasonable external financing alternatives, we believe augured for a prudent
approach focusing on the preservation of the Company's CLO investments,
financial position and long-term prospects.
Completely deleveraging the Company through the financial
crisis was a significant achievement and put the Company in a position to
continue to (i) finance its corporate operations without seeking external
financing sources, (ii) if required, take protective measures with respect to
its CLO investments, such as injecting new equity or other strategies, and
(iii) return value to its shareholders through capital distributions,
including dividends and share repurchases.
With that success and, we believe, prudent perspective as
background, by mid-2009 we began to look for opportunities to cautiously
further utilize TFG's resources for the benefit of its shareholders. To that
end, early in the second half of the year, the Company began negotiating the
purchase of LCM and several CLO investments with an aggregate face amount of
$39 million. The LCM transaction closed in early 2010 as has a further
secondary add-on CLO investment with a face amount of approximately $10.0
million. In addition, the Investment Manager sought further transactions with
managers with whom the Company had an existing and positive relationship,
such as LCM.
Despite this success, the Investment Manager remains mindful
of the difficult and uncertain environment. For example, further collateral
coverage, or O/C, test breaches could negatively impact the cash flows of the
Company's CLO investment portfolio. Many of the Company's CLO investments
remain in breach of their applicable O/C test or may otherwise breach such a
test in the event of further economic or loan market decline or other
significant market disruptions. In addition, external financing may remain
difficult and TFG's CLO investments still may require equity contributions or
other strategies to ensure continued cash flow generation.
Although much uncertainty remains regarding, among other
things, the pace and scale of the global economic recovery, we believe 2010
will continue to see improvement in the leveraged loan and CLO markets with a
corresponding restoration of the overall structural strength and cash-flow
generation capacity of TFG's CLO investments.
This constructive view, though not without significant
downside risks, reflects a number of positive fundamental and technical
trends. Firstly, the financial performance of many leveraged loan borrowers
has been on the mend as a result of successful cost-cutting measures and/or
top-line revenue growth. Secondly, the wave of maturity extensions, covenant
amendments, and deleveraging measures executed by leveraged borrowers during
2009, has reduced the pipeline of distressed businesses at risk of near-term
default. Equally important, the recovery prospects on defaulted loans are
expected to continue to improve as a result of greater availability of exit
financing, increased risk appetite and recovery in capital markets activity
in terms of both primary loan/high yield bond issuance as well as M&A/IPO
activity. In addition, a continued deceleration in the pace of downgrades to
Caa1/CCC+ or below and a return of loan repayments closer to average
historical levels, would be expected to have a positive effect on the overall
performance of TFG's CLO investments, allowing for the restoration of
previously incurred O/C losses and the reinstatement of cash flows to equity
tranches. We expect however that, in-line with 2009 trends, the performance
of our European CLOs will continue to lag that of TFG's U.S. investments due
to, among other things, less favorable legal and loan market characteristics
of certain national European loan markets as well as certain structural
features of European CLOs.
We believe our success in navigating a difficult economic
environment and our resulting strong balance sheet, positions TFG well to
take advantage of meaningful opportunities where some of its peers may be
more constrained especially across what we believe may be a shrunken
competitive landscape. The Company, we believe, may have significant
potential to become more of a financial services firm that functions not only
as an investment holding company but also as an operating company capable of
pursuing attractive investment opportunities across multiple asset classes as
a part of its investment objective and for the benefit of its shareholders.
In 2010, we expect to continue to evaluate a variety of uses
of deploying TFG's resources in a manner consistent with the challenges
presented and TFG's investment objective. Firstly, we believe that the LCM
acquisition has been a good use of TFG's cash and we expect to continue to
explore other potential acquisitions to grow our asset management platform
both within and beyond the CLO and loan market. Secondly, during early Q1
2010 and potentially throughout the year, TFG expects to continue to see
attractive secondary CLO investment opportunities. Thirdly, the end of 2009
offered evidence of the potential re-opening of the new issue CLO markets and
the Company may be able to capitalize on new issue CLO prospects during 2010
in order to grow LCM's business and add to its existing CLO investment
portfolio. In addition, we will continue to review opportunities to support
TFG's existing CLO investments through capital contributions or other
strategies and will explore investment opportunities in assets and asset
classes within and beyond the leveraged loan market. Finally and importantly,
we intend to continue to serve our aim of returning capital to TFG
shareholders (including through dividends, the continuation of our updated
and enhanced share repurchase program and other means).
Please refer to the section entitled "Risk Factors" herein and
a more complete description of risks and uncertainties pertaining to an
investment in TFG on the Company's website at: www.tetragoninv.com.
Financial Review 2009
Overview
As was expected, 2009 proved to be a challenging year for TFG, although
from a performance perspective, both in terms of the CLO investment
portfolio and the earnings of the Company, the year ended significantly
more positively than it began. In Q1 2009, a sharp rise in defaults and a
significant increase in CCC+ downgrades by ratings agencies allied to a
steep decline in loan prices resulted in a deterioration in CLO investment
performance and associated utilization of the ALR. Against a backdrop of
the global economy in dramatic decline and an increasingly pessimistic
view emanating from the ratings agencies and financial institutions, the
ALR was increased to $315.0 million at the end of the quarter.
