Tetragon Financial Group Limited (TFG):
Performance Report for Period Ended 30 September 2013
Tetragon Financial Group Limited (TFG) is a Guernsey closed-ended investment company
traded on NYSE Euronext in Amsterdam under the ticker symbol "TFG."(1) In this report we
provide an update on TFG's results of operations for the period ending 30 September 2013.
EXECUTIVE SUMMARY AND OUTLOOK
OVERVIEW
TFG achieved positive operating and financial performance in Q3 2013 with an
annualised Return on Equity ("RoE") of 11.2% for the first nine months of 2013, in line
with the company's over-the- cycle target of 10-15% per annum.(2) Annualised RoE for Q3
2013 alone was 9.1%, slightly below our target due to, among other things, continued loan
spread tightening in the United States, deleveraging of post-reinvestment period CLO
structures, and loan defaults in certain U.S. CLOs.
During the quarter, TFG invested over $53.4 million of capital(3) into new investments
in: loans (via CLO equity); real estate; equities; and credit. We expect, given current
opportunities, to continue to invest in these asset classes in the fourth quarter.
Loans remain the dominant asset class in the portfolio, but the composition of
investments is changing as CLOs created before the crisis in 2008 (that we refer to as
U.S. Pre-Crisis CLOs) are amortising, and as our new investments become more meaningful.
In addition, new CLO exante equity returns are at the lower end of their return
expectations due to a combination of factors including relatively high AAA debt spread
levels. As we make new investments, we continue to compare risk-adjusted expected returns
with a desire to balance, amongst other things, the duration and correlation risks within
the total portfolio.
TFG's asset management business ("TFG Asset Management") had a good quarter with all
funds across the different asset classes performing well, which is not only accretive to
our RoE and Net Asset Value ("NAV") per share but also hopefully bodes well for attracting
future client assets.
GOALS
Looking at the company's goals for 2013 expressed in the 2012 Annual Report:
1. To deliver 10-15% RoE per annum to shareholders.(4)
The company met its RoE target of 10-15% through 30 September 2013 with annualised RoE
of 11.2%.
2. To manage more of TFG's assets on the TFG Asset Management platform.
The amount of TFG's capital that was externally managed as of the end of Q3 2013 was
52.9%, down from 63.2% at the end of 2012.(5)
3. To grow client AUM and fee income.
TFG Asset Management's assets under management ("AUM") at 30 September 2013 stood at
$9.1 billion, compared to $7.7 billion at 2012 year-end.(6)
4. To add further asset management businesses to the TFG Asset Management platform.
As mentioned in TFG's interim report, a senior distressed credit portfolio manager
joined the TFG Asset Management platform. TFG Asset Management established a distressed
credit fund in Q3 2013, and this team is investing and building a performance track record
in the strategy.
EXECUTIVE SUMMARY AND OUTLOOK
OUTLOOK
Notwithstanding the unknowns of the financial markets, we remain cautiously optimistic
for TFG's current portfolio and new investments. We would highlight three areas of note:
First, as we have said before, managing the deleveraging of our Pre-Crisis CLO
portfolio is a complex and important dynamic; we are routinely evaluating the exercise of
refinancing and call options against available reinvestment opportunities to seek to
optimize the return on both individual investments and the overall portfolio.
Second, GreenOak Real Estate ("GreenOak") has seen good performance in their
investment portfolios to date and as their business expands, so do TFG's opportunities to
invest in real estate in the United States, Europe and Japan, either within the funds or
as a co-investor in discrete opportunities.
Thirdly, corporate activity has picked up in Europe. This has benefitted the
investments in European equities over the last few months and may continue to do so if it
this trend remains in place.
KEY METRICS
TFG continues to focus on three key metrics when assessing how value is being created
for, and delivered to, TFG shareholders: Earnings, NAV per share and Dividends.
EARNINGS - RETURN ON EQUITY ("RoE")
<pre>
- Year to date RoE(7) to Q3 2013 was 8.4% (11.2% annualised) which maintains
the year to date RoE performance within TFG's over-the-cycle target of 10-15% per
annum.(8)
- TFG generated Net Economic Income(9) of $136.5 million in the first three
quarters of 2013, a fall of 32.9% versus the same period in 2012.
- Q3 2013's results saw a continuation of certain trends in CLO performance
identified in Q2 2013; a slowing down in the CLO cashflows compared to prior years,
and therefore the expected future returns generated by CLOs during the second quarter.
This arose primarily from a continued combination of loan spread compression and
elevated levels of prepayments, reflecting borrowers taking the opportunity to
refinance at lower spreads. The U.S. CLO portfolio also saw some defaults being
recognised late in the quarter.
- This trend was counterbalanced by two positives: (1.) a continued improvement
in the outlook for Euro-denominated CLO deals which resulted in a further reduction in
the discount rate that TFG applied to the relevant projected cash flows, adding
approximately $9.1 million (before fees) to the fair value of this part of the CLO
portfolio; and (2.) continuing strong performance in the non-CLO assets in TFG's
investment portfolio.
- The TFG Asset Management segment contributed approximately $2.5 million of
"EBITDA equivalent"(10) in the quarter and an EBITDA equivalent of $18.4 million year
to date through Q3 2013.
</pre><pre>
Figure 1
Annual Return on Equity
RoE
2007 11.4%
2008 -3.7%
2009 -27.6%
2010 48.0%
2011 36.0%
2012 20.8%
2013 annualised 11.2%
</pre> EARNINGS PER SHARE ("EPS")
<pre>
- TFG generated an Adjusted EPS(11) of $0.37 during Q3 2013 resulting in a
year to date EPS of $1.39 (YTD Q32012: $1.77).
</pre><pre>
Figure 2
Adjusted EPS Comparison Q3 2011 - Q3 2013
YTD through
Q3 2011 $2.77
YTD through
Q3 2012 $1.77
YTD through
Q3 2013 $1.39
</pre><pre>
- CLOs continue to contribute the majority of the investment portfolio
income ($1.61 of EPS in the first three quarters of 2013) albeit at a lower level than
recent years as returns on U.S. CLOs normalise.
- The further recalibration of discount rates used in modelling the fair value
of the European CLO portfolio, largely in response to sustained reductions in observed
risk premia, added approximately $0.09 of EPS after fees (please see page 26 for
further detail).
- The returns on other asset classes, shown in "other investment income",
continue to contribute an increasing proportion of the investment portfolio gains,
which we discuss in detail later in this report.
- Fee income relating to the TFG Asset Management segment activities contributed
$0.45 of EPS in the first three quarters, with the growth year-on-year primarily
reflecting the addition of asset management activities through the Polygon Transaction
in 2012.
</pre><pre>
Figure 3
TETRAGON FINANCIAL GROUP
TFG Earnings per Share Analysis (2011-Q3 2013)
Component YTD Q3 2013 2012 2011
CLOs $1.61 $3.65 $4.76
Hedging derivatives and options $0.05 ($0.10) ($0.04)
Direct loans $0.02 $0.07 $0.03
Other investment income $0.22 $0.09 N/A
Fee income $0.45 $0.32 $0.20
Expenses and taxes net of recoveries excluding share
based compensation ($0.96) ($1.32) ($1.47)
Noncontrolling interest N/A ($0.01) ($0.02)
Net economic income/ adjusted EPS $1.39 $2.70 $3.46
</pre> NAV PER SHARE
Total NAV increased to $1,704.0 million which equated to Pro Forma Fully Diluted NAV
per Share(12) of $15.49.
[Figure 4]
DIVIDENDS
<pre>
- Dividends per Share ("DPS"): TFG declared a Q3 2013 DPS of $0.14,
unchanged from Q2 2013. On a rolling 12-month basis, the dividend of $0.55 represents
a 25.0% increase over the preceding four quarters.
- TFG continues to pursue a progressive dividend policy with a target payout
ratio of 30-50% of normalized earnings. The Q3 2013 DPS of $0.14 brings the cumulative
DPS since TFG's IPO to $2.675.
</pre><pre>
Figure 5
12-month Rolling DPS Comparison Q3 2011 - Q3 2013 (USD)
Q3 2011 $0.380
Q3 2012 $0.440
Q3 2013 $0.550
</pre> CASH FLOW & USES OF CASH
TFG's cash flows from operations increased by 10.1% in the first three quarters of
2013 compared with the same period of 2012, to $299.7 million. Cash flows generated by the
CLO portfolio continued to be the primary source of cash and increased by 9.0% in the
period to Q3 2013 to $361.5 million compared with the first three quarters of 2012. CLO
cash flows are discussed in more detail in the Investment Portfolio section of this
report.
TFG invested $46.4 million into the equity tranches of new CLO issues in the first
three quarters of 2013, $45.5 million of it in the first quarter, as the new issue CLO
market slowed (and proved to be less attractive compared to other TFG investment
opportunities) in the second and third quarters. In Q3 2013, TFG invested a small amount
into a new CLO deal being managed by LCM Asset Management LLC ("LCM"). TFG continued to
add to its investments in equities, credit and convertible bonds primarily via Polygon
branded in-house managed funds and in real estate vehicles managed by GreenOak.
Net cash flows year to date from the sales, prepayments and maturity of loans is $70.9
million, which is largely unchanged from the end of Q2 2013. TFG utilised $40.1 million to
pay dividends in the first three quarters of the year compared with $37.3 million in the
equivalent period in 2012. $12.7 million was utilised to repurchase TFG's shares during
the first three quarters of 2013.
At the end of Q3 2013, TFG's investible cash balance was $226.8 million, approximately
13.0% of net assets, unchanged as a percentage from Q2 2013.
[Figure 6]
TFG STRUCTURE OVERVIEW
TFG owns 1) an investment portfolio of $1.7 billion of financial assets and 2) TFG
Asset Management, a global alternative asset management business with $9.1 billion of
client assets under management. Investors may find the above chart useful to better
understand the company's structure.
