Tetragon Financial Group Limited (TFG) Performance Report for Period Ended 31 December 2011
LONDON, January 31, 2012 /PRNewswire/ --
Tetragon Financial Group Limited (TFG) is a Guernsey closed-ended investment company traded on Euronext Amsterdam by NYSE Euronext under the ticker symbol "TFG."(1) In this report we provide an update on TFG's results of operations for the period ending December 31, 2011. Please note that the Q4 2011 dividend announcement and accompanying capital distributions data, among other information, will be disclosed in the 2011 Annual Report expected to be published along with 2011 annual audited financial statements on or around March 6, 2012.
- Executive Summary:
Corporate-Level Results
- Operating Results: The company generated EPS of $0.69 (Q3 2011: $0.57 EPS), consolidated net income of $80.3 million (Q3 2011: consolidated net income of $67.3 million) and grew consolidated net assets to $1,474.4 million or $12.71 per share (Q3 2011: consolidated net assets of $1,413.6 million or $12.06 per share). Certain modeling assumption and discount rate changes, which are described in more detail later in this document, contributed approximately $11.7 million to net income, or EPS of $0.10.
- Cash Receipts and Balances: Cash flows from TFG's CLO investments continued to grow in Q4 2011, totaling $113.2 million (Q3 2011: $105.1 million). The cash balance on December 31, 2011 was $211.5 million, up from $155.6 million as of the end of the prior quarter. In addition, TFG held approximately $107.1 million in market value of liquid U.S. leveraged loans as of the end of the year, down slightly from $110.3 million as of the end of Q3 2011.
Investment Portfolio Performance Highlights
- CLO Collateral Performance: TFG's CLO average portfolio statistics continued to outperform market-wide default and CCC-asset holding averages, as credit quality improved during the quarter.
- CLO IRRs: The weighted-average IRR of TFG's CLO equity investments rose to 17.6% at the end of Q4 2011, up from 16.8% at the end of Q3 2011. This reflected, among other factors, certain changes in TFG's modeling assumptions (please refer to pages 9-13 of this document for additional information) as well as continued structural strength and improving excess interest margins of certain of our CLOs' underlying investments.
- New CLO Equity Investments: During Q4 2011, we invested approximately $14.5 million in the equity tranche of a new issue CLO managed by a third-party investment manager already represented within TFG's existing CLO portfolio. Consistent with aspects of our current investment strategy, this investment represented a majority of the CLO equity tranche. During the course of Q4 2011 we also made a secondary add-on purchase of approximately $1.9 million of an equity tranche of an existing TFG U.S. CLO.
- New CLO Mezzanine Debt Investments: Early in Q1 2012, we invested approximately $1.1 million in a mezzanine debt tranche of a U.S. CLO already represented within TFG's CLO equity portfolio.(2) We believe that certain mezzanine debt tranches may offer attractive risk-adjusted returns given their credit enhancement levels, potential for price appreciation in light of improving credit quality, end of CLOs' reinvestment periods, and rating upgrades, as well as the favorable impact of early optional redemptions. While historically we have focused exclusively on the equity tranches of CLOs, we may seek to make similar opportunistic mezzanine debt investments if and when appropriate.
- Direct Loan Investments: TFG held direct loans with a fair value of $107.1 million at the end of Q4 2011, down from $110.3 million as of the end of the prior quarter, as the company realized some positions. The direct loan portfolio performed well during this period, experiencing no defaults or downgrades and benefiting from market value gains.
Asset Management Platform
- LCM: LCM continued to perform well during Q4 2011, with all of LCM Cash Flow CLOs(3)continuing to pay senior and subordinated management fees. As of the end of the year, total loan assets under management were approximately $3.4 billion, unchanged from the prior quarter.
- GreenOak: GreenOak continues to build its team and execute on its business growth strategy.