Although the pace of decline slowed in Q2 2009, it was not
until the second half of the year that investment performance and earnings
turned the corner. A rally of loan prices aided by a declining default rate
helped certain of the CLO investments in the portfolio to rebuild O/C cushion
leading to increased expected cash flows and associated fair value. As a
result, TFG was able to post positive earnings in Q3 and Q4 whilst also
rebuilding the ALR, although earnings overall for the year were approximately
$(2.50) per share.
CONSOLIDATED INCOME COMPARISON 2009 VS. 2008
2009 2008
Statement of Operations Consolidated Consolidated
($MM) ($MM)
Interest Income from Investments 165.5 217.1
Interest Income from Cash 0.1 4.3
Other Income 1.3 4.3
Investment Income 166.9 221.4
Management and Performance Fees (42.2) (41.9)
Administrative / Custody and
Other Fees (2.4) (2.9)
Interest Expense (0.6) (13.1)
Total Operating Expenses (45.2) (57.9)
Net Investment Income 121.7 163.5
Realized / Unrealized (Loss) /
Gain From
Hedging and FX (9.1) 13.9
Net change in Unrealized
(Depreciation) /
Appreciation in Investments (427.7) (224.3)
Net Realized Gain on Investments 0.0 0.3
Realized / Unrealized Losses from
Investments and FX (436.8) (210.1)
Net Income (315.1) (46.6)
On a consolidated basis net investment income of $121.7
million was approximately 26% lower compared to the $163.5 million recorded
in 2008. Primarily this reflected the reduction in the CLO investment
portfolio weighted average IRR which drives the recognition of interest
income and this figure fell approximately $51.6 million to $165.5 million in
2009. This was partially mitigated by a reduction in total operating
expenses, in particular interest expense, which was down $12.5 million.
Unrealized depreciation on the CLO investment portfolio of approximately
$(427.7) million, of which $(207.9) million was the result of net additions
to the ALR, turned positive net investment income into an overall loss for
the year. The hedging losses recorded in 2009 were incurred with respect to
foreign exchange.
Consolidated Income - 2009 Quarter on Quarter Comparison
The quarter-on-quarter comparison of consolidated net income
(see table below)(1) illustrates how the earnings picture progressed through
the year from a significant loss in Q1 2009 through an improving earnings
picture in the latter half of the year.
The key driver of the net loss in 2009 was the unrealized
change in depreciation on the portfolio in Q1 2009, with a recovery in the
CLO investment portfolio providing the stimulus for subsequent positive
earnings later in the year, particularly in Q4 2009. This recovery in
earnings was in spite of a $94.9 million reinstatement of the ALR from
approximately $254.1 million at the end of Q2 2009 to $349.0 million by the
end of December 2009.
TFG Quarterly Statement of Operations
Statement of Operations Q4 Q3 Q2 Q1 Total
2009 2009 2009 2009 2009
($MM) ($MM) ($MM) ($MM) ($MM)
Interest Income from
Investments 41.1 33.1 44.9 46.4 165.5
Interest Income from Cash 0.0 0.0 0.0 0.1 0.1
Other Income 0.3 0.3 0.2 0.5 1.3
Investment Income 41.4 33.4 45.1 47.0 169.9
Management and Performance
Fees (32.7) (2.6) (2.7) (4.2)(42.2)
Administrative / Custody and
Other Fees (0.8) (0.5) (0.5) (0.6) (2.4)
Interest Expense (0.0) (0.0) (0.0) (0.6) (0.6)
Total Operating Expenses (33.5) (3.1) (3.2) (5.4 (45.2)
Net Investment Income 7.9 30.3 41.9 41.6 121.7
Realized / Unrealized Gains /
(Losses)
From Hedging and FX (5.0) (2.1) (2.1) 0.1 (9.1)
Net change in Unrealized
(Depreciation) /
Appreciation in
Investments 91.8 3.0 (66.5) (456.0)(427.7)
Net Realized Gain / (Loss) on
Investments 0.0 0.0 0.0 0.0 0.0
Realized / Unrealized Gains /
(Losses)
from Investments and FX 86.8 0.9 (68.6) (455.9)(436.8)
Net Increase / (Decrease) in
Net Assets
from Operations 94.7 31.2 (26.7) (414.3)(315.1)
Financial Highlights Table
The table below illustrates a number of key metrics, certain
of which have been the focus of previous parts of the Financial Review
section. Cash generated by the CLO investment portfolio was negatively
impacted as certain investments in response to failure of applicable
collateral coverage, or O/C tests, either partially diverted cash to buy new
collateral or completely cut off cash to equity tranche investors (such as
TFG). However, taken in the context of the challenges presented to the CLO
investment portfolio, aggregate cash flows were resilient. Cash receipts per
share recovered from a low of $0.25 per share in Q2 2009 to $0.31 in Q4 2009,
although this is still well down on the usual run rate in 2008 of
approximately $0.59-$0.62 per share.