INVESTMENT PORTFOLIO
INVESTMENT PORTFOLIO OVERVIEW
During Q3 2013, TFG continued to invest in U.S. corporate loans (by investing in the
equity tranches of new issue U.S. CLOs managed by LCM and third-party managers), real
estate (via GreenOak-managed vehicles), as well as credit, convertible bonds and equities,
both directly and via investments in Polygon-managed hedge funds.
U.S. corporate loans accessed via CLO equity, which constitute the majority of TFG's
investment assets, registered positive performance during Q3 2013, but saw declines in
their expected future cash flows primarily as a result of loan spread tightening (which
may be reflected with a lag in TFG's CLO portfolio as compared with the overall loan
market), de-leveraging of certain U.S. Pre- Crisis CLOs which exited their reinvestment
periods, and in some cases, losses on underlying CLO assets.
TFG's real estate, equity, credit and convertible bond investments continued to
perform well during the quarter.
PORTFOLIO COMPOSITION AND OUTLOOK
[Figure 7]
TFG's net assets, which totalled $1,704.0 million at the end of Q3 2013, consisted
mainly of:
<pre>
- Corporate loans, both directly owned and indirectly owned through CLO
investments;
- Equity, credit, and convertible bonds, primarily owned through Polygon fund
investments;
- Real estate (GreenOak investments); and
- Cash.
</pre> The following charts summarize selected performance metrics for certain asset classes
in TFG's investment portfolio.
Figure 8a
<pre>
September 2013 Net
Assets
Asset Type (in $MM) LTM Performance
U.S. Pre-Crisis CLOs (i) $727.1 22.9%(ii)
U.S. Post-Crisis CLOs (i) $178.9 10.5%(ii)
European CLOs $155.2 53.7%(ii)
U.S. Direct Loans $43.1 4.5%
</pre> (i) "U.S. Pre-Crisis CLOs" and "U.S. Post-Crisis CLOs" refers to U.S. CLOs issued
before and after December 2008, respectively. TFG owns $1.75 million notional in a CLO
debt tranche. Such investment is excluded from these performance metrics.
(ii) For CLOs and direct loans, calculated as the total return. The total return is
calculated as the sum of the aggregate ending period fair values and aggregate cash flows
received during the year, divided by the aggregate beginning period fair values for all
such investments. LTM performance for U.S. Post-Crisis CLOs is weighted by the beginning
of period fair values or cost if the investment was made less than 12 months before the
current quarter-end. U.S. Post-Crisis CLO equity investments which were made during the
year, and which therefore lack a full year of performance, are annualised. The LTM
performance for European CLOs excludes the impact of any changes in the EUR-USD exchange
rate on TFG's fair values and cash flows received for such investments.
Figure 8b
<pre>
LTM Return on
September 2013 Net Time-Weighted
Assets Average Capital
Asset Type (in $MM) Invested (ii)
Equities (i) $158.5 22.9%
Credit and Convertible Bonds $46.9 13.5%
</pre> (i) Assets characterized as "Equities" consist of the fair value of investments in
Polygon-managed equity funds as well as the net assets of, or capital committed to, equity
assets (as applicable) held directly on the balance sheet.
(ii) Returns presented reflect the cumulative annualised performance for each asset
type over TFG's period of investment from 1 December 2012 to 30 September 2013 against the
time-weighted average capital invested. Returns for directly-held equities are calculated
on the basis of cumulative investment-to-date performance and the time-weighted average
required amount of margin posted with all relevant counterparties over the analysis
period. Time-weighted average capital invested in each asset type is calculated for each
investment through 30 September 2013, based on the actual number of days and assuming a
365-day year. TFG invests in Polygon-managed funds on a preferred fee-basis.
CORPORATE LOANS
TFG's exposure to the corporate loan asset class (whether held directly or indirectly
via CLO equity investments) totalled $1,104.4 million at the end of Q3 2013 ($1,184.9
million at the end of Q2 2013) and remained diversified, with 73.7% in U.S.
broadly-syndicated senior secured loans, 12.2% in U.S. middle-market senior secured loans
and 14.1% in European senior secured loans.(13)
TFG's CLO equity investments, which comprise the majority of its exposure to corporate
loan assets, represented indirect exposure to approximately $16.4 billion par value of
leveraged loans.
When reporting on our corporate loan exposures, we find it useful to further segment
such investments into the following classes:
<pre>
- U.S. Pre-Crisis CLOs
- U.S. Post-Crisis CLOs
- European CLOs
- Direct U.S. Loans
</pre> U.S. PRE-CRISIS CLOs
As of the end of Q3 2013, TFG held equity investments in 52 U.S. Pre-Crisis CLOs and
one investment in the debt tranche of a U.S. Pre-Crisis CLO.(14) U.S. Pre-Crisis CLO
equity investments had total fair value of $727.1 million as of 30 September 2013,
compared with $787.3 million at the end of the prior quarter. As of the end of Q3 2013 all
U.S. Pre-Crisis CLOs were passing their junior-most O/C tests.(15)
During Q3 2013, TFG's U.S. Pre-Crisis CLO investments produced cash flows of $76.1
million, compared with $89.5 million generated in Q2 2013. This quarter-on-quarter decline
was primarily driven by continued compression of CLO excess spread margins, the result of
loan spread tightening and amortization of certain CLOs as they moved out of, or further
beyond, the end of their reinvestment periods. Additionally, U.S. Pre-Crisis CLO managers
which were able to reinvest during the quarter faced increasingly challenging reinvestment
criteria as a result of tightening weighted average life, maturity and other collateral
quality test constraints. We expect that the de-leveraging pace of U.S. Pre-Crisis CLOs
will become an increasingly important driver of their mid-term cash flow generation
capacity as well as a key input in our evaluation of the call options on these
transactions. The pace of CLO amortisation will, in turn, depend on the repayment rate of
the underlying loans as well as each transaction's reinvestment status, including the
ability to reinvest repayment proceeds after the end of the reinvestment period. Although
U.S. loan prepayments recently declined to 4.6% in Q3 2013 from 13.9% in Q2 2013,(16) we
believe that prepayment rates, and therefore the pace of CLO wind-down, will continue to
be volatile in the future, directly impacting the cash flow generation capacity of TFG's
U.S. Pre-Crisis CLO equity investments.
U.S. POST-CRISIS CLOs
As of the end of Q3 2013, TFG held 11 equity investments in U.S. Post-Crisis CLOs with
a total fair value of $178.9 million, down from $209.0 million as of the end of Q2 2013.
The decrease in fair value was primarily the result of the early redemption of one CLO,
which was managed by LCM. We estimate the realized IRR to TFG on the redeemed investment
to be over 17.0%. Additionally, during the quarter TFG made a small investment in the
equity tranche of a new issue U.S. Post-Crisis CLO managed by LCM, totalling $1.0 million
at cost.
U.S. POST-CRISIS CLOs (continued)
The performance of TFG's U.S. Post-Crisis CLOs was shaped by the same loan market
trends as the U.S. Pre-Crisis CLO portfolio, with continued spread tightening serving as
the main driver of earnings for these investments. All U.S. Post-Crisis CLOs remained in
compliance with their O/C tests as of the end of Q3 2013.(17) During Q3 2013, TFG's U.S.
Post-Crisis CLO investments produced cash flows of $35.4 million, as compared with $12.6
million in the prior quarter. These gains in cash collections primarily reflect the early
redemption of one CLO and an increase in the number of U.S. Post-Crisis CLO transactions
that have reached their first payment dates.
EUROPEAN CLOs
As of the end of Q3 2013, TFG held equity investments in 10 European CLOs with a total
fair value of $155.2 million, up from $145.4 million as of the end of Q2 2013. Shortly
after the end of the quarter, TFG made a secondary investment in the equity tranche of a
European CLO at a cost of $3.7 million.
The performance of TFG's European CLO equity investments in Q3 2013 has improved
significantly, as O/C test levels of certain transactions increased and as previously
accrued CLO liabilities and management fees were repaid, allowing for distributions to the
equity tranches. Despite the progress made to date, we continue to expect that the
performance of the European CLO portfolio may remain volatile, as a result of their
relatively low excess structural and collateral quality test cushions.
During Q3 2013, TFG's European CLO investments generated cash flow of EUR9.2 million,
compared with EUR5.0 million in the first quarter of 2013. We compare the cash flows
generated by the European CLO investments over a six-month period, as European CLOs
generally pay semi- annually, as opposed to quarterly for U.S. CLOs. As of the end of Q3
2013, 91.3% of all of TFG's European CLO investments were passing their junior-most O/C
tests, weighted by fair value, and 90.0% were passing when weighted by number of
deals.(18)
The following graph shows the evolution of TFG's CLO equity investment IRRs over the
past three years.
[Figure 9]
DIRECT LOANS
As of the end of Q3 2013, TFG held U.S. direct loan investments with a total fair
value of $43.1 million and par value of $43.1 million, largely unchanged from the end of
the prior quarter ($43.2 million fair value and $43.4 million par value). The fundamental
credit metrics of this portfolio were stable during the quarter and there continued to be
no defaults.
EQUITIES
As of the end of Q3 2013, TFG held $158.5 million of investments (at fair value) in
equities via Polygon-managed equity funds as well as directly owned. The net assets
attributable to directly owned equities currently consist primarily of the collateral
posted (or otherwise held) by TFG in margin accounts with financial institutions. Similar
to our approach to leveraged loan investing, we believe that TFG may benefit by owning
equities outright, in addition to investing indirectly via Polygon-managed funds. TFG will
continue to look to deploy additional capital into direct investments of equities, credit,
and convertible bonds, when appropriate.
Currently, TFG's equity investments are primarily focused on European event-driven
equity, global equities and mining equities-related investments. An initial equity fund
investment was made on 1 December 2012, and through the end of Q3 2013, TFG's investments
in equities (including both fund investments and direct investments) generated an
annualised return on time- weighted average capital of approximately 22.9%.(19)
CREDIT AND CONVERTIBLE BONDS
As of the end of Q3 2013, TFG held $46.9 million of investments (at fair value) in
Polygon-managed credit and convertible bond funds, up from $20.8 million at the end of Q2
2013. An initial fund investment was made on 1 December 2012 and through the end of Q3
2013, TFG's investments in credit and convertible bonds generated an annualised return on
time-weighted average capital of approximately 13.5%.(20)
REAL ESTATE
As of the end of Q3 2013, TFG held $50.3 million of investments (at fair value) in
GreenOak- managed real estate funds and vehicles, including $16.4 million of new capital
investments funded during Q3 2013. Such investments include numerous commercial and
residential properties across Japan, the United States and Europe.