Performance Fee
A performance fee of $23.2 million was accrued in Q4 2011 in accordance with TFG's investment management agreement and based on a "Reference NAV" of Q3 2011. The hurdle rate for Q1 2012 incentive fee has been reset at 3.2304% (Q4 2011: 3.0255%) as per the process outlined in TFG's 2010 Audited Financial Statements and in accordance with TFG's investment management agreement.(4)
- Investment Portfolio Performance Details:
- CLO Portfolio Size: As of the end of Q4 2011, the estimated total fair value of TFG's CLO equity investment portfolio was approximately $1,147.4 million (consisting of $1,024.0 million of U.S. investments and $123.4 million of European investments), up from approximately $1,138.6 million as of the end of the prior quarter ($984.6 million of U.S. investments and $154.0 million of European investments). TFG's total indirect exposure to leveraged loans through its CLO equity investments was approximately $18.4 billion as ofthe end of Q4 2011.(5)
- CLO Portfolio Composition: With the additional investments made during the fourth quarter, the CLO equity portfolio increased to 77 transactions as of the end of Q4 2011, up from 75 as of the end of the prior quarter. For the same period, the number of deals in the portfolio increased to 68 from 67 as of the end of the prior quarter. The number of external CLO managers remained unchanged from Q3 2011, at 27.(6)
- CLO Collateral Performance: As of the end of Q4 2011, approximately 97% of TFG's CLO equity investments were passing their junior-most O/C tests, weighted by fair value, down from 98% as of the end of Q3 2011.(7) Similarly, 64, or approximately 94%, of the company's CLO equity investments were passing their junior-most O/C tests as of the end of Q4 2011, compared to 64, or approximately 96% as of the end of Q3 2011.(8)
TFG's U.S. CLOs performed well during the quarter with 100% of them by fair value and 100% by number passing their junior-most O/C tests (note that U.S. CLOs represented approximately 89.2% of the total fair value of TFG's CLO equity investment portfolio as of December 31, 2011).(9,10) In comparison, the market-wide average of U.S. CLOs estimated to be passing their junior O/C tests as of the end of Q4 2011 was approximately 93.9% (when measured on a percentage of transactions basis).(11)
- CLO Portfolio Credit Quality: As of December 31, 2011, the weighted-average percentage of corporate obligors rated Caa1/CCC+ or below across all of TFG's CLO equity investments was 7.0% compared to an approximate 7.8% weighted-average maximum level permitted under the terms of our investments.(12) For TFG's U.S. CLO equity investments, the weighted-average percentage of CCC assets was 5.5%, with a weighted-average maximum permitted level of 8.4%. In comparison, the market-wide median CCC asset holdings of U.S. CLOs was estimated to be approximately 7.7% as of the end of Q4 2011.(13) TFG's European CLO equity investments saw average CCC holdings of 12.3% as of the end of 2011, against a 5.7% weighted-average permitted level.
The weighted-average WARF across all of TFG's CLO equity investments stood at approximately 2,624 as of the end of Q4 2011. Weighted-average WARF levels for U.S. and European deals were 2,533 and 2,948 respectively. Each of these foregoing statistics represents a weighted-average summary of all of our 68 deals.(14) Each individual deal's metrics will differ from these averages and vary across the portfolio.
ALL CLOs Q4 2011 Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010
Caa1/CCC+ or Below Obligors: 7.0% 7.0% 7.2% 7.6% 8.3% 9.6%
WARF: 2,624 2,614 2,642 2,664 2,671 2,658
(table continues)
ALL CLOs Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008
Caa1/CCC+ or Below
Obligors: 10.5% 11.1% 12.0% 12.6% 11.6% 11.4% 7.6%
WARF: 2,706 2,762 2,809 2,813 2,800 2,758 2,577
US CLOs Q4 2011 Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010
Caa1/CCC+ or Below Obligors: 5.5% 5.5% 5.8% 6.5% 6.9% 7.9%
WARF: 2,533 2,522 2,542 2,591 2,622 2,610
(table continues)
US CLOs Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 2008
Caa1/CCC+ or Below Obligors: 8.4% 9.4% 12.0% 12.8% 11.9% 12.1% 8.6%
WARF: 2,648 2,719 2,799 2,824 2,831 2,810 2,630
Q4 Q2
EUR CLOs 2011 Q3 2011 2011 Q1 2011 Q4 2010 Q3 2010
Caa1/CCC+ or Below Obligors: 12.3% 12.0% 12.3% 11.4% 13.1% 15.3%
WARF: 2,948 2,941 2,997 2,914 2,837 2,817
(table continues)
Q2 Q4
EUR CLOs 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 2008
Caa1/CCC+ or Below Obligors: 17.4% 16.8% 15.6% 12.0% 10.8% 8.8% 4.1%
WARF: 2,898 2,907 2,845 2,779 2,696 2,587 2,403
- TFG and Market Default Rates: TFG's lagging 12-month corporate loan default rate decreased to 0.4% during the fourth quarter.(15) Drilling down by geography, TFG's U.S. CLO equity investments registered a lagging 12-month default rate of 0.3%, with European CLO equity investments at 1.0%. By comparison, the lagging 12-month U.S. institutional loan default rate fell to 0.2% by principal amount as of December 31, 2011, according to S&P/LCD, down from approximately 0.3% during the prior quarter.(16) The lagging 12-month default rate for the S&P European Leveraged Loan Index (ELLI) stood at 4.1% as of the end of December 31, 2011.(17) Please refer to Figure 4 below for a historical summary of TFG's CLO equity investments' default performance.
- Direct Loan Investments: As of December 31, 2011, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $111.1 million and total fair value of $107.1 million. The underlying businesses performed well during the quarter, with the loan portfolio trading up to approximately 96% of par from an average price of 94% of par, and with no defaults registered in the portfolio. For the quarter, there were net realized gains of approximately $0.3 million bringing the year-to-date net realized gains to approximately $0.9 million. In addition, the portfolio earned $1.5 million of interest income and discount premium during the fourth quarter, bringing this year's total to $5.8 million.