Financial Highlights
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
2009 2009 2009 2009 2008 2008 2008 2008
Net income
($MM) $94.7 $31.2 $(26.7) $(414.3) $(187.1) $48.8 $45.8 $45.9
EPS ($) $0.76 0.25 $(0.21) $(3.29) $(1.48) $0.39 $0.36 $0.36
Cash
receipts
($MM) $38.4 $35.3 $31.9 $47.1 $75.3 $77.7 $118.0 $74.0
Cash
receipts per
share ($) $0.31 $0.28 $0.25 $0.37 $0.60 $0.62 $0.94 $0.59
Net cash
balance
($MM) $174.4 $149.7 $123.8 $94.3 $59.9 $13.4 $(69.4) $(152.9)
Net assets
($MM) $807 $721 $693 $723 $1,142 $1,348 $1,319 $1,289
Number of
shares
outstanding
(million) 124.8 126.2 125.9 125.7 126.0 126.2 126.3 125.7
NAV per
share ($) $6.47 $5.71 $5.50 $5.75 $9.06 $10.69 $10.44 $10.25
DPS ($) $0.06 $0.03 $0.03 $0.03 $0.03 $0.15 $0.15 $0.15
Weighted
average
IRR on
completed
transactions
(%) 11.9% 10.3% 9.2% 10.6% 13.8% 16.9% 16.6% 16.0%
Number of
investments 61 61 61 61 61 61 61 61
Net excess
life-to-date
loss
accruals
($MM) $(215.0)$(95.0)$(39.0) $(50.0)$(115.0)$(158.0)$(137.0)$(116.0)
Accelerated
loss
reserve
($MM) $(349.0)$(333.8)$(254.1)$(315.0)$(141.0) $0.0 $0.0 $0.0
Cash Flow from Operations
As expected, cash generated by the CLO investment portfolio in
2009 was significantly lower than in 2008 as a result of factors described
above. The use of the cash generated also differed in 2009. In 2008, $490.2
million of cash flowed out of the Company in relation to "financing
activities" of which $379.0 million went directly to reducing leverage. By
2009, the task of deleveraging was largely completed and only a further $9.1
million of cash flowed out in this respect. Dividends and share repurchases
accounted for the balance of financing outflows.
Cash Flow From 2009 2008
Operations
MM MM
$ $
Net cash inflow from
operating activities 139.0 345.3
Net cash (outflows)
from financing activities (29.0) (490.2)
Net increase /
(decrease) in cash
and short term deposits 110.0 (144.9)
Cash and cash
equivalents at start
of year 63 209.2
Exchange rate gain /(loss) 1.4 (1.3)
Cash and cash
equivalents at end of year 174.4 63
Net Assets
The fall in Net Assets in 2009 was a result of the reduction
in aggregated fair value of the CLO investment portfolio from $1,082.5
million at 31 December 2008 to $655.2 million at the end of 2009. As cash
continued to flow from the CLO investment portfolio, albeit at a lower
overall level than previously, debt was paid down to zero and the cash
balance of the company increased significantly.
Consolidated Balance Sheet Summary 2009 2008
MM MM
$ $
Cash and cash equivalents 174.4 63.0
Investments in CLOs (at fair
value) 655.2 1,082.5
Debt - (117.6)
Other Assets / Liabilities (22.8) 114.1
Equity 806.8 1,142
Description of Business
TFG (company number 43321) is a Guernsey closed-ended investment company
that currently invests primarily in selected securitized asset classes and
aims to provide stable returns to investors across various credit and
interest rate cycles. TFG is registered in the public register of the
Netherlands Authority for the Financial Markets ("AFM") under section
1:107 of the Netherlands Financial Markets Supervision Act ("FMSA") as a
collective investment scheme from a designated country.
As described above, the Company's investment objective is to generate
distributable income and capital appreciation. To achieve this objective,
and to aim to provide stable returns to investors across various interest
rate and credit cycles, Polygon Credit Management LP (the "Investment
Manager") seeks to identify opportunities, assets and asset classes it
believes to be attractive and asset managers it believes to be superior
based on their track record and expertise. It also seeks to use the market
experience of the Investment Manager to negotiate favorable transactions.
As part of this current investment strategy, the Investment Manager may
employ hedging strategies and leverage in seeking to provide attractive
returns while managing risk.
From inception through 31 December 2009, the Tetragon Financial Group
Master Fund Limited (company number 43322) has acquired CLO investments
with an end-of-year fair value of approximately $655.0 million.
Senior secured bank loans represent the substantial majority of assets
underlying the CLO portfolio. The Company currently gains exposure to
these assets primarily through investments in the residual tranches or
equity tranches of CLO products ("Residual Tranches") and also has had
exposure through previous investments in the Residual Tranches of
collateralized debt obligation products, which are both securitized
interests in underlying assets assembled by asset managers and divided
into tranches based on their degree of credit risk ("Securitization
Vehicles").
The Company currently invests in a broad range of CLO products, utilizing
32 asset managers, and its underlying assets are diversified on a
geographic and industry sector basis. Interest rate and funding risk are
sought to be mitigated through the long-term matched funding embedded in
the CLO structure (i.e., the assets acquired bear interest by reference to
a floating rate similar to the funding source for those assets).
Since January 2010, the Company also owns a 75% interest in
LCM, an asset manager with approximately $2.5 billion of loan assets under
management as of year-end 2009 that yielded positive results for the
Company's investment performance.
Certain Corporate Background
Shares of TFG (the "Shares") are publicly traded solely on the
Euronext Amsterdam by NYSE Euronext under the ticker symbol "TFG". The Shares
do not carry any voting rights other than limited voting rights in respect of
variation of their class rights. The voting shares of TFG are owned by
Polygon Credit Holdings II Limited, which is a non-U.S. affiliate of the
Investment Manager and the Service Providers (as defined below). The voting
shares are not entitled to receive dividends.