The company expects to continue to fund capital commitments into GreenOak projects
during the remainder of 2013.
FINANCING SOURCES, HEDGING ACTIVITY AND OTHER MATTERS
As of the end of Q3 2013, TFG had no outstanding debt and the net consolidated cash on
its balance sheet stood at $256.9 million, compared to $243.8 million at the end of Q2
2013. The balance of TFG's "investible cash," which excludes certain amounts consolidated
for U.S. GAAP purposes but which are restricted to specific uses or otherwise unavailable
to be invested, was $226.8 million, compared to $217.8 million at the end of Q2 2013.
TFG had no direct credit hedges in place at the end of Q3 2013, but employed certain
foreign exchange rate and "tail risk" interest rate hedges to seek to mitigate its
exposure to Euro-USD foreign exchange risk and a potential significant increase in U.S.
inflation and/or nominal interest rates, respectively. We review our hedging strategy on
an ongoing basis as we seek to address identified risks to the extent practicable and in a
cost-effective manner.
TFG ASSET MANAGEMENT
TFG Asset Management comprises the fee income-generating areas of TFG's portfolio:
management and performance fees from internal and external asset managers. The three
internal asset management brands, LCM, GreenOak and Polygon, continued to perform well
through 30 September 2013.
UPDATE ON KEY METRICS
<pre>
- Performance of the underlying funds: all of the various funds managed by
TFG Asset Management's brands had positive net performance through the end of Q3 2013.
- Gross revenues: composed primarily of management and performance fees from
clients, totalled $43.7 million through 30 September 2013.
- "EBITDA equivalent": totalled $18.4 million through Q3 2013.
</pre><pre>
Figure 10
TETRAGON FINANCIAL GROUP
TFG Asset Management Statement of Operations Through Q3 2013
U.S. GAAP Net Economic income
$MM $MM
YTD YTD
Fee income(i) 43.7 43.7
Unrealised Polygon performance fees(ii) - 2.1
Interest income 0.2 0.2
Total income 43.9 46.0
Operating, employee and administrative expenses(i) (27.6) (27.6)
Net income - "EBITDA equivalent" 16.3 18.4
Performance fee allocation to TFM (1.7) (2.2)
Amortisation expense on management contracts (5.1) (5.1)
Net income before taxes 9.5 11.1
Income taxes (2.5) (3.0)
Net income 7.0 8.1
</pre> (i) Nets off cost of recovery on "Other fee income" against this cost contained in
"Operating, employee, and administrative expenses." Operating costs also removes
amortisation from the U.S. GAAP segmental report.
(ii) Unrealised Polygon performance fees represent the fees calculated by the
applicable administrator of the relevant Polygon funds, in accordance with the applicable
fund constitutional documents, when determining NAV at quarter end, less certain assumed
costs. Similar amounts, if any, from LCM and GreenOak are excluded from this line item.
Such fees would typically not be realised or recognised under U.S. GAAP until calendar
year end, and are therefore subject to change based on fund performance during the
remainder of the year. There can be no assurance that the company will realise all or any
portion of such amounts. Through 30 September 2013, this amount equalled $2.1 million
before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced
the net contribution to $1.1 million as shown in Figure 10 and further represented in
Figures 17 and 18 of this report.
ASSET MANAGEMENT BRANDS
AUM for LCM, GreenOak and Polygon are shown below at 30 September 2013.
Figure 11
<pre>
Summary of TFG Asset Management AUM ($BN)
Brand 30 September 2013 30 June 2013
LCM $ 4.3 $ 4.5
GreenOak (i) $ 3.6 $ 3.2
Polygon (ii) $ 1.2 $ 1.1
Total $ 9.1 $ 8.8
</pre> (i) Includes funds and advisory assets.
(ii) AUM for Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund,
Polygon European Equity Opportunity Master Fund and associated managed account, Polygon
Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed
Opportunities Master Fund, as calculated by the applicable fund administrator. Includes,
where relevant, investments by Tetragon Financial Group Master Fund Limited.
LCM
LCM is a specialist in below investment-grade U.S. broadly-syndicated leveraged loans
that was established in 2001. Farboud Tavangar is the senior portfolio manager.
LCM continued to perform well in Q3 2013, with all of LCM's Cash Flow CLOs that were
still within their reinvestment periods continuing to pay senior and subordinated
management fees.
At 30 September 2013, LCM's total CLO loan assets under management stood at
approximately $4.3 billion. During the quarter, LCM successfully raised LCM XIV, a $400.0
million asset CLO which closed on 11 July 2013, while LCM VIII, with assets totalling
approximately $300.0 million, was called in mid-July 2013. LCM currently manages 11 CLOs.
[Figure 12]
GREENOAK
GreenOak is a real estate-focused principal investing and advisory firm established in
2010. The Principals and Founders are John Carrafiell, Sonny Kalsi and Fred Schmidt.
During Q3 2013, GreenOak continued to execute on its strategy with respect to its
funds and its advisory assignments on behalf of select strategic clients with mandates in
Europe, Japan, and the United States.
At 30 September 2013, assets under management totalled approximately $3.6 billion.
POLYGON FUNDS
[Figure 13]
(i) Assets under management include all third-party interests and total projected
capital investment costs.
Total AUM for the Polygon funds was approximately $1.2 billion at 30 September 2013.
The funds continued to perform well through the end of Q3 2013. A distressed credit fund
was launched in September 2013 and the team is currently building a performance track
record in the strategy.
Figure 14
<pre>
Summary of Polygon Funds Assets Under Management ($ MM)
Annualised
2013 Net LTD Fund 30 Sep 2013 Performance Performance
European Event-Driven Equity(i) $ 296 12.8% 13.8%
Convertibles(ii) $ 297 7.1% 21.4%
Mining Equities(iii) $ 51 1.6% 4.3%
Private Equity Vehicle(iv) $ 519 1.4% 6.9%
Distressed Credit(v) $ 25 1.2% 15.7%
Other Equity(vi) $ 17 16.8% 13.5%
Polygon Funds' Total AUM(vii) $1,205
</pre> (i) The fund began trading 8 July 2009 with Class B shares which carry no incentive
fee. Class A shares commenced trading on 1 December 2009. Returns from inception through
November 2009 for Class A shares have been pro forma adjusted to match the fund's Class A
share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive
fee and other items, in each case, as set forth in the offering Memorandum). From December
2009 to February 2011, the table reflects actual Class A share performance on the terms
set forth in the Offering Memorandum. From March 2011, forward, the table reflects actual
Class A1 share performance on the terms set forth in the Offering Memorandum. Class A1
share performance is equivalent to Class A share performance for prior periods. AUM figure
is for the Polygon European Equity Opportunity Master Fund and associated managed account
as calculated by the applicable fund administrators.
(ii) The fund began trading with Class B shares, which carry no incentive fees, on 20
May 2009. Class A shares of the fund were first issued on 1 April 2010 and returns from
inception through March 2010 have been pro forma adjusted to match the fund's Class A
share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive
fee over a hurdle and other items, in each case, as set forth in the Offering Memorandum).
AUM figure is for the Polygon Convertible Opportunity Master Fund as calculated by the
applicable fund administrator.
POLYGON FUNDS (continued)
(iii) The fund began trading with Class B1 shares, which carry no incentive fees, on 1
June 2012. Returns shown here have been pro forma adjusted to account for a 2.0%
management fee, a 20% incentive fee, and non trading expenses capped at 1%, in each case,
as set forth in the Offering Memorandum. AUM figure is for the Polygon Mining Opportunity
Master Fund as calculated by the applicable fund administrator.
(iv) The fund's inception was on 8 March 2011. Individual investor performance will
vary based on their high water mark. Currently the majority of Class C share class
investors have not reached their high water mark, so their performance is the same as
their gross performance. AUM figure is for the Polygon Recovery Fund LP as calculated by
the applicable fund administrator.
(v) The fund's inception was on 1 September 2013. Returns shown are for Class A shares
reflecting the terms set forth in the offering documents (2.0% management fee, 20%
incentive fee and other items, in each case, as set forth in the offering documents). AUM
figure is for the Polygon Distressed Opportunities Master Fund as calculated by the
applicable fund administrator.
(vi) The fund began trading with Class B/B1 shares, which carry no incentive fees, on
12 September 2011. Returns shown here have been pro forma adjusted to account for a 2.0%
management fee and a 20% incentive fee, in each case, as to be set forth in further
definitive documents. AUM figure is for the Polygon Global Equities Master Fund as
calculated by the applicable fund administrator.
Note: The AUM noted above includes investments in the relevant strategies by TFG,
other than in respect of the Private Equity Vehicle, where there is no such investment.
The Private Equity vehicle, at the time of the Polygon transaction and currently, remains
a closed investment strategy.
Note: Past performance or experience (actual or simulated) does not necessarily give a
guide for the future and no representation is being made that the funds listed will or are
likely to achieve profits or losses similar to those shown.
[Figure 15]
FINANCIAL TABLES
FINANCIAL HIGHLIGHTS
Figure 16
<pre>
TETRAGON FINANCIAL GROUP
Financial Highlights Through Q3 2011-2013
Q3 2013 Q3 2012 Q3 2011
U.S. GAAP net income ($MM) (YTD) $118.1 $203.4 $330.1
Net economic income ($MM) (YTD) $136.5 $203.4 $330.1
U.S. GAAP EPS (YTD) $1.21 $1.77 $2.77
Adjusted EPS (YTD) $1.39 $1.77 $2.77
Return on equity (YTD) 8.4% 13.8% 29.0%
Net assets ($MM) $1,704.0 $1,623.6 $1,413.6
U.S. GAAP number of shares outstanding (MM) 97.7 113.6 117.2
U.S. GAAP NAV per share $17.45 $14.29 $12.06
Pro Forma number of shares outstanding (MM) 110.0 113.6 117.2
Pro Forma fully diluted NAV per share $15.49 $14.29 $12.06
DPS $0.140 $0.115 $0.100
</pre> In this section, we present consolidated financial data incorporating TFG and its 100%
subsidiary, Tetragon Financial Group Master Fund Limited.