- Real Estate Investments: TFG has funded a small portion of its investment capital commitments to GreenOak's investment projects, totaling approximately $2.4 million from inception through the end of Q4 2011 to finance recent investments in Japan and the U.S.
- Asset Management Platform Details:
- LCM Developments: LCM's operating results and financial performance remained strong throughout Q4 2011, with all senior and subordinated CLO management fees on LCM Cash Flow CLOs current as of December 31, 2011.Taking into account all LCM-managed vehicles, the gross income for Q4 2011 for LCM totaled $4.3 million, compared to an average quarterly fee income in 2010 of approximately $3.2 million. Pre-tax profit for the entire LCM business, of which TFG owns 75%, was approximately $2.2 million as of the same period (2010 quarterly average of $1.4 million). TFG continues to leverage and benefit from the LCM team's expertise in the ongoing management of the company's direct loan investment portfolio.
LCM Asset Management Performance Snapshot
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
2011 2011 2011 2011 2010 2010 2010 2010
Gross Fee Income ($MM) $4.3 $4.4 $3.9 $3.8 $3.4 $3.0 $2.9 $3.3
Pre-tax Income ($MM) $2.2 $2.2 $1.9 $1.9 $1.1 $1.4 $1.4 $1.9
- GORE Real Estate Developments: GreenOak continues to build its team and execute on its business growth strategy, including investment management and advisory engagements. The company has had its first closing of a U.S. fund and expects a closing in a Japanese fund in Q1 2012.
We continue to seek to grow and expand our asset management businesses and capabilities as we further our efforts to transition the company to a broadly diversified financial services firm that benefits from diverse income streams. We continue to review potential market opportunities in this regard and would seek to potentially make significant progress in these efforts in 2012.
- Loan and CLO Market Developments:
- U.S. leveraged loan default rate remains near historical lows: The U.S. lagged 12-month loan default rate fell to 0.17% by principal amount as of December 31, 2011, down from 0.32% in the prior quarter and down from 1.87% as of the end of Q4 2010.(18)
- U.S. and European loan prepayments return toward historical averages: During Q4 2011, the U.S. S&P/LSTA Leveraged Loan Index quarterly repayment rate declined to 4.1% from 7.0% during the prior quarter, on the heels of reduced loan and bond take-out activity.(19) In Europe, the Q4 2011 S&P European Leveraged Loan Index quarterly repayment rate also declined to €7.8 billion, down from an average of approximately €10.0 billion repaid in each of the preceding three quarters.(20)
- Loan indices register positive returns despite intra-period volatility: U.S. secondary loan prices rose at the end of Q4 2011 resulting in a 1.52% U.S. S&P/LSTA Leveraged Loan Index return for 2011.(21) In Europe, the weighted-average bid of the S&P European Leveraged Loan Index ("ELLI") declined approximately 66 bps to €84.3 at the end of Q4 2011 vs. Q3 2011, although the ELLI returned a modest 0.36% for the year (excluding currency effects).(22)
- "Maturity wall" reduction continues albeit at a reduced pace: During Q4 2011, U.S. S&P/LSTA Index issuers reduced or extended approximately $15.8 billion or 10.2% of loan maturities due by the end of 2014, down from approximately $23.0 billion or 12.9% in Q3 2011. (23)
- Primary loan issuance volumes significant but below Q3 2011: Institutional U.S. loan issuance during Q4 2011 totaled $26.0 billion, down from approximately $28.0 billion in Q3 2011.(24) European primary loan issuance also decreased quarter-over-quarter, with €6.4 billion of leveraged loans issued in Q4 2011, compared with €9.5 billion during Q3 2011.(25)
- O/C ratios improve in the U.S. but decline slightly in Europe: During Q4 2011, O/C ratios of U.S. CLOs strengthened on average. According to Morgan Stanley, the median junior O/C test cushion for U.S. CLOs increased to 3.88% as of December 31, 2011,(26) up from 3.75% as of the end of the prior quarter.(27) The median junior O/C test cushion for European CLOs, however, decreased to 1.76% as of the end of Q4 2011,(28) down from 1.79% as of the end of Q3 2011. (29)
- Arbitrage CLO new issuance market activity picks up: U.S. arbitrage-driven CLO issuance accelerated during Q4 2011 as ten transactions totaling $4.3 billion were priced, up from six deals totaling $2.4 billion issued during Q3 2011. (30)
- U.S. CLO equity continues strong performance: U.S. CLO equity tranches saw continued robust distributions, as CLOs benefitted from low defaults, the increasing prevalence of LIBOR floors, and the ability of managers to build excess spread and par via below-par reinvestments, among other factors.
- CLO debt prices post quarter-on-quarter gains: Average secondary U.S. CLO debt prices rose at the end of Q4 2011 versus the prior quarter with the exception of originally AA-rated bonds which declined $2-3 points.(31)
- Fair Value Determination for TFG's CLO Equity Investments:
- In accordance with the company's valuation policies as 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.
- Fundamentally, the valuation process involves two stages:
(1) In stage one, future cash flows for each transaction in the CLO equity portfolio are modeled, using a market-standard modeling tool into which the applicable latest transaction details are loaded, and to which the base case assumptions are added.