The current exchange listing, corporate structure and
governance and investment management arrangements of TFG were established to
help foster the achievement of the Company's investment objective.(1) In
particular, at the time of its initial public offering and in consultation
with the Company's underwriters and its legal and financial advisors, the
Investment Manager concluded, and continues to believe, after analyzing
various listing alternatives within the United States and Europe, that
Euronext Amsterdam is favorably suited to facilitate the Company's pursuit of
its investment objective and to address relevant legal, regulatory, liquidity
and other commercial considerations. Similarly, TFG's corporate structure and
governance were designed to seek to position the Company to best serve its
investment objective as well as to address a variety of relevant
considerations, including applicable legal requirements. For example, the TFG
corporate structure and governance combined with the Investment Manager's
actions in addressing financing risk helped the Company effectively execute a
buy-and-hold strategy, that yielded positive results for the Company's
investment performance.
Investment Management
Polygon Credit Management LP (the "Investment Manager") has
been appointed the investment manager of TFG and the Master Fund pursuant to
an investment management agreement dated 26 April 2007 (the "Investment
Management Agreement"). The management and control of the Investment Manager
is vested in its general partner, Polygon Credit Management GP LLC (the
"General Partner"), which is responsible for all actions of the Investment
Manager. The General Partner and the Investment Manager are affiliated with
Polygon Investment Partners LLP (together with its other affiliated
management companies, other than the Investment Manager and the General
Partner, "Polygon"). As the General Partner is responsible for all actions of
the Investment Manager, any references to the Investment Manager in this
Annual Report or in any of our disclosure shall be deemed to include a
reference to the General Partner to the extent applicable.
The investment committee of the Investment Manager (the "Investment
Committee") currently consists of Jeffrey Herlyn, Michael Rosenberg, David
Wishnow, Reade Griffith, Alexander Jackson and Paddy Dear (the
"Principals") and is responsible for the investment management of the
portfolio and the business. The Investment Committee currently sets forth
the investment strategy and approves each significant investment by the
Master Fund.
The Risk Committee of the Investment Manager currently consists of the
Principals. The Risk Committee is currently responsible for the risk
management of the portfolio and the business and performs active and
regular oversight and risk monitoring.
Polygon Investment Partners LLP and Polygon Investment Partners LP
(together, the "Service Providers") provide the Investment Manager with
certain services in relation to Company pursuant to a Services Agreement
dated 26 April 2007. The Service Providers also provide operating,
infrastructure and administrative services to LCM pursuant to a Services
Agreement dated as of 29 January 2010 and to various Polygon managers
pursuant to applicable services agreements.
For more information on TFG's investment manager, including a
summary of key terms of the Investment Management Agreement, please refer to
the Company's website at www.tetragoninv.com.
Historical Approach to Investments
The Investment Manager has sourced investment opportunities both within
and beyond the leveraged loan market through a variety of channels,
including the Investment Manager's network of direct relationships with
major commercial and investment banks and asset managers.
The current performing CLO investment portfolio is composed solely of
substantial positions in the Residual Tranches of a broad range of CLO
products. Residual Tranches will in most cases be unrated and represent
the "equity" or "first loss" position of a CLO.
The Investment Manager believes by taking majority or substantial
positions in the Residual Tranches, the Company may influence various
features within a CLO or its applicable collateral management terms that
could improve the value of its investment.
CLO Asset Class Selection
The Investment Manager has to date focused primarily on
utilizing CLO Securitization Vehicles to achieve its investment objective and
has sought to employ a multiple asset class investment strategy, including
through such Securitization Vehicles.
The Investment Manager has sought to select the Company's
target asset classes following an analysis of key factors affecting returns;
including (i) credit spread risk premiums, (ii) economic and credit cycles,
and (iii) rating agency analyses.
As previously described, the asset class primarily represented
in the Company's current CLO portfolio consists of leveraged loans, comprised
of (a) broadly syndicated senior secured loans of U.S. borrowers; (b) broadly
syndicated senior secured loans of European borrowers; and (c) middle-market
senior secured loans of U.S. borrowers. Notwithstanding the Investment
Manager's focus to date on the leveraged loan asset class, the Investment
Manager may seek to achieve its investment objective through investments in
other opportunities, assets or asset classes, which may be unrelated to the
leveraged loan asset class.
Asset Manager Selection
In selecting asset managers, the Investment Manager has sought
to take advantage of the significant experience of certain of the Company's
principals in the securitization market. In conducting its assessment of an
asset manager, the Investment Manager reviews certain aspects of such asset
manager's business, such as the manager's reputation, personnel, research
capabilities, financial strength, business infrastructure, asset manager
ratings, and, generally, its ability to appropriately manage the underlying
asset portfolio as well as its prior dealings with the Company or its
principals.
The Investment Manager has sought to select asset managers
(including, LCM) that it believes to be superior and has looked to select
asset managers with a demonstrated strength in credit analysis and the
management of credits on a long-term basis consistent with its buy-and-hold
strategy. Notwithstanding the acquisition of LCM, the Company expects to
continue to seek and enjoy diversification of asset managers.
The Company believes that, as a result of (among other things)
the reduction in CLO issuance volumes in 2008 and 2009 and expected low
levels of issuance in 2010, the CLO asset manager industry may continue to
face some consolidation pressures as was evidenced in 2009 as several
managers exited the market or otherwise reorganized, including certain of our
CLO managers. The Company realized value on several of its CLO investments in
connection with such activity in 2009, including, significantly, through its
acquisition of LCM.