We believe the following metrics may be helpful in understanding the progress and
performance of the company:
<pre>
- Return on Equity (8.4%): Net Economic Income ($136.5 million) divided by
Net Assets at the start of the year ($1,624.4 million).
- Net Economic Income (+$136.5 million): adds back to the U.S. GAAP net income
(+$118.1 million) the imputed Q3 2013 share based employee compensation (+$17.3
million), which is generated on an ongoing basis resulting from the Polygon
transaction and also includes unrealized Polygon performance fees(21) (+$1.1 million).
- Pro Forma Fully Diluted Shares (110.0 million): adjusts the U.S. GAAP shares
outstanding (97.7 million) for the impact of escrow shares used as consideration in
the Polygon transaction and associated stock dividends (+12.3 million) and for the
potential impact of options issued to TFG's investment manager at the time of TFG's
IPO (0.0 million).
- Adjusted EPS ($1.39): calculated as Net Economic Income ($136.5 million)
divided by weighted-average U.S. GAAP shares outstanding (97.9 million).
- Pro Forma Fully Diluted NAV per Share ($15.49): calculated as Net Assets
($1,704.0 million) divided by Pro Forma Fully Diluted shares (110.0 million).(22)
</pre> STATEMENT OF OPERATIONS
<pre>
Figure 17
TETRAGON FINANCIAL GROUP
Statement of Operations Through Q3 2011-2013
Q3
Q3 2013 2012 Q3 2011
($MM) ($MM) ($MM)
Statement of Operations (YTD) (YTD) (YTD)
Interest income 158.9 175.1 154.0
Fee income 43.7 18.8 15.9
Other income - cost recovery 15.4 - -
Investment income 218.0 193.9 169.9
Management and performance fees (50.7) (73.3) (115.5)
Other operating and administrative expenses (73.8) (14.8) (18.8)
Total operating expenses (124.5) (88.1) (134.3)
Net investment income 93.5 105.8 35.6
Net change in unrealised appreciation in investments 10.6 106.5 300.1
Realised gain on investments 11.0 0.6 0.6
Realised and unrealised gains/(losses) from hedging and fx 6.2 (5.4) (1.8)
Net realised and unrealised gains from investments and fx 27.8 101.7 298.9
Income taxes (3.2) (2.4) (3.0)
Noncontrolling interest - (1.7) (1.4)
U.S. GAAP net income 118.1 203.4 330.1
Add back share based employee compensation 17.3 - -
Net unrealised Polygon performance fees 1.1 - -
Net Economic Income 136.5 203.4 330.1
</pre> A performance fee of $7.7 million was accrued in Q3 2013 in accordance with TFG's
investment management agreement and based on a "Reference NAV" of Q2 2013. Year to date,
the Investment Manager has earned performance fees of $32.0 million. The hurdle rate for
the Q4 2013 incentive fee has been reset at 2.893708% (Q3 2013: 2.920958%) as per the
process outlined in TFG's 2012 audited financial statements and in accordance with TFG's
investment management agreement.
Please see TFG's website, http://www.tetragoninv.com and the 2012 TFG audited
financial statements for more details on the calculation of this fee.
STATEMENT OF OPERATIONS BY SEGMENT
<pre>
Figure 18
TETRAGON FINANCIAL GROUP
Statement of Operations by Segment Through Q3 2013
Investment
Portfolio TFG AM Total
$MM $MM $MM
(YTD) (YTD) (YTD)
Interest income 158.7 0.2 158.9
Fee income - 43.7 43.7
Other income - cost recovery - 15.4 15.4
Investment and management fee income 158.7 59.3 218.0
Management and performance fees (49.0) (1.7) (50.7)
Other operating and administrative expenses (8.4) (48.1) (56.5)
Share based employee compensation - - (17.3)
Total operating expenses (57.4) (49.8) (124.5)
Net investment income 101.3 9.5 93.5
Net change in unrealised appreciation in investments 10.6 - 10.6
Realised gain on investments 11.0 - 11.0
Realised and unrealised gains from hedging and fx 6.2 - 6.2
Net realised and unrealised gains from investments and fx 27.8 - 27.8
Income taxes (0.7) (2.5) (3.2)
U.S. GAAP net income 128.4 7.0 118.1
Share based employee compensation - - 17.3
Net unrealised Polygon performance fees - 1.1 1.1
Net economic income 128.4 8.1 136.5
</pre><pre>
Figure 19
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 September 2013 and 31 December 2012
Sep-13 Dec-12
$MM $MM
Assets
Investments, at fair value 1,364.4 1,440.4
Management contracts 38.3 43.4
Cash and cash equivalents 256.9 175.9
Amounts due from brokers 42.6 13.1
Derivative financial assets 12.8 7.6
Property, plant and equipment 0.3 -
Deferred tax asset 1.2 -
Other receivables(i) 49.3 15.8
Total assets 1,765.8 1,696.2
Liabilities
Other payables and accrued expenses 45.3 61.7
Amounts payable on share options 7.8 6.6
Income and deferred tax payable 0.3 4.3
Derivative financial liabilities 8.4 2.2
Total liabilities 61.8 74.8
Net assets 1,704.0 1,621.4
</pre> (i) Includes $35 million of cash committed to investments which will migrate to
investments, at fair value in Q4 2013.
STATEMENT OF CASH FLOWS
Figure 20
<pre>
TETRAGON FINANCIAL GROUP
Statement of Cash Flows Through Q3 2011-2013
Q3 2013 Q3 2012 Q3 2011
$MM $MM $MM
(YTD) (YTD) (YTD)
Operating Activities
Operating cash flows after incentive fees and before
movements in working capital 294.5 272.6 155.1
Purchase of fixed assets (0.4) - -
Change in payables/receivables 5.6 (0.3) 6.0
Cash flows from operating activities 299.7 272.3 161.1
Investment Activities
Amounts payable for purchase of investments 0.0
Proceeds on sales of investments
- Net proceeds from swap resets 4.6 - -
- Proceeds sale of bank loans and maturity and prepayment of
investments 91.40 65.6 112.40
- Proceeds on realisation of real estate investments 10.9 0.8 0.0
- Proceeds sale of derivatives - swaptions 2.6 0.0 0.0
- Proceeds sale of CLOs 0.0 0.2 0.0
Purchase of investments
- Purchase of CLOs (46.4) (87.8) (46.6)
- Purchase of bank loans (20.5) (44.6) (129.2)
- Purchase of real estate investments (33.4) (9.8) (1.4)
- Purchase of interest rate swaptions 0.0 - (17.8)
- Investments in asset managers (0.5) (2.7) 0.0
- Investments in equities (85.0) 0.0 0.0
- Investments in credit and convertible bonds (60.0) 0.0 0.0
Cash flows from operating and investing activities 163.4 194.0 78.5
Amounts due from broker (29.5) 2.8 (6.9)
Net purchase of shares (12.7) (17.3) (20.6)
Dividends paid to shareholders (40.1) (37.3) (33.4)
Distributions paid to noncontrolling interest 0.0 (0.8) (2.6)
Cash flows from financing activities (82.3) (52.6) (63.5)
Net increase in cash and cash equivalents 81.1 141.4 15
Cash and cash equivalents at beginning of period 175.9 211.5 140.6
Effect of exchange rate fluctuations on cash and cash
equivalents (0.1) 0.2 0
Cash and cash equivalents at end of period 256.9 353.1 155.6
</pre> U.S.GAAP TO FULLY DILUTED SHARES RECONCILATION
Figure 21 (23)
<pre>
U.S. GAAP to Fully Diluted Shares Reconciliation
30 Sep 2013
Shares (MM)
Legal Shares Issued and Outstanding 134.50
Less: Shares Held In Subsidiary 16.60
Less: Shares Held In Treasury 7.95
Less: Escrow Shares(23.i) 12.29
U.S. GAAP Shares Outstanding 97.66
Add: Manager (IPO) Share Options(23.ii) 0.04
Add: Escrow Shares(23.i) 12.29
Pro Forma Fully Diluted Shares 109.99
</pre> (i) As previously disclosed, on 28 October 2013, approximately 1.2 million non-voting
shares of TFG (together with accrued dividends, the "Vested Shares") that were issued
pursuant to TFG's acquisition in October 2012 of Polygon Management L.P. and certain of
its affiliates (the "Polygon Transaction") will vest with certain persons (other than
Messrs. Griffith and Dear whose shares will not vest on such date) (such persons, the
"Sellers"), all of whom are employees of TFG, pursuant to the Polygon Transaction.
Certain of these employees are entering into a sales trading plan (the "Fixed Trading
Plan") providing for the sale of up to an aggregate of approximately 105,000 Vested Shares
in the market. Beginning on 15 November 2013, a brokerage firm will be authorized to sell
such TFG shares under the Fixed Trading Plan pursuant to certain irrevocable instructions.
The Fixed Trading Plan is intended to comply with TFG's Insider Trading Policy and Rule
10b5 -1 under the United States Securities Exchange Act of 1934, as amended. The Fixed
Trading Plan has been approved by TFG in accordance with its Insider Trading Policy, and
will expire no later than 28 February 2014. Employees of TFG may enter into additional
trading plans in the future from time to time.
Concurrently with the entry into the Fixed Trading Plan, the Sellers expect to agree
to sell to Messrs. Griffith and Dear on 15 November 2013 an aggregate of approximately
225,000 Vested Shares at a price equal to the volume -weighted average trading price of
the TFG shares over the period from October 1 through October 14, 2013 (adjusted for the
Q3 2013 dividend). Messrs. Griffith and Dear have advised TFG that they have no plans to
dispose of these shares.