(2) In stage two, a discount rate reflecting the perceived level of risk is applied to those future cash flows to generate a fair value for each transaction. Prior to the financial crisis, with TFG's CLO equity portfolio performing well in a generally benign credit environment, the IRRs on TFG's CLO equity investments were considered to adequately reflect the relative risk to their applicable cash flows and therefore, amortized cost reflected fair value. Due to elevated market risk premia observable in the marketplace during and since the financial crisis, among other factors, this effective discount rate used to derive fair value has typically been higher than each transaction's IRR and therefore, in such instances, has resulted in a fair value which is lower than the transaction's amortized cost. The difference between these two figures, on an aggregate basis across the CLO equity portfolio, has been characterized as the "ALR Fair Value Adjustment" or "ALR."
- During Q4 2011, evidence of widening differences in expectations for performance outcomes of U.S. and European CLOs continued to mount, reflecting, among other factors, diverging economic outlooks for the U.S. and Europe, elevated market volatility and corresponding differences in investor appetite with respect to certain investment risks. As a result, it was deemed appropriate to reflect these differences via:
( 1) Adjustments to certain of the forward looking average modeling assumptions for U.S. CLO deals, and
(2) Adjustments to the discount rates applied to the modeled cash flows for European deals.
These recalibrations are described in more detail below.
- Forward-looking CLO Equity Cash Flow Modeling Assumptions Recalibrated in Q4 2011:
- The Investment Manager reviews, and adjusts in consultation with the company's audit committee, as appropriate, the CLO equity investment portfolio's modeling assumptions to factor in historic, current and potential market developments on the performance of TFG's CLO equity investments as described above. At the end of Q4 2011, certain assumptions for U.S. deals were recalibrated, based on, among other factors, certain observable data with respect to defaults and reinvestment prices.
The key average assumption variables have been summarized in the table below and discussed on the following pages. The modeling assumptions disclosed below are a weighted average (by U.S. dollar amount) of the individual deal assumptions, aggregated by geography (i.e., U.S. and European). Each individual deal's assumptions may differ from this geographical average and vary across the portfolio. Previously, these modeling assumptions had been shown on an average aggregated portfolio level (again with individual deals varying across the portfolio).
U.S. CLOs - Default and Reinvestment Prices Recalibrated
Variable Year Current Assumptions Prior Assumptions
CADR
1.0x WARF-implied 1.5x WARF-implied
2012-2013 default rate (2.2%) default rate (3.3%)
1.5x WARF-implied 1.5x WARF-implied
2014 default rate (3.3%) default rate (3.3%)
1.5x WARF-implied 1.0x WARF-implied
2015-2016 default rate (3.3%) default rate (2.2%)
1.0x WARF-implied 1.0x WARF-implied
Thereafter default rate (2.2%) default rate (2.2%)
Recovery Rate
Until deal
maturity 72% 72%
Prepayment Rate
Until deal 20.0% p.a. on loans; 20.0% p.a. on loans;
maturity 0.0% on bonds 0.0% on bonds
Reinvestment Price
2012 98% 100%
Thereafter 100% 100%
European CLOs - Unchanged
Variable Year Current Assumptions Prior Assumptions
CADR
1.5x WARF-implied 1.5x WARF-implied
2012-2014 default rate (3.1%) default rate (3.1%)
1.0x WARF-implied 1.0x WARF-implied
Thereafter default rate (2.1%) default rate (2.1%)
Recovery Rate
Until deal
maturity 68% 68%
Prepayment Rate
Until deal 20.0% p.a. on loans; 20.0% p.a. on loans;
maturity 0.0% on bonds 0.0% on bonds
Reinvestment Price
Until deal
maturity 100% 100%
- Constant Annual Default Rate ("CADR"):
- U.S. CLOs: The average CADR applied to U.S. CLOs for 2012 and 2013 was reduced to 1.0x the WARF-implied default rate or approximately 2.2%, down from 1.5x or 3.3% under the previous assumption set. During the course of 2011, multiple research sources expressed the view that near-term defaults would remain at levels well-below the long-term average. In light of these market expectations, as well as low realized 2011 U.S. defaults, we believe that adjusting TFG's default assumptions in 2012-2013 to 1.0x the long-term WARF-implied average was appropriate. Beyond 2013 through 2016, the default assumption of 1.5x the WARF-implied default rate has been applied to reflect, among other factors, continued significant macro-economic and systemic risks as well as the remaining size of the "maturity wall" between 2014 and 2016.
- European CLOs: The average CADR applied to European CLOs for 2012-2014 has remained unchanged at 1.5x the WARF-implied default rate or approximately 3.1%. Beyond 2014, the default assumption has also remained unchanged at a reduced rate of 1.0x the WARF-implied default rate. These levels reflect, among other things, observable market data regarding the significant level of near-term uncertainty surrounding Euro-zone economies.