The Company continues to selectively explore strategic
business opportunities in asset management, both within and beyond the
leveraged loan market as such opportunities may offer, among other benefits,
high quality, repeatable, income streams that diversify the Company's current
income.
Asset Diversification
The Investment Manager has sought to diversify its exposures
across underlying asset classes, industry sectors, geographies and asset
managers. For risk management purposes, the Investment Manager analyzes risks
and may where appropriate engage in hedging strategies on both a
portfolio-wide basis as well as a single-name basis.
At any given time, certain geographic areas, asset types or
industry sectors may provide more attractive investment opportunities than
others and, as a result, the Company's investment portfolio may be
concentrated in particular geographic areas, asset types or industry sectors.
Please refer to the Company's monthly updates on the Company's website
(www.tetragoninv.com) for a review of the Company's underlying
investments' bank loan industry exposure for the relevant period. Due to the
overlap of investments of different asset managers, there may be
concentrations of individual credits from time to time.
As described above, other than its ownership interest in LCM
all of the Company's currently performing investments are in CLOs.
Notwithstanding the efforts of the Investment Manager to diversify across
underlying assets, the Company's investments (including, LCM) could face
significant downward pressure as Securitization Vehicles, such as CLOs,
generally come under increased market pressure. For example, many of the
Company's investments in Securitization Vehicles are and will be illiquid and
have values that are susceptible to changes in the ratings and market values
of such vehicles' underlying assets, which may make it difficult for the
Company to sell such holdings. Similarly, the fee revenue earned by LCM, in
its capacity as collateral manager to certain CLOs, may be negatively
impacted by the performance of such CLOs underlying assets.
Buy-and-Hold Strategy
The emphasis of the Investment Manager's existing strategy for the
Company has been on the selection and structuring of investment positions
that are then intended to be held for returns based on cash flows and other
revenues to provide a stable stream of income for the Company. The
Investment Manager believes, for example, that its buy-and-hold strategy
has allowed the Company to take a long-term view on the expected cash
flows from a CLO or other Securitization Vehicle. Market developments,
however, have and may continue to, impact the fair value of a
Securitization Vehicle and/or its underlying assets. The Investment
Manager may dispose of portfolio positions from time to time and may
reallocate investments in the portfolio within and among asset classes on
a discretionary basis. The Company believes the Investment Manager's asset
liability management and its strategy of taking substantial (or majority)
positions in its CLO investments has made a buy-and-hold strategy more
attractive, as the Investment Manager may in certain cases influence the
performance of a CLO investment through, among other things, the support
of amendments to the CLO structure or the collateral management agreement.
Valuation
State Street Fund Services (Guernsey) Limited serves as the
Company's independent administrator and values the investments of the Master
Fund on an ongoing basis. The NAV per Share is expected to fluctuate over
time with the performance of TFG's investments. The NAV of TFG and the Master
Fund and the NAV per Share are determined as at the close of business on the
last business day of each fiscal quarter for purposes of calculating
incentive fees. As TFG makes all of its investments through the Master Fund,
TFG's NAV will equal the NAV of the Master Fund before incentive fees. The
Company's valuation policies are set forth on the Company's website at
www.tetragoninv.com. The information on the "Valuation" page of the
website supersedes any other disclosure by the Company with respect to such
information. Subject to the foregoing, additional information with respect to
TFG's or the Master Fund's valuation policies may be found in each company's
annual audited financial statements accompanying this Annual Report.
Capital Distributions
The Company has sought to continue to return value to its
shareholders, including through dividends and share repurchases.
The Board of Directors will have the authority to declare
dividend payments, based upon the recommendation of the Investment Manager,
subject to the approval of the voting shares of TFG and adherence to
applicable law, including the satisfaction of a solvency test as required
pursuant to the Companies (Guernsey) Law, 2008, as amended. The Investment
Manager's recommendation with respect to the declaration of dividends (and
other capital distributions) may be informed by a variety of considerations,
including (i) the expected sustainability of the Company's cash generation
capacity in the short and medium term, (ii) the current and anticipated
performance of the Company, (iii) the current and anticipated operating and
economic environment and (iv) other potential uses of cash ranging from
preservation of the Company's investments and financial position to other
investment opportunities. TFG has and may continue to also pay scrip
dividends currently conducted through an optional dividend reinvestment
program. If the Board of Directors declares a cash dividend payable by TFG,
they will also (in their capacity as directors of the Master Fund) declare an
equal dividend per share payable concurrently by the Master Fund. TFG has and
may also continue to engage in share repurchases in the market from time to
time. Such purchases may at appropriate price levels below NAV represent an
attractive use of TFG's excess cash and an efficient means to return cash to
Shareholders. Any decision to engage in share repurchases will be made by the
Investment Manager, upon consideration of relevant factors, and will be
subject to, among other things, applicable law and profits at the time. The
Company continues to explore other methods of returning capital to
shareholders as well as improving liquidity for its shares.
Please refer to the section entitled "Risk Factors" herein and
a more complete description of risks and uncertainties pertaining to an
investment in TFG on the Company's website at: www.tetragoninv.com.
Reporting
In accordance with applicable regulations under Dutch law, TFG publishes
monthly statements on its website for the benefit of its investors
containing the following information: the total value of the investments
of the Master Fund; a general statement of the composition of the
investments of the Master Fund; and the number of outstanding shares of TFG.