For additional information regarding the Polygon Transaction and the future vesting
schedule for shares issued thereunder, see Notes 4 and 9 to the 2012 Tetragon Financial
Group Limited audited financial statements and Note 4 to the 2012 Tetragon Financial Group
Master Fund Limited audited financial statements, each included in the TFG 2012 Annual
Report.
Rule 10b5-1 provides a "safe harbor" that is designed to permit individuals to
establish a pre-arranged plan to buy or sell company stock if, at the time such plan is
adopted, the individuals are not in possession of material, nonpublic information.
APPENDIX I
CERTAIN REGULATORY INFORMATION
This Performance Report constitutes TFG's interim management statement as required
pursuant to Section 5:25e of the Dutch Financial Markets Supervision Act ("FMSA").
Pursuant to Section 5:25e and 5:25m of the FMSA, this report is made public by means of a
press release and has been filed with the Netherlands Authority for the Financial Markets
(Autoriteit Financiele Markten) and also made available to the public by way of
publication on the TFG website (http://www.tetragoninv.com).
An investment in TFG involves substantial risks. Please refer to the Company's website
at http://www.tetragoninv.com for a description of the risks and uncertainties
pertaining to an investment in TFG.
This release does not contain or constitute an offer to sell or a solicitation of an
offer to purchase securities in the United States or any other jurisdiction. The
securities of TFG have not been and will not be registered under the U.S. Securities Act
of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United
States or to U.S. 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 U.S. 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 FMSA as a collective investment scheme from a designated country. This release
constitutes regulated information ("gereglementeerde informative") within the meaning of
Section 1:1 of the FMSA.
APPENDIX II
FAIR VALUE DETERMINATION OF TFG'S CLO EQUITY INVESTMENTS
In accordance with the valuation policies set forth on the company's website, the
values of TFG's CLO equity investments are determined using a third-party cash flow
modeling tool. The model contains certain assumption inputs that are reviewed and adjusted
as appropriate to factor in how historic, current and potential market developments
(examined through, for example, forward- looking observable data) might potentially impact
the performance of TFG's CLO equity investments. Since this involves modeling, among other
things, forward projections over multiple years, this is not an exercise in recalibrating
future assumptions to the latest quarter's historical data.
Subject to the foregoing, when determining the U.S. GAAP-compliant fair value of TFG's
portfolio, the company seeks to derive a value at which market participants could transact
in an orderly market and also seeks to benchmark the model inputs and resulting outputs to
observable market data when available and appropriate.
Forward-looking CLO Equity Cash Flow Modeling Assumptions Unchanged in Q3 2013
The Investment Manager reviews and, when appropriate, adjusts in consultation with
TFG's audit committee, the CLO equity investment portfolio's modeling assumptions as
described above. At the end of Q3 2013, key assumptions relating to defaults, recoveries,
prepayments and reinvestment prices were unchanged from the previous quarter. This was the
case across both U.S. and European deals.
<pre>
Figure 22
U.S. Deals
Variable Year Current Assumptions
CADR
2013-2014 1.0x WARF-implied default rate (2.2%)
2015-2017 1.25x WARF-implied default rate (2.7%)
Thereafter 1.0x WARF-implied default rate (2.2%)
Recovery Rate
Until deal maturity 73%
Prepayment Rate
Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price
Until deal maturity 100%
</pre><pre>
Figure 23
European Deals
Variable Year Current Assumptions
CADR
2013-2014 1.5x WARF-implied default rate (3.1%)
2015-2017 1.25x WARF-implied default rate (2.6%)
Thereafter 1.0x WARF-implied default rate (2.1%)
Recovery Rate
Until deal maturity 68%
Prepayment Rate
Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price
Until deal maturity 100%
</pre> APPENDICES
APPENDIX II (Continued)
These key average assumption variables include the modeling assumptions disclosed as a
weighted-average (by U.S. dollar amount) of the individual deal assumptions, aggregated by
geography (i.e. U.S. and European). Such weighted averages may change from month to month
due to movements in the amortised costs of the deals, even without changes to the
underlying assumptions. Each individual deal's assumptions may differ from this
geographical average and vary across the portfolio.
The reinvestment price, assumptions about reinvestment spread and reinvestment life
are also input into the model to generate an effective spread over LIBOR. Newer vintage
CLOs may have a higher weighted-average reinvestment spread over LIBOR or shorter
reinvestment life assumptions than older deals. Across the entire CLO portfolio, the
reinvestment price assumption of 100% for U.S. deals and European deals with their
respective assumed weighted-average reinvestment spreads, generates an effective spread
over LIBOR of approximately 288 bps on broadly syndicated U.S. loans, 272 bps on European
loans, and 328 bps on middle market loans.
Application of Discount Rate to Projected U.S. Pre-Crisis CLO Equity Cash Flows:
European Discount Rates Recalibrated; U.S. Discount Rates Unchanged
In determining the applicable rates to use to discount projected cash flows, an
analysis of observable risk premium data is undertaken. For U.S. CLOs, observable risk
premia such as BB and BBB CLO tranche spreads maintained reductions which had been
observed in previous quarters, and continued to edge lower. For example, according to
Citibank research, BB spreads, which were 6.5% at the end of Q2 2013, finished Q3 2013 at
5.6%, whilst BBB spreads marginally decreased quarter on quarter.(24) Taking this into
account, whilst also considering other market and deal related factors, the discount rates
for the U.S. deals have, for now, been maintained at 15.0% for strong deals and 20.0% for
other deals. Stability around these levels will be monitored closely as we move through
Q4.
European observable risk premia, such as BB and BBB CLO tranche spreads, like their
U.S. counterparts, have followed a downward trajectory since the middle of 2012. Taking
the BB spreads for example, they have reduced from 22.0% at the end of Q2 2012 to 11.9% at
the end of Q1 2013, then decreased further into Q3 2013 to 9.9%.(25) This tightening has
resulted not just in a reduction of the European CLO mezzanine spreads at an absolute
level, but also relatively when compared to the equivalent U.S. rates. For example, the
differential between U.S. and European BB spreads has narrowed from 8.2% a year ago to
approximately 4.3% at the end of Q3 2013.(26)
Whilst there remain certain factors which may support a differential between European
and U.S. spreads, such as the CCC and O/C ratios in European deals and the higher risks
connected with the ongoing Eurozone issue, observable data and other evidence are
supportive of a reduction in the differential between the discount rates which are being
applied to deals from these two geographies. Consequently, the discount rate applied to
European deal projected cash flows has been reduced to 20.0% from 22.5%. We will continue
to monitor observable factors in determining the appropriate discount rate as we move
towards the end of the year.
Historically, we have characterized the difference arising where fair value is lower
than the amortised cost for the portfolio, which can occur when the discount rates used to
discount future cash flows when determining fair value are higher than the modeled IRRs,
as the "ALR Fair Value Adjustment" or "ALR". For European deals, at the end of Q3 2013 the
ALR was $51.0 million compared to $56.4 million at the end of Q2 2013. As explained in
prior reports, the ALR is now zero for U.S. deals.
APPENDICES
APPENDIX II (Continued)
U.S. Post-Crisis CLOs-Discount Rates Remain at Deal IRRs
The applicable discount rate for U.S. Post-Crisis CLOs is determined with reference to
each deal's specific IRR, which, in the absence of other observable data points, is deemed
to be the most appropriate indication of the current risk premium on these structures. At
the end of Q3 2013, the weighted-average discount rate (and IRR) on these deals was 10.3%.
Such deals represented approximately 16.9% of the CLO equity portfolio by fair value (down
from 18.3% at the end of Q2 2013). We will continue to monitor observable data on these
newer vintage transactions to determine whether the IRR remains the appropriate discount
rate.
Effect on Fair Value and Net Income of Recalibration of Certain Discount Rates
Overall, the net impact of the recalibration of European discount rates described
above led to an overall increase in fair value of the total CLO equity portfolio of
approximately $9.1 million, or $6.8 million in bottom line net income.
APPENDIX III
CLO MARKET COMMENTARY
<pre>
- U.S. leveraged loan default rate rises: The U.S. lagged 12-month loan
default rate rose to 2.41% by principal amount at the end of Q3 2013, up from 1.37% at
the end of Q2 2013.(27) Despite the increase, the trailing 12-month U.S. loan default
rate remains below the 3.2% historical average.(28) TFG's lagging 12-month loan
default rate increased to 1.8% at the end of Q3 2013, up from 1.5% at the end of Q2
2013.(29) The graph below summarizes three-year history for both TFG and the U.S.
market-wide loan default rates.