- Recovery Rate: The U.S. and European average recovery rates remain unchanged at their long-term average for the life of each CLO transaction.
- Prepayment Rate: While observable loan prepayment rates remained elevated during 2011, the pace of repayments decelerated during the second half of 2011, as described earlier in this letter. In light of the significant inter-period volatility of observed quarterly prepayment rates, we have therefore maintained our long-term assumption of a 20% p.a. prepayment rate on loans and 0% p.a. on bonds throughout the life of each transaction.
- Reinvestment Price and Spread: In order to better reflect recently observable reinvestment prices the assumed reinvestment price for U.S. CLOs in 2012 has been reduced to 98%, a level that generates an effective spread over LIBOR of approximately 343 bps on broadly syndicated U.S. loans, and 417 bps on middle market loans. From 2013, the reinvestment price assumption remains at par until the maturity of the investment. For European CLOs an assumed reinvestment price of 100% has been maintained for the life of each of these deals.
- Effect of Assumption Changes on Fair Value: The input assumption recalibrations for U.S. CLO equity investments outlined above, had the impact of increasing future projected cash flows on an aggregate portfolio level, which when discounted at TFG's applicable discount rates (see below), resulted in an increase in fair value of approximately $39.4 million or 4.0% relative to the immediately preceding assumptions utilized.
- Application of Discount Rate to Projected CLO Equity Cash Flows and ALR:
- In determining the applicable discount rates to use, an analysis of observable risk premium data is undertaken. The second half of 2011 saw a notable divergence in the way that spreads on BB and BBB originally rated tranches performed, depending on whether they referenced U.S. or European CLOs. For example, U.S. BBs as reflected by Citibank, tightened during Q4 2011 to end the year at approximately 11.5%. By contrast European BBs moved significantly wider to 23.5%, ending the year approximately 10.0% wider than where they had been six months earlier.
- This growing disparity between U.S. and European mezzanine CLO spreads is also reflected, we believe, in the risk premium attached by investors to U.S. and European CLO equity. Various investment bank research reports, for example, indicate that for the United States, strong current cash flows provide support for CLO equity prices and we believe that our previous discount rates of 20% for strong deals, and 25% for the rest of the U.S. CLO portfolio, remain appropriate as of year- end. By contrast, for European deals we believe that the widening of mezzanine spreads is also indicative of changing attitudes to the European risk premium in general and in particular, higher discount rates and lower carrying values on European CLO equity. In order to better reflect this, we have increased the discount rate for all European deals to 30%, which restores a reasonable spread over European BB CLO spreads and reflects the divergence from the risk premium on U.S. deals.
- As a direct result of the increase in their discount rates, the fair value of TFG's European CLO equity investments decreased by $23.8 million when converted into U.S. dollars compared to the immediately preceding utilized discount rates.
- Through the process described above, as of the end of Q4 2011, the total ALR stands at $128.7 million, consisting of $20.4 million for U.S. deals and $108.3 million for European deals, as compared to $118.0 million at the end of Q3 2011 (split $32.2 million for U.S. deals and $85.8 million for European deals).
- The average carrying value of TFG's U.S. CLO equity investments, which accounted for approximately 89.2% of the CLO equity investment portfolio by fair value, was approximately $0.78 on the dollar at end of Q4 2011, up from $0.76 on the dollar at the end of Q3 2011. By contrast the average carrying value of the European deals fell from €0.53 per Euro as of the end of Q3 2011 to €0.44 per Euro as of the end of Q4 2011. It is important to note, however, that significant dispersion of carrying values exists across transactions within each geographic grouping, particularly in the case of Europe, with a range of carrying values of €0.09 to €0.62 per Euro.
- As discussed in the last quarterly report, the applicable discount rate for the new vintage deals (issued after 2010) 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 Q4 2011, the weighted average discount rate (and IRR) on these deals was 13.2%. Such deals represented approximately 5.7% of the CLO equity portfolio by fair value. We will continue to monitor observable data on these newer vintage transactions to determine whether the IRR remains the appropriate discount rate.
- Overall, the net impact of the recalibration of certain modeling assumptions and discount rates led to an overall increase in fair value of the total CLO equity portfolio of approximately $15.6 million, or $11.7 million in bottom line net income, which compares to overall consolidated net income of $80.3 million for the quarter.
Selected CLO Equity Portfolio Metrics
As of December 31, 2011
U.S. CLO European CLO CLO Portfolio
IRR (W.A.) 19.6% 8.6% 17.6%
Discount Rate (W.A.) 20.2% 30.0% 21.3%
Fair Value ($MM) $1,024.0 $123.4 $1,147.4
ALR ($MM) $20.4 $108.3 $128.7
- Hedging Activity:
As of December 31, 2011, TFG had no direct credit hedges in place, but employed certain foreign exchange rate and "tail risk" interest rate hedges to seek to mitigate its exposure to Euro-USD foreign exchange risk and a potential significant increase in U.S. inflation and/or nominal interest rates, respectively. We review our hedging strategy on an on-going basis as we seek to address identified risks to the extent practicable and in a cost-effective manner.