In addition, in accordance with the requirements of Euronext
Amsterdam by NYSE Euronext and applicable regulations under Dutch law, TFG
provides annual and semi-annual reports to its shareholders, including
year-end financial statements, which in the case of the financial statements
provided in its annual reports, will be reported in accordance with U.S. GAAP
and audited in accordance with international auditing standards. TFG also
provides interim management statements to investors in accordance with
section 5:25e of the FMSA. The NAV of TFG is available to investors on a
monthly basis on the Company's website at www.tetragoninv.com.
Directors Statements
The Directors of TFG confirm that (i) this Annual Report
constitutes the TFG management review for the twelve month period ended 31
December 2009 and contains a fair review of that period and (ii) the 2009
audited financial statements accompanying this Annual Report for TFG have
been prepared in accordance with applicable laws and in conformity with
accounting principles generally accepted in the United States of America.
Risk Factors
An investment in TFG involves substantial risks and
uncertainties. Investors may review a more detailed description of these
risks and uncertainties and others to which the Company is subject on the
Company's website at www.tetragoninv.com. These risks and
uncertainties include, among others, those listed below.
- Many of the Company's investments are in the form of highly
subordinated securities, which are susceptible to losses of up to
100% of the initial investments, including losses resulting from
changes in the financial rating ascribed to, or changes in the
market value or fair value of, the underlying assets of an
investment. CLO vehicles generally invest in fixed income
securities rated lower than Baa by Moody's or lower than BBB by S&P
(or, if not rated, of comparable quality) and may be regarded as
predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, market
developments (including, without limitation, deteriorating economic
outlook, rising defaults and rating agency downgrades) may impact
the fair value of an investment and/or its underlying assets, as we
experienced during the period from the third quarter of 2008
through the first half of 2009.
- Defaults, their resulting losses and other losses on underlying
assets (including bank loans) may have a negative impact on the
value of the Company's portfolio and cash flows received. In
addition, bank loans may require substantial workout negotiations
or restructuring in the event of a default or liquidation which
could result in a substantial reduction in the interest rate and/or
principal.
- The modeled cash flow predictions and assumptions used to calculate
the IRR and fair value of each CLO investment may prove to be
inaccurate and require adjustment. Factors affecting the accuracy
of such modeled cash flow predictions include: (1) uncertainty in
predicting future market values of certain distressed asset types,
(2) the inability to accurately model collateral manager behavior,
and (3) the divergence of assumed variables from realized levels
over the period covered by the model.
- Bank loans are generally subject to liquidity risks and,
consequently, there may be limited liquidity if a Securitization
Vehicle is required to sell or otherwise dispose of such bank
loans.
- Many of the Company's investments in Securitization Vehicles are
and will be illiquid and have values that are susceptible to
changes in the ratings and market values of such vehicles'
underlying assets, which may make it difficult for the Company to
sell such holdings.
- The Company may be exposed to counterparty risk, which could make
it difficult for the Company to collect on the obligations
represented by investments and result in significant losses.
- The Company's organizational, ownership and investment structure
may create significant conflicts of interest that may be resolved in
a manner which is not always in the best interests of the Company or
the shareholders of TFG.
- The Investment Manager may devote time and commitment to other
activities.
- Shares of TFG (the "Shares") do not carry any voting rights other
than limited voting rights in respect of variation of their class
rights. The holder of the voting shares of TFG will be able to
control the composition of the Board of Directors and exercise
extensive influence over TFG's and the Master Fund's business and
affairs. Furthermore, no formal corporate governance code applies to
TFG. Additional information on the organizational structure and
corporate governance of TFG may be found on the Company's website at
www.tetragoninv.com.
- The performance of many of the Company's investments may depend to a
significant extent upon the performance of its asset managers.
- The Company is subject to concentration risk in its investment
portfolio, which may increase the risk of an investment in TFG.
- The Company's CLO investments are subject to (i) interest rate risk,
which could cause the Company's cash flow, fair value of its assets
and operating results to decrease and (ii) currency risk, which could
cause the value of the Company's CLO investments in U.S. Dollars to
decrease regardless of the inherent value of the underlying
investments.
- TFG's principal source of cash will be the investments that it
makes through the Master Fund. TFG's ability to pay dividends will
depend on it receiving distributions from the Master Fund.
- The ability of Securitization Vehicles in which the Company invests
to sell assets and reinvest the proceeds may be restricted, which
may reduce the yield from the Company's investment in those
Securitization Vehicles.
- The shares of TFG may continue to trade below NAV. The NAV per
Share will change over time with the performance of the Company's
investments and will be determined by the Company's valuation
principles. The fees payable to the Investment Manager will be
based on NAV and changes in NAV, which will not necessarily
correlate to changes in the market value of the shares of TFG.
- TFG and the Master Fund have approved a very broad investment
objective and the Investment Manager will have substantial
discretion when making investment decisions. In addition, the
Investment Manager's strategies may not achieve the Company's
investment objective.
- Shareholders will not be able to terminate the Company's investment
management agreement. None of the Investment Manager or the Service
Providers owe fiduciary duties to the shareholders of TFG.
- The Company may become involved in litigation that adversely
affects the Company's business, investments and results of
operations.
- If the Company's relationship with the Investment Manager and its
principals were to end or such principals or other key
professionals were to depart, it could have a material adverse
effect on the Company.