</pre> [Figure 24]
<pre>
- U.S. and European primary loan issuance remains robust despite
deceleration: Institutional U.S. loan issuance volumes declined modestly to $100.8
billion in Q3 2013 vs. $116.9 billion in Q2 2013.(30) Nonetheless, total institutional
loan issuance for the first nine months of 2013 totalled $367.0 billion, up 79.0%
versus the prior year and only slightly below the prior 2007 full-year record, placing
the market on a path to exceed that record should issuance continue at this pace.(31)
European institutional leveraged loan issuance also declined to EUR8.7 billion in Q3
2013, down from EUR14.6 billion in Q2 2013, but year to date institutional volumes,
totalling EUR31.1 billion, are up 173.0% vs. the prior year.(32)
- U.S. loan refinancing activity slows while M&A volumes rise: U.S. leveraged
loan issuers executed $28.9 billion of leveraged loan re-pricings during Q3 2013
representing a significant decline from $71.1 billion of such amendments executed in
Q2 2013.(33) Conversely, M&A-linked volumes reached a post-credit crunch high at $44.3
billion of institutional loans, up from $27.2 billion in Q2 2013.(34)
- Loan performance positive year to date as European loan returns outpace the
U.S.: The U.S. S&P/LSTA Leveraged Loan Index returned 3.53% year to date as of the end
of Q3 2013.(35) Total returns on the S&P European Leveraged Loan Index ("ELLI") stood
at 6.15% year to date (including currency effects), outperforming the U.S. market and
reflecting strong technical market conditions.(36)
</pre> APPENDIX III (Continued)
<pre>
- U.S. repayments decline but rise in Europe: The U.S. S&P/LSTA Leveraged
Loan Index repayment rate declined to 4.6% during Q3 2013 vs. 13.9% in Q2 2013.(37)
Prepayments within the S&P European Leveraged Loan Index ("ELLI"), on the other hand,
rose to 11.0% during Q3 2013, up from 10.0% in the prior quarter.(38) Q3 2013 was the
first quarter since 2012 that the European quarterly loan repayment rate outpaced the
U.S. rate.(39)
- U.S. and European CLO junior O/C ratios remain range-bound: During Q3 2013,
average O/C ratios of U.S. and European CLOs remained broadly stable with marginal
changes as compared with the end of Q2 2013. According to Morgan Stanley, the median
junior O/C test cushion for U.S. CLOs rose slightly to 5.17% at the end of Q3 2013(40)
vs. 5.12% in Q2 2013.(41) The median junior O/C test cushion for Euro CLOs declined to
0.84% at the end of Q3 2013(42) vs. 0.86% at the end of the prior quarter.(43)
- U.S. arbitrage CLO issuance volumes decline vs. prior quarters: U.S. arbitrage
cash flow CLO issuance totalled $15.1 billion in Q3 2013, down from $16.0 billion in
Q2 2013 and $26.3 billion in Q1 2013.(44) This decline reflected multiple headwinds,
including a tightening of the equity "arbitrage funding gap" as AAA liability spreads
remained persistently high in the face of generally tightening loan spreads as well as
continued regulatory uncertainty with respect to U.S. CLO risk-retention. Nonetheless,
year to date issuance of $57.4 billion has already exceeded the 2012 total,(45) and
market participants anticipate that issuance will continue at a measured pace during
the remainder of the year.
</pre> APPENDIX IV
ADDITIONAL CLO PORTFOLIO STATISTICS
<pre>
- CLO Portfolio Credit Quality: The weighted-average WARF across all of
TFG's CLO equity investments stood at approximately 2,553 as of the end of Q3 2013.
Each of these foregoing statistics represents a weighted-average summary (weighted by
initial cost) of all of our deals. Each individual deal's metrics will differ from
these averages and vary across the portfolio.
</pre> Figure 25
<pre>
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
ALL CLOs 2013 2013 2013 2012 2012 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+
or
Below
Obligors: 4.9% 5.0% 5.1% 6.0% 6.4% 5.7% 6.2% 7.0% 7.0% 7.2% 7.6% 8.3%
WARF: 2,553 2,568 2,541 2,599 2,605 2,578 2,588 2,624 2,614 2,642 2,664 2,671
</pre><pre>
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
U.S. CLOs 2013 2013 2013 2012 2012 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+
or
Below
Obligors: 3.9% 4.1% 4.0% 4.5% 4.9% 4.2% 4.8% 5.5% 5.5% 5.8% 6.5% 6.9%
WARF: 2,534 2,550 2,510 2,524 2,528 2,491 2,504 2,533 2,522 2,542 2,591 2,622
</pre><pre>
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
EUR CLOs 2013 2013 2013 2012 2012 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+
or
Below
Obligors: 9.1% 8.7% 9.7% 11.7% 12.2% 11.6% 11.1% 12.3% 12.0% 12.3% 11.4% 13.1%
WARF: 2,631 2,642 2,670 2,896 2,903 2,910 2,900 2,948 2,941 2,997 2,914 2,837
</pre> CLO EQUITY PORTFOLIO DETAILS AS OF 30 SEPTEMBER 2013
<pre>
Figure 26 part 1
Tetragon Financial Group Limited (TFG)
CLO Portfolio Details
As of 30 September 2013
Original
Original Deal End of Wtd Avg Cost of
Invest. Cost Closing Year of Reinv Spread Funds
Transaction(i) Deal Type ($MM USD)(ii) Date Maturity Period (bps)(iii)(bps)(iv)
Transaction 1 EUR CLO 37.5 2007 2024 2014 374 55
Transaction 2 EUR CLO 29.7 2006 2023 2013 387 52
Transaction 3 EUR CLO 22.2 2006 2022 2012 414 58
Transaction 4 EUR CLO 33.0 2007 2023 2013 422 48
Transaction 5 EUR CLO 36.9 2007 2022 2014 413 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 386 51
Transaction 7 EUR CLO 38.5 2007 2023 2013 402 46
Transaction 8 EUR CLO 26.9 2005 2021 2011 394 53
Transaction 9 EUR CLO 41.3 2007 2023 2013 423 50
Transaction 10 EUR CLO 27.0 2006 2022 2012 385 50
EUR CLO Subtotal: 326.3 400 52
Transaction 11 US CLO 20.5 2006 2018 2012 311 45
Transaction 12 US CLO 22.8 2006 2019 2013 346 46
Transaction 13 US CLO 15.2 2006 2018 2012 336 47
Transaction 14 US CLO 26.0 2007 2021 2014 351 49
Transaction 15 US CLO 28.1 2007 2021 2014 417 52
Transaction 16 US CLO 23.5 2006 2020 2013 399 46
Transaction 17 US CLO 26.0 2007 2021 2014 337 40
Transaction 18 US CLO 16.7 2005 2017 2011 306 45
Transaction 19 US CLO 1.2 2005 2017 2011 306 45
Transaction 20 US CLO 26.6 2006 2020 2012 423 52
Transaction 21 US CLO 20.7 2006 2020 2012 410 53
Transaction 22 US CLO 37.4 2007 2021 2014 421 53
Transaction 23 US CLO 19.9 2007 2021 2013 320 66
Transaction 24 US CLO 16.9 2006 2018 2012 420 46
Transaction 25 US CLO 20.9 2006 2018 2013 408 46
Transaction 26 US CLO 27.9 2007 2019 2013 426 43
Transaction 27 US CLO 23.9 2007 2021 2014 560 51
Transaction 28 US CLO 7.6 2007 2021 2014 560 51
Transaction 29 US CLO 19.1 2005 2018 2011 392 66
Transaction 30 US CLO 12.4 2006 2018 2012 435 67
Transaction 31 US CLO 9.5 2005 2017 2012 308 52
Transaction 32 US CLO 24.0 2007 2021 2014 318 59
Transaction 33 US CLO 16.2 2006 2020 2012 363 56
Transaction 34 US CLO 22.2 2006 2020 2012 364 50
Transaction 35 US CLO 23.6 2006 2018 2012 450 52
Transaction 36 US CLO 28.4 2007 2021 2013 420 46
Transaction 37 US CLO 9.3 2005 2017 2011 292 50
Transaction 38 US CLO 23.7 2007 2021 2013 322 42
Transaction 39 US CLO 7.8 2005 2017 2011 429 70
Transaction 40 US CLO 13.0 2006 2020 2011 377 39
Transaction 41 US CLO 22.5 2006 2020 2013 375 48
Transaction 42 US CLO 22.4 2007 2021 2014 388 47
Transaction 44 US CLO 22.3 2006 2018 2012 318 54
Transaction 45 US CLO 23.0 2006 2018 2012 304 46
Transaction 46 US CLO 21.3 2007 2019 2013 301 51
Transaction 47 US CLO 28.3 2006 2021 2013 314 47
Transaction 48 US CLO 23.0 2006 2019 2013 330 46
Transaction 49 US CLO 12.6 2005 2017 2011 362 40
Transaction 50 US CLO 12.3 2006 2018 2012 345 40
Transaction 51 US CLO 18.0 2007 2020 2013 360 53
Transaction 54 US CLO 0.5 2005 2017 2012 336 56
Transaction 55 US CLO 0.3 2005 2017 2011 344 39
Transaction 56 US CLO 23.0 2007 2019 2014 371 42
Transaction 57 US CLO 0.6 2007 2019 2014 371 42
Transaction 58 US CLO 21.8 2007 2019 2014 374 49
Transaction 59 US CLO 0.4 2007 2019 2014 374 49
Transaction 61 US CLO 18.8 2010 2021 2014 346 45
Transaction 62 US CLO 29.1 2007 2021 2014 329 42
Transaction 63 US CLO 25.3 2007 2020 2013 380 53
Transaction 64 US CLO 27.3 2007 2021 2013 409 38
Transaction 65 US CLO 15.4 2007 2021 2013 378 47
Transaction 66 US CLO 26.9 2006 2021 2013 311 49
Transaction 67 US CLO 21.3 2006 2020 2013 322 46
Transaction 68 US CLO 27.3 2007 2022 2014 356 48
Transaction 69 US CLO 19.3 2006 2020 2013 369 44
Transaction 70 US CLO 28.2 2007 2019 2013 293 52