- Further Notice
Please be advised that the Investment Manager currently expects to file for registration as an investment adviser under U.S. Investment Advisers Act of 1940 in February 2012.
- Quarterly Investor Call
We will host a conference call for investors on March 9, 2012 at 15:00 GMT/16:00 CET/10:00 EST to discuss Q4 2011 results and to provide a company update.
The conference call may be accessed by dialing +44-(0)20-7162-0025 and +1-334-323-6201 (a passcode is not required). Participants may also register for the conference call in advance via the following link https://eventreg1.conferencing.com/webportal3/reg.html?Acc=247751&Conf=182336.
A replay of the call will be available for 30 days by dialing +44-(0)-20-7031-4064 and +1-954-334-0342, access code 911333 and as an MP3 recording on the TFG website.
Expected Upcoming Events Date
January 2012 Monthly Report February 20, 2012 (approx)
2011 Audited Financial Statements Reported March 6, 2012 (approx)
Q4 2011 Dividend (Ex- date) March 6, 2012
Q4 2011 Dividend Record Date March 8, 2012
Quarterly Investor Call March 9, 2012
February 2012 Monthly Report March 20, 2012 (approx)
Q4 2011 Dividend Payment Date March 28, 2012
TETRAGON FINANCIAL GROUP
Financial Highlights
Quarterly
Q4 2011 Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010 Average
Net income ($MM) $80.3 $67.3 $88.1 $174.7 $132.0 $125.0 $111.2
EPS ($) $0.69 $0.57 $0.74 $1.46 $1.09 $1.03 $0.93
CLO Cash receipts ($MM)(1) $113.2 $105.1 $102.4 $90.9 $78.9 $71.8 $93.7
CLO Cash receipts
per share ($) $0.97 $0.89 $0.86 $0.76 $0.66 $0.59 $0.79
Net cash balance ($MM) $211.5 $155.6 $67.7 $147.0 $140.6 $187.9 $151.7
Net assets ($MM) $1474.4 $1413.6 $1368.3 $1298.0 $1137.5 $1018.6 $1285.1
Number of shares
outstanding (million)(2) 116.0 117.2 118.8 119.6 120.1 120.8 118.8
NAV per share ($) $12.71 $12.06 $11.52 $10.85 $9.47 $8.43 $10.84
NAV per share movement
(% from prior quarter) 5.4% 4.7% 6.2% 14.6% 12.3% 13.3% 9.4%
DPS ($) TBC $0.10 $0.10 $0.09 $0.09 $0.08 $0.09
Weighted average IRR on
completed transactions (%) 17.6% 16.8% 16.3% 15.8% 15.1% 13.7% 15.9%
Number of CLO investments(3) 77 75 75 74 70 68 73
ALR Fair Value Adjustment
($MM) ($128.7) ($118.0) ($133.8)($155.7)($258.0)($274.7) ($178.1)
(1) Gross cash receipts from CLO portfolio.
(2) Excludes shares held in treasury.
(3) Excludes CDO-squared and ABS CDO transactions written off in October 2007. TFG continues to hold the economic rights to 3 of these written-off transactions.
TETRAGON FINANCIAL GROUP
Quarterly Statement of Operations as at 31 December 2011
Statement of Operations Q4 2011 Q3 2011 Q2 2011 Q1 2011
($MM) ($MM) ($MM) ($MM) Interest income 55.1 53.6 52.0 48.4
CLO management fee income 4.3 4.4 3.9 3.8
Other income 2.9 0.8 1.5 1.5
Investment income 62.3 58.8 57.4 53.7
Management and performance fees (28.6) (24.3) (31.2) (59.9)
Admin/ custody and other fees (7.6) (9.0) (4.1) (5.7)
Total operating expenses (36.2) (33.3) (35.3) (65.6)
Net investment income 26.1 25.5 22.1 (11.9)
Net change in unrealised appreciation/
(depreciation) in investments 58.5 50.5 65.0 184.5
Realised gain/(loss) on investments 0.3 - - 0.6
Realised and unrealised gains/(losses)
from hedging and fx (3.3) (7.1) 2.4 2.9
Net realised and unrealised gains/(losses)
from investments and fx 55.5 43.4 67.4 188.0
Income taxes (0.7) (1.1) (1.0) (1.0)
Noncontrolling interest (0.6) (0.5) (0.4) (0.5)
Net increase/(decrease) in net assets
from operations 80.3 67.3 88.1 174.7
TETRAGON FINANCIAL GROUP
Balance Sheet as at 31 December 2011
Dec-11
$MM
Assets
Investments in securities, at fair value 1264.4