- The Investment Manager's compensation structure may encourage the
Investment Manager to invest in high risk investments.
- The liability of the Investment Manager to the Company is limited
and the Company's indemnity of the Investment Manager may lead the
Investment Manager to assume greater risks when making investment
related decisions than it otherwise would.
- The Shares are subject to legal and other restrictions on resale
and the Euronext Amsterdam by NYSE Euronext trading market is less
liquid than other major exchanges, which could affect the price of
the Shares. TFG may decide in the future to list the Shares on a
stock exchange other than Euronext Amsterdam by NYSE Euronext. There
can be no assurance that an active trading market would develop on
such an exchange.
- The performance of LCM and, in turn, the Company's operating
results, may be negatively influenced by various factors, including
the (i) performance of LCM-managed CLOs, which in general are subject
to the same risks as the Company's CLO investments and are currently
the primary source of LCM's revenues and (ii) ability of LCM to
retain key personnel, the loss of whom may negatively affect LCM's
ability to provide asset and collateral management services in a
fashion, and of a quality, consistent with its prior practice.
Furthermore, the Company's ownership of LCM may negatively impact
certain aspects of the Company's CLO investment strategy and as a
result the Company's performance as well as the Company's ability to
diversify its investments across multiple asset managers
The foregoing is not a comprehensive list of the risks and uncertainties
to which the Company is subject.
End Notes
Corporate Profile
(1) TFG invests substantially all its capital through the Master Fund, in
which it holds a 100% share.
Letter to Shareholders
(1) Such return is based on the following assumptions: TFG shares were
purchased at a price of $2.87 per share on 31 December 2008, quarterly
dividends of $0.12 per share for the year were reinvested into the shares of
TFG on each dividend ex-date during the year (27 February 2009 at $1.05 per
share, 27 April 2009 at $1.03 per share, 31 July 2009 at $0.98 per share, and
23 October 2009 at $2.39 per share) and all shares were sold at the closing
price of $3.91 per share on 31 December 2009.
(2) For additional information please refer to the Company's website at
www.tetragoninv.com.
2009 Performance at a Glance
(1) S&P/LCD U.S. Leveraged Lending Review 4Q 2009. Please note that TFG's
investment portfolio includes approximately 6.7% CLOs with primary exposure
to European broadly syndicated senior secured loans and such loans are
included in the calculation of TFG's corporate loan default rate.
(2) Based on the most recent trustee reports available for our
investments as of 31 December 2009.
(3) Morgan Stanley CDO Market Tracker, 8 January 2010; based on a sample
of 480 U.S. CLO transactions.
(4) Please note that as of 31 December 2009, TFG's investment portfolio
included approximately 6.7% CLOs with primary exposure to European broadly
syndicated senior secured loans and such loans are included in the
calculation of TFG's % of CLOs failing junior par coverage tests and % of
Caa1/CCC+ or below rated assets. Since the market-level statistics cited
above are limited to U.S. CLOs they may not be perfectly comparable to TFG's
portfolio.
(5) Excess Caa/CCC+ or below rated assets above the transaction specific
permitted maximum holding levels are generally haircut in our transactions at
market value for purposes of the over-collateralization and/or interest
reinvestment test ratios.
(6) Morgan Stanley CDO Market Tracker, 8 January 2010.
(7) Based on a weighted average share count, excluding treasury shares,
of 125.8 million for 2009 and 126.0 million for 2008.
(8) The life-to-date net loss reserve is investment-specific. It is
calculated by subtracting the actual collateral loss for each investment from
the expected collateral loss, where the expected loss is a function of
expected collateral size, TFG's loss assumptions and the length of time the
investment has been held. The net excess loss amount reflects the overall O/C
loss performance of TFG's portfolio; it reflects the cumulative effect of
loss under-performance and over-performance of our individual investments on
an aggregate portfolio basis. Please refer to footnote 15 of this Annual
Report for a discussion regarding the distinction between life-to-date net
loss reserve and the Accelerated Loss Reserve.
(9) The Accelerated Loss Reserve like the life-to-date net loss reserve
is transaction specific. The life-to-date net loss reserve is calculated by
subtracting the actual collateral loss for each investment from its expected
collateral loss, where the expected collateral loss is a function of the
expected collateral size, TFG's loss assumptions and the length of time the
investment has been held. Whereas the life-to-date net loss reserve is an
adjustment embedded in TFG's modeling assumptions, the Accelerated Loss
Reserve is a direct adjustment to the fair value of an investment and the
cumulative value of such adjustments will be and is evidenced in the
accompanying financial statements.
(10) 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 see the TFG website, www.tetragoninv.com, for more
details.
Investment Manager's Report
Portfolio Overview
(1) The CLO asset characterizations referenced above reflect the primary
asset focus of the vehicles. These transactions, however, may allow for
limited exposure to other asset classes including unsecured loans, high yield
bonds, or structured finance securities.
(2) As of 31 December 2009 TFG continued to hold three non-performing CDO
investments, all of which were in the form of securitization vehicles other
than CLOs. We do not expect to collect any additional cash flows from these
investments.
(3) Based on the most recent trustee reports available for our
investments as of 31 December 2009 (for Q4 2009 and 30 September 2009 (for Q3
2009).
(4) Morgan Stanley CDO Market Tracker, 8 January 2010; based on a sample
of 480 U.S. CLO transactions.