Transaction 71 US CLO 24.6 2006 2020 2013 345 40
Transaction 72 US CLO 1.7 2006 2018 2012 371 42
Transaction 73 US CLO 4.8 2007 2019 2014 371 42
Transaction 74 US CLO 1.9 2007 2019 2014 374 49
Transaction 75 US CLO 5.5 2007 2019 2014 399 168
Transaction 76 US CLO 32.7 2011 2022 2014 304 46
Transaction 77 US CLO 1.9 2006 2018 2012 404 212
Transaction 78 US CLO 14.5 2011 2023 2016 491 217
Transaction 79 US CLO 22.9 2012 2023 2015 417 215
Transaction 80 US CLO 19.4 2012 2022 2015 416 185
Transaction 81 US CLO 22.7 2012 2022 2016 452 216
Transaction 82 US CLO 21.7 2012 2024 2016 425 206
Transaction 83 US CLO 25.4 2012 2022 2016 479 193
Transaction 84 US CLO 20.8 2013 2025 2017 411 183
Transaction 85 US CLO 24.6 2013 2023 2017 404 170
US CLO Subtotal: 1,327.1 379 72
Total CLO Portfolio: 1,653.3 383 68
</pre><pre>
Figure 26 part 2
Tetragon Financial Group Limited (TFG)
CLO Portfolio Details
As of 30 September 2013
Annualized
Current Current Jr- Jr-Most O/C (Loss) Gain ITD Cash
Cost of Most O/C Cushion at of Cushion Received
Funds Cushion(vi) Close(vii) (viii) IRR(ix) as % of
Transaction(i) (bps)(v) Cost(x)
Transaction 1 58 0.88% 3.86% (0.48%) 0.6% 29.6%
Transaction 2 60 0.71% 3.60% (0.42%) 9.6% 96.1%
Transaction 3 81 4.67% 5.14% (0.06%) 12.1% 121.4%
Transaction 4 47 5.49% 5.76% (0.04%) 15.6% 107.8%
Transaction 5 59 0.91% 5.74% (0.78%) 9.4% 74.8%
Transaction 6 60 (0.13%) 4.70% (0.66%) 5.3% 49.7%
Transaction 7 45 1.32% 3.64% (0.36%) 6.0% 31.9%
Transaction 8 58 2.82% 4.98% (0.27%) 8.7% 90.6%
Transaction 9 49 1.69% 6.27% (0.71%) 6.5% 62.9%
Transaction 10 57 0.87% 4.54% (0.51%) 4.4% 36.6%
EUR CLO Subtotal: 56 1.80% 4.84% (0.45%) 67.1%
Transaction 11 50 7.11% 4.55% 0.36% 20.3% 176.9%
Transaction 12 52 8.09% 4.45% 0.53% 20.2% 175.0%
Transaction 13 49 5.00% 4.82% 0.03% 21.1% 190.5%
Transaction 14 50 2.98% 5.63% (0.40%) 18.7% 166.5%
Transaction 15 48 3.56% 4.21% (0.10%) 29.2% 212.8%
Transaction 16 45 3.37% 4.44% (0.15%) 21.1% 188.6%
Transaction 17 40 4.48% 4.24% 0.04% 23.6% 181.2%
Transaction 18 54 11.17% 4.77% 0.81% 19.7% 187.9%
Transaction 19 54 11.17% 4.77% 0.81% 23.6% 182.1%
Transaction 20 67 5.47% 5.28% 0.03% 22.1% 190.8%
Transaction 21 69 5.26% 4.76% 0.07% 18.5% 170.4%
Transaction 22 53 2.92% 5.00% (0.32%) 21.2% 168.0%
Transaction 23 89 5.12% 4.98% 0.02% 19.7% 170.1%
Transaction 24 49 5.91% 4.17% 0.24% 18.2% 157.4%
Transaction 25 48 7.01% 4.13% 0.43% 22.6% 181.6%
Transaction 26 47 5.78% 4.05% 0.26% 19.6% 161.7%
Transaction 27 51 10.83% 6.11% 0.70% 32.7% 230.8%
Transaction 28 51 10.83% 6.11% 0.70% 44.0% 156.6%
Transaction 29 236 23.26% 4.82% 2.31% 17.8% 171.2%
Transaction 30 96 4.33% 5.16% (0.11%) 18.2% 163.6%
Transaction 31 86 7.24% 5.02% 0.27% 16.0% 184.5%
Transaction 32 59 4.03% 5.57% (0.25%) 21.0% 165.3%
Transaction 33 123 8.75% 6.99% 0.23% 13.8% 153.4%
Transaction 34 61 6.04% 6.66% (0.09%) 18.8% 173.7%
Transaction 35 124 11.95% 5.00% 0.96% 18.7% 172.7%
Transaction 36 60 2.76% 5.18% (0.37%) 19.6% 160.4%
Transaction 37 129 17.73% 4.34% 1.67% 14.7% 162.8%
Transaction 38 45 4.19% 5.07% (0.13%) 27.6% 206.6%
Transaction 39 447 72.52% 3.15% 8.73% 9.3% 89.6%
Transaction 40 52 N/A N/A N/A 21.2% 180.6%
Transaction 41 49 4.16% 4.71% (0.08%) 21.8% 181.0%
Transaction 42 48 4.92% 3.92% 0.15% 22.0% 173.1%
Transaction 44 156 9.61% 4.16% 0.74% 9.7% 124.3%
Transaction 45 72 3.06% 4.46% (0.21%) 8.3% 111.4%
Transaction 46 71 1.85% 4.33% (0.39%) 7.2% 99.9%
Transaction 47 43 2.82% 4.34% (0.22%) 21.5% 182.5%
Transaction 48 55 3.40% 5.71% (0.33%) 15.5% 142.9%
Transaction 49 58 5.86% 3.94% 0.24% 12.3% 124.4%
Transaction 50 51 6.14% 4.25% 0.26% 13.3% 127.2%
Transaction 51 55 5.12% 4.47% 0.10% 21.2% 173.8%
Transaction 54 151 18.17% 3.69% 1.72% 54.6% 919.4%
Transaction 55 86 22.02% 3.59% 2.26% 58.4% 879.0%
Transaction 56 42 4.58% 4.53% 0.01% 22.8% 180.1%
Transaction 57 42 4.58% 4.53% 0.01% 48.9% 1000.9%
Transaction 58 49 3.61% 4.04% (0.07%) 25.1% 188.1%
Transaction 59 49 3.61% 4.04% (0.07%) 52.7% 1392.9%
Transaction 61 45 2.45% 4.04% -0.25% 17.7% 139.6%
Transaction 62 43 4.10% 5.20% (0.17%) 22.3% 184.2%
Transaction 63 53 2.12% 4.78% (0.43%) 19.4% 161.9%
Transaction 64 44 N/A N/A N/A 22.9% 178.9%
Transaction 65 55 4.33% 4.96% (0.09%) 15.3% 129.8%
Transaction 66 49 3.45% 4.05% (0.09%) 22.4% 187.1%
Transaction 67 45 4.16% 4.38% (0.03%) 20.5% 167.3%
Transaction 68 48 5.70% 4.41% 0.19% 27.4% 225.5%
Transaction 69 44 6.91% 5.61% 0.20% 26.6% 210.1%
Transaction 70 52 4.96% 6.21% (0.18%) 18.9% 162.8%
Transaction 71 51 6.14% 4.25% 0.26% 25.8% 92.8%
Transaction 72 42 4.58% 4.53% 0.01% 20.6% 82.3%
Transaction 73 42 4.58% 4.53% 0.01% 20.6% 82.3%
Transaction 74 49 3.61% 4.04% (0.07%) 22.5% 86.8%
Transaction 75 168 4.57% 4.05% 0.23% 12.1% 47.6%
Transaction 76 72 3.06% 2.43% 0.09% 33.3% 100.7%
Transaction 77 213 5.63% 5.04% 0.33% 12.7% 29.6%
Transaction 78 217 5.34% 4.00% 0.79% 14.4% 39.0%
Transaction 79 215 4.26% 4.00% 0.16% 7.2% 29.7%
Transaction 80 185 4.26% 4.17% 0.06% 10.9% 27.7%
Transaction 81 217 4.57% 4.00% 0.55% 7.6% 16.6%
Transaction 82 207 4.16% 4.00% 0.16% 8.1% 17.1%
Transaction 83 193 6.24% 4.02% 3.65% 11.9% 7.7%
Transaction 84 184 4.17% 4.02% 0.25% 8.3% 14.8%
Transaction 85 170 5.07% 4.00% 4.89% 7.4% 2.2%
US CLO Subtotal: 85 5.70% 4.59% 0.23% 148.1%
Total CLO Portfolio: 79 4.92% 4.64% 0.09% 131.9%
</pre> Notes
(i) Transactions are investments made on a particular investment date. Multiple
transactions may be associated with the same tranche of the same CLO deal. Note that
Transaction 60 was removed from the table above, as the remaining value of the assets of
the CLO is immaterial. Transaction 60 continues to be held as of 30 September 2013.
(ii) The USD investment cost reflects a USD-EUR exchange rate fixed at a single
historical rate to avoid the impact of skewed weightings and FX volatility over time. As
such, the investment costs of European CLOs as shown in this table may not be comparable
to the investments costs as shown in TFG's financial statements.
(iii) Par weighted-average spread over LIBOR or EURIBOR (as appropriate) of the
underlying loan assets in each CLO's portfolio.
(iv) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the
debt tranches issued by each CLO, as of the closing date of each transaction.
(v) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the
debt tranches issued by each CLO, as of the most recent trustee report date.
(vi) The current junior-most O/C cushion is the excess (or deficit) of the junior-most
O/C test ratio over the test requirement, as of the latest trustee report available as of
the report date.
(vii) The junior-most O/C cushion at close is the excess (or deficit) of the
junior-most O/C test ratio over the test requirement that was expected on each deal's
closing date. Please note that two of TFG's investments are so called "par structures"
which don't include a junior O/C test. They have been marked by an "N/A" in the relevant
junior-most O/C test columns.
(viii) Calculated by annualizing the change from the expected closing date junior-most
O/C cushion to the current junior-most O/C cushion.
(ix) Calculated from TFG's investment date. Includes both historical cash flows
received to-date and prospective cash flows expected to be received, based on TFG's base
case modeling assumptions.
(x) Inception to report date cash flow received on each transaction as a percentage of
its original cost.
CLO EQUITY PORTFOLIO DETAILS (CONTINUED) AS OF 30 SEPTEMBER 2013
[Figure 27]
APPENDICES
BOARD OF DIRECTORS
<pre>
Paddy Dear Reade Griffith Byron Knief*
Rupert Dorey* David Jeffreys* Greville Ward*
</pre> *Independent Director
<pre>
SHAREHOLDER INFORMATION:
Registered Office of TFG and the Master Fund
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
Investment Manager
Tetragon Financial Management LP
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Investor Relations
David Wishnow / Greg Wadsworth
[email protected]
Press Inquiries Brunswick Group
Andrew Garfield
[email protected]
Auditors
KPMG Channel Islands Ltd.
20 New Street
St. Peter Port, Guernsey
Channel Islands GY1 4AN
Sub-Registrar and Transfer Agent
Computershare
One Wall Street
New York, NY 10286
United States of America
Issuing Agent, Dutch Paying and Transfer Agent
Kas Bank N.V.