Intangible assets - CLO management contracts 0.1
Cash and cash equivalents 211.5
Amounts due from brokers 15.8
Derivative financial assets - interest rate swaptions 7.2
Derivative financial assets - forward contracts 6.7
Coupons receivable on CLOs 0.2
Other receivables 2.7
Total Assets 1508.6
Liabilities
Other payables and accruals 30.2
Amounts payable to Guernsey Feeder 0.5
Amounts payable on Share Options 1.6
Income and deferred tax payable 1.8
Total Liabilities 34.1
Net Assets Before Noncontrolling Interest 1474.5
Noncontrolling interest 0.1
Total Equity Attributable to TFG 1474.4
TETRAGON FINANCIAL GROUP
Statement of Cash Flows for the period ended 31 December 2011
Dec-11
$MM (YTD)
Operating Activities
Operating cash flows before movements in
working capital after dividends paid
to Guernsey feeder 251.3
Change in payables/receivables 2.6
Cash flows from operating activities 253.9
Investment Activities
Amounts payable for purchase of investments
Proceeds on sales of investments 102.3
Purchase of investments
- Purchase of CLO's (63.0)
- Purchase of bank loans (131.7)
- Purchase derivatives - swaptions (17.8)
- Investments in GORE Funds and Manager (4.8)
Maturity and prepayment of investments 20.0
Cash flows from operating and investing activities 158.9
Amounts due from broker (11.6)
Net Purchase of shares (28.0)
Dividends paid to shareholders (45.1)
Distributions paid to noncontrolling interest (3.2)
Cash flows from financing activities (87.9)
Net increase in cash and cash equivalents 70.9
Cash and cash equivalents at beginning of period 140.6
Cash and cash equivalents at end of period 211.5
CLO EQUITY PORTFOLIO DETAILS
As of December 31, 2011
Original Original Current
Invest. Deal End of Wtd Avg Cost of Cost of
Cost Closing Year of Reinv Spread Funds Funds
Transaction Deal Type ($MM USD)(1) Date Maturity Period (bps)(2) (bps)(3) (bps)(4)
Transaction 1 EUR CLO 37.5 2007 2024 2014 301 55 58
Transaction 2 EUR CLO 29.7 2006 2023 2013 338 52 53
Transaction 3 EUR CLO 22.2 2006 2022 2012 354 58 61
Transaction 4 EUR CLO 33.0 2007 2023 2013 347 48 48
Transaction 5 EUR CLO 36.9 2007 2021 2012 334 60 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 331 51 59
Transaction 7 EUR CLO 38.5 2007 2023 2013 330 46 48
Transaction 8 EUR CLO 26.9 2005 2021 2011 332 53 55
Transaction 9 EUR CLO 41.3 2007 2023 2013 341 50 46
Transaction 10 EUR CLO 27.0 2006 2022 2012 333 50 52
EUR CLO Subtotal: 326.3 333 52 53
Transaction 11 US CLO 20.5 2006 2018 2012 363 45 45
Transaction 12 US CLO 22.8 2006 2019 2013 359 46 46
Transaction 13 US CLO 15.2 2006 2018 2012 348 47 47
Transaction 14 US CLO 26.0 2007 2021 2014 346 49 50
Transaction 15 US CLO 28.1 2007 2021 2014 401 52 48
Transaction 16 US CLO 23.5 2006 2020 2013 418 46 45
Transaction 17 US CLO 26.0 2007 2021 2014 346 40 40
Transaction 18 US CLO 16.7 2005 2017 2011 332 45 45
Transaction 19 US CLO 1.2 2005 2017 2011 332 45 45
Transaction 20 US CLO 26.6 2006 2020 2012 402 52 52
Transaction 21 US CLO 20.7 2006 2020 2012 390 53 52
Transaction 22 US CLO 37.4 2007 2019 2013 419 53 53
Transaction 23 US CLO 19.9 2007 2021 2013 357 66 66
Transaction 24 US CLO 16.9 2006 2018 2012 368 46 47
Transaction 25 US CLO 20.9 2006 2018 2013 373 46 46
Transaction 26 US CLO 27.9 2007 2019 2013 367 43 44
Transaction 27 US CLO 23.9 2007 2021 2014 493 51 51
Transaction 28 US CLO 7.6 2007 2021 2014 493 51 51
Transaction 29 US CLO 19.1 2005 2018 2011 440 66 78
Transaction 30 US CLO 12.4 2006 2018 2012 444 67 68
Transaction 31 US CLO 9.3 2005 2017 2012 329 52 50
Transaction 32 US CLO 24.0 2007 2021 2014 320 59 59