(5) Please note that as of 31 December 2009, TFG's investment portfolio
included approximately 6.7% CLOs with primary exposure to European broadly
syndicated senior secured loans and such loans are included in the
calculation of TFG's % of CLOs failing junior par coverage tests and % of
Caa1/CCC+ or below rated assets. Since the market-level statistics cited
above are limited to U.S. CLOs they may not be perfectly comparable to TFG's
portfolio.
(6) Excess Caa/CCC+ or below rated assets above the transaction specific
permitted maximum holding levels are generally haircut in our transactions at
market value for purposes of the over-collateralization and/or interest
reinvestment test ratios.
(7) Morgan Stanley CDO Market Tracker, 8 January 2010.
(8) Weighted by the original USD cost of each investment.
(9) S&P/LCD Quarterly Review, Q4 2009.
(10) As of 31 December 2009, the Accelerated Loss Reserve totaled
approximately $349.0 million, compared to an initial reserve amount of
$141.0MM as of 31 December 2008. The Accelerated Loss Reserve like the
life-to-date net loss reserve is transaction specific. Whereas the
life-to-date net loss reserve is an adjustment embedded in TFG's modeling
assumptions, the Accelerated Loss Reserve is a direct adjustment to the fair
value of an investment to account for the potential impact of certain losses
and the cumulative value of such adjustments will be and is evidenced in
TFG's financial statements.
(11) S&P/LCD Quarterly Review, Q4 2009.
(12) S&P/LCD News, Leveraged Commentary and Data, "Despite activity,
cov-relief amendment trend remains friendly," 7 January 2010.
(13) S&P/LCD News, Leveraged Commentary and Data, "Distressed exchanges
roll on; more loan issuers skirt default," 13 October 2010. Many 2009
distressed exchanges resulted in temporary "Selective Default" downgrades
from the rating agencies, however, these were typically temporary and were
removed once the exchanged were successfully completed.
(14) S&P/LCD Quarterly Review, Q4 2009.
(15) S&P/LCD Quarterly Review, Q4 2009.
(16) S&P/LCD Quarterly Review, Q4 2009; excludes interest.
(17) S&P/LCD European Leveraged Lending Review, Q4 2009; market value
gain only.
(18) S&P/LCD Quarterly Review, Q4 2009.
(19) S&P/LCD Quarterly Review, Q4 2009.
(20) U.S. CLOs generally require that Caa1/CCC+ or below rated asset
holdings above permitted holding levels are held at market value for O/C
purposes, while defaulted assets are held at the lower of market value and
assigned rating agency assigned recovery rate. European CLOs are generally
required to hold both excess Caa1/CCC+ or below rated assets and defaulted
securities at the lower of market value and rating agency assigned recovery
rate.
(21) S&P/LCD Quarterly Review, Q4 2009.
Key Base Case Modelling Assumptions
(1) Please note that TFG undertakes no obligation to update public
disclosure with respect to these or other modeling assumptions, except as
required by law.
(2) The base-case weighted-average recovery rate represents the weighted
average of expected recoveries for each transaction based on our assumed
recoveries on each asset class and each transactions' targeted asset mix,
assuming 75% recovery on first-lien U.S. loans, 70% on first-lien European
loans, 50% recovery on U.S. second-lien loans and mezzanine loans, and 30%
recovery on high yield bonds.
Capital Distributions 2009: Dividends and Share Repurchases
(1) For additional information please refer to the Company's
website at www.tetragoninv.com.
Consolidated Income - 2009 Quarter on Quarter Comparison
(1) The quarterly breakout of interest income from Investments and Net
change in Unrealized (Depreciation) / Appreciation in Investments reflects a
correcting adjustment relating to the numbers previously reported in Q1, Q2
and Q3. This is a reclassification between these two line items and the Net
Increase / (Decrease) in Net Assets from Operations is unchanged.
Certain Corporate Background
1) The quarterly breakout of interest income from Investments
and Net change in Unrealized (Depreciation) / Appreciation in Investments
reflects a correcting adjustment relating to the numbers previously reported
in Q1, Q2 and Q3. This is a reclassification between these two line items and
the Net Increase / (Decrease) in Net Assets from Operations is unchanged.
2009 Annual Report and Audited Financial Statements:
Our full 2009 annual report and audited financial statements
for the year ending December 31, 2009, can be found at our website,
www.tetragoninv.com.
About Tetragon:
Tetragon Financial Group Limited (TFG) is a Guernsey
closed-ended investment company traded on Euronext Amsterdam by NYSE Euronext
under the ticker symbol "TFG."
Tetragon Financial Group Limited (TFG) currently invests
primarily through long-term funding vehicles such as collateralized loan
obligations (CLOs) in selected securitized asset classes and aims to provide
stable returns to investors across various interest rate and credit cycles.
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 as a collective investment scheme from a designated
country.
For further information, please contact:
TFG: Press Inquiries:
David Wishnow/Yuko Thomas Finsbury
Investor Relations Charles Chichester/Talia
ir@tetragoninv.com Druker/Rollo Head
+44-20-7251-3801
For further information, please contact: TFG: David Wishnow/Yuko Thomas, Investor Relations, ir at tetragoninv.com; Press Inquiries: Finsbury, Charles Chichester/Talia Druker/Rollo Head, +44-20-7251-3801
Tags: London, March 1, Tetragon Financial Group Limited, United Kingdom