Spuistraat 172
1012 VT Amsterdam
The Netherlands
Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
One Ropemaker Street
London EC2Y 9HR
United Kingdom
Legal Advisor (as to Guernsey law)
Ogier
Ogier House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GY1 1WA
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam
The Netherlands
Stock Listing
NYSE Euronext in Amsterdam
Administrator and Registrar
State Street (Guernsey) Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
</pre> END NOTES
Executive Summary and Outlook
(1) TFG invests substantially all its capital through a master fund, Tetragon
Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the issued
shares. In this report, unless otherwise stated, we report on the consolidated business
incorporating TFG and TFGMF. References to "we" or "TFM" are to Tetragon Financial
Management LP, TFG's investment manager.
(2) TFG's returns will most likely fluctuate with LIBOR. LIBOR directly flows through
some of TFG's investments and, as it can be seen as the risk-free short-term rate, it
should affect all of TFG's investments. In high-LIBOR environments, TFG should achieve
higher sustainable returns; in low-LIBOR environments, TFG should achieve lower
sustainable returns.
(3) The amount of capital invested during the quarter is net of certain repayments of
capital for directly owned bank loans and real estate funds.
(4) Please see endnote 2 above.
(5) The percentage of TFG's capital that is externally managed is calculated by
dividing the sum of the U.S. GAAP fair value of all investment assets managed by parties
other than TFG or its affiliates, by the total Net Asset Value of the company.
(6) Includes GreenOak funds and advisory assets, AUM for Polygon Recovery Fund LP,
Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master
Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon
Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as
calculated by the applicable administrators for value date 30 September 2013. Includes,
where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG Asset
Management as used in this report includes the assets under management of several
investment advisers, including Tetragon Asset Management L.P., which is an investment
manager registered under the U.S. Investment Advisers Act of 1940.
Key Metrics
(7) Please refer to Financial Highlights on page 17 of this report for the definition
of Return on Equity.
(8) Please see endnote 2 above.
(9) Please refer to Financial Highlights on page 17 of this report for the definition
of Net Economic Income.
(10) Please see Figure 10, "TFG Asset Management Statement of Operations Through Q3
2013" on page 13 for the determination of TFG Asset Management EBITDA.
(11) Please refer to Financial Highlights on page 17 of this report for the definition
of Adjusted EPS.
(12) Please refer to Financial Highlights on page 17 of this report for the definition
of Pro Forma Fully Diluted Shares and Pro Forma Fully Diluted NAV per Share.
Investment Portfolio
(13) 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.
(14) Please note that TFG may hold more than one investment in any CLO transaction
within its portfolio.
(15) Based on the most recent trustee reports available as of 30 September 2013.
(16) S&P/LCD Leveraged Lending Review, Q3 2013.
(17) Based on the most recent trustee reports available as of 30 September 2013.
(18) Based on the most recent trustee reports available as of 30 September 2013.
(19) Assets characterized as "Equities" consist of the fair value of investments in
Polygon-managed equity funds as well as the net assets of, or capital committed to, equity
assets (as applicable) held directly on the balance sheet. Cumulative annualised equity
returns are calculated over TFG's period of investment from 1 December 2012 to 30
September 2013 against the time-weighted average capital invested. Time-weighted average
capital invested is calculated using each investment through 30 September 2013, the actual
number of days and assuming a 365-day year, where the time-weighted capital for
directly-held equities is calculated on the basis of the required amount of margin posted
with all relevant counterparties over the analysis period. TFG invests in Polygon-managed
funds on a preferred fee-basis.
(20) Returns presented reflect the cumulative annualised performance for the asset
type over TFG's period of investment from 1 December 2012 to 30 September 2013 against the
time-weighted average capital invested. Time-weighted average capital invested is
calculated using each investment through 30 September 2013, based on the actual number of
days and assuming a 365-day year. TFG invests in Polygon-managed funds on a preferred
fee-basis.
Financial Tables
(21) Unrealised Polygon performance fees represent the fees calculated by the
applicable administrator of the relevant Polygon funds, in accordance with the applicable
fund constitutional documents, when determining net asset value at quarter end, less
certain assumed costs. Similar amounts, if any, from LCM and GreenOak are excluded from
this line item. Such fees would typically not be realised or recognised under U.S. GAAP
until calendar year end, and are therefore subject to change based on fund performance
during the remainder of the year. There are can be no assurance that the company will
realise all or any portion of such amounts. Through 30 September 2013, this amount
equalled $2.1 million before (1) an assumed imputed tax charge and (2) estimated TFM
performance fees reduced the net contribution to $1.1 million as shown in Figure 10 and
further represented in Figures 17 and 18 of this report.
(22) Pro Forma Fully Diluted NAV per Share seeks to reflect certain potential changes
to the total non-voting shares over the next few years, which may be utilized in the
calculation of NAV per Share. Specifically, the number of shares used to calculate U.S.
GAAP NAV per Share has been adjusted to incorporate:
(i) Shares which have been used as consideration for the acquisition of Polygon and
applicable stock dividends relating thereto, and which are held in escrow and are expected
to be released and incorporated into the U.S. GAAP NAV per Share over a five-year period.
(ii) The number of shares corresponding to the applicable intrinsic value of the
options issued to the Investment Manager at the time of the company's IPO with a strike
price of $10.00, to the extent such options are in the money at period end. The intrinsic
value of the manager (IPO) share options is calculated as the excess of (x) the closing
price of the shares as of the final trading day in the relevant period over (y) $10.00
(being the exercise price per share) times (z) 12,545,330 (being a number of shares
subject to the options before the application of potential anti-dilution). The terms of
exercise under the options allow for exercise using cash, as well as, with the consent of
the board of the Company, certain forms of cashless exercise. Each of these prescribed
methods of exercise may give rise to the issuance of a different number of shares than the
approach described herein. If the options were to be surrendered for their intrinsic value
with the board's consent, rather than exercised, the number of shares issued would equal
the intrinsic value divided by the closing price of the shares as of the final trading day
in the relevant period. This approach has been selected because we currently believe it is
more reasonably illustrative of a likely outcome if the options are exercised. The options
are exercisable until 26 April 2017.
(23) Pro Forma Fully Diluted NAV per Share seeks to reflect certain potential changes
to the total non-voting shares over the next few years, which may be utilized in the
calculation of NAV per Share. Specifically, the number of shares used to calculate U.S.
GAAP NAV per Share has been adjusted to incorporate:
(i) Shares which have been used as consideration for the acquisition of Polygon and
applicable stock dividends relating thereto, and which are held in escrow and are expected
to be released and incorporated into the U.S. GAAP NAV per Share over a five-year period.
(ii) The number of shares corresponding to the applicable intrinsic value of the
options issued to the Investment Manager at the time of the company's IPO with a strike
price of $10.00, to the extent such options are in the money at period end. The intrinsic
value of the manager (IPO) share options is calculated as the excess of (x) the closing
price of the shares as of the final trading day in the relevant period over (y) $10.00
(being the exercise price per share) times (z) 12,545,330 (being a number of shares
subject to the options before the application of potential anti-dilution). The terms of
exercise under the options allow for exercise using cash, as well as, with the consent of
the board of the Company, certain forms of cashless exercise. Each of these prescribed
methods of exercise may give rise to the issuance of a different number of shares than the
approach described herein. If the options were to be surrendered for their intrinsic value
with the board's consent, rather than exercised, the number of shares issued would equal
the intrinsic value divided by the closing price of the shares as of the final trading day
in the relevant period. This approach has been selected because we currently believe it is
more reasonably illustrative of a likely outcome if the options are exercised. The options
are exercisable until 26 April 2017.
Appendix II
(24) Citi Research - "Global Structured Credit Strategy" - 11 October 2013
(25) Citi Research - "Global Structured Credit Strategy" - 11 October 2013
(26) Citi Research - "Global Structured Credit Strategy" - 11 October 2013.
Appendix III
(27) S&P/LCD News, "With one default in September, loan default rate hits 3-year
high," 1 October 2013.
(28) S&P/LCD News, "With one default in September, loan default rate hits 3-year
high," 1 October 2013.
(29) The calculation of TFG's lagging 12-month corporate loan default rate does not
include certain underlying investment collateral that was assigned a "Selective Default"
rating by one or more of the applicable rating agencies. Such Selected Defaults are
included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed
above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes
approximately 14.1% CLOs with primary exposure to European senior secured loans and such
loans are included in the calculation of TFG's corporate default rate.
(30) S&P/LCD Quarterly Review, Q3 2013.
(31) S&P/LCD Quarterly Review, Q3 2013.
(32) S&P/LCD Quarterly Review, Q3 2013.
(33) S&P/LCD Quarterly Review, Q3 2013.
(34) S&P/LCD Quarterly Review, Q3 2013.
(35) S&P/LCD News, "Leveraged loans return 0.24% in September; YTD return is 3.53%," 1
October 2013.
(36) S&P/LCD News, "(EUR) S&P ELLI: ELLI gains 1.02% in September, returns 6.69% YTD,"
8 October 2013.
(37) S&P/LCD Leveraged Lending Review, Q3 2013.
(38) S&P/LCD News, "(EUR) ELLI repayments fall to EUR1.2B in September," 9 October
2013.
(39) S&P/LCD News, "(EUR) ELLI repayments EUR1.6 billion in March," 8 April 2013.
(40) Morgan Stanley CLO Market Tracker, 4 October 2013; based on a surveillance
universe of 405 USD-denominated CLOs and 184 Euro-denominated CLOs.
(41) Morgan Stanley CLO Market Tracker, 9 July 2013; based on a surveillance universe
of 420 USD-denominated CLOs and 184 Euro-denominated CLOs.
(42) Morgan Stanley CLO Market Tracker, 4 October 2013; based on a surveillance
universe of 405 USD-denominated CLOs and 184 Euro-denominated CLOs.
(43) Morgan Stanley CLO Market Tracker, 9 July 2013; based on a surveillance universe
of 420 USD-denominated CLOs and 184 Euro-denominated CLOs.
(44) S&P/LCD Quarterly Review, Q3 2013.
(45) S&P/LCD Quarterly Review, Q3 2013.
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