Transaction 33 US CLO 16.2 2006 2020 2012 355 56 71
Transaction 34 US CLO 22.2 2006 2020 2012 355 50 50
Transaction 35 US CLO 23.6 2006 2018 2012 443 52 52
Transaction 36 US CLO 28.4 2007 2021 2013 424 46 55
Transaction 37 US CLO 9.3 2005 2017 2011 311 50 50
Transaction 38 US CLO 23.7 2007 2021 2013 323 42 42
Transaction 39 US CLO 7.8 2005 2017 2011 357 70 84
Transaction 40 US CLO 13.0 2006 2020 2011 422 39 39
Transaction 41 US CLO 22.5 2006 2020 2013 365 48 48
Transaction 42 US CLO 22.4 2007 2021 2014 360 47 48
Transaction 43 US CLO 0.2 2007 2021 2014 370 54 54
Transaction 44 US CLO 22.3 2006 2018 2012 309 54 59
Transaction 45 US CLO 23.0 2006 2018 2012 318 46 46
Transaction 46 US CLO 21.3 2007 2019 2013 327 51 51
Transaction 47 US CLO 28.3 2006 2021 2013 327 47 43
Transaction 48 US CLO 23.0 2006 2019 2013 352 46 46
Transaction 49 US CLO 12.6 2005 2017 2011 320 40 39
Transaction 50 US CLO 12.3 2006 2018 2012 337 40 39
Transaction 51 US CLO 18.0 2007 2020 2013 363 53 53
Transaction 52 US CLO 0.3 2003 2015 2008 293 93 269
Transaction 53 US CLO 0.6 2004 2016 2011 300 61 67
Transaction 54 US CLO 0.5 2005 2017 2012 326 56 56
Transaction 55 US CLO 0.3 2005 2017 2011 327 39 39
Transaction 56 US CLO 23.0 2007 2019 2014 362 42 42
Transaction 57 US CLO 0.6 2007 2019 2014 362 42 42
Transaction 58 US CLO 21.8 2007 2019 2014 357 49 49
Transaction 59 US CLO 0.4 2007 2019 2014 357 49 49
Transaction 60 US CLO 18.8 2010 2021 2014 408 198 198
Transaction 61 US CLO 29.1 2007 2021 2014 326 45 45
Transaction 62 US CLO 25.3 2007 2020 2013 358 42 42
Transaction 63 US CLO 27.3 2007 2021 2013 342 53 53
Transaction 64 US CLO 15.4 2007 2021 2013 415 38 38
Transaction 65 US CLO 26.9 2006 2021 2013 341 47 48
Transaction 66 US CLO 21.3 2006 2020 2013 329 49 49
Transaction 67 US CLO 27.3 2007 2022 2014 325 46 45
Transaction 68 US CLO 19.3 2006 2020 2013 428 48 48
Transaction 69 US CLO 28.2 2007 2019 2013 416 44 44
Transaction 70 US CLO 24.6 2006 2020 2013 303 52 52
Transaction 71 US CLO 1.7 2006 2018 2012 337 40 39
Transaction 72 US CLO 4.8 2007 2019 2014 362 42 42
Transaction 73 US CLO 1.9 2007 2019 2014 362 42 42
Transaction 74 US CLO 5.5 2007 2019 2014 357 49 49
Transaction 75 US CLO 32.7 2011 2022 2014 409 168 168
Transaction 76 US CLO 1.9 2006 2018 2012 318 46 46
Transaction 77 US CLO 14.5 2011 2023 2016 359 212 212
US CLO Subtotal: 1170.4 369 57 57
Total CLO Portfolio: 1496.7 361 56 56
(Table continued.)
Current Jr- Jr-Most O/C Annualized ITD Cash
Most O/C Cushion at (Loss) Gain Received as
Transaction Deal Type Cushion(5) Close(6) of Cushion(7) IRR(8) % of Cost(9)
Transaction 1 EUR CLO -3.83% 3.86% (1.71%) - 29.6%
Transaction 2 EUR CLO 0.75% 3.60% (0.56%) 9.6% 46.8%
Transaction 3 EUR CLO 4.53% 5.14% (0.10%) 13.7% 84.4%
Transaction 4 EUR CLO 3.91% 5.76% (0.39%) 13.5% 63.4%
Transaction 5 EUR CLO 3.57% 5.74% (0.49%) 8.4% 41.5%
Transaction 6 EUR CLO -0.41% 4.70% (0.91%) 6.5% 49.7%
Transaction 7 EUR CLO -0.31% 3.64% (0.83%) 5.9% 31.9%
Transaction 8 EUR CLO 1.00% 4.98% (0.62%) 13.4% 87.1%
Transaction 9 EUR CLO 0.35% 6.27% (1.25%) 7.7% 32.7%
Transaction 10 EUR CLO -0.62% 4.54% (0.96%) 8.8% 32.7%
EUR CLO Subtotal: 0.73% 4.84% (0.83%) 47.4%
Transaction 11 US CLO 5.44% 4.55% 0.17% 20.3% 124.0%
Transaction 12 US CLO 5.74% 4.45% 0.25% 20.3% 117.2%
Transaction 13 US CLO 6.23% 4.82% 0.26% 20.0% 127.5%
Transaction 14 US CLO 4.18% 5.63% (0.30%) 17.1% 91.6%
Transaction 15 US CLO 3.27% 4.21% (0.21%) 27.2% 135.8%
Transaction 16 US CLO 3.15% 4.44% (0.23%) 20.5% 121.5%
Transaction 17 US CLO 4.46% 4.24% 0.05% 22.3% 117.0%
Transaction 18 US CLO 4.87% 4.77% 0.02% 18.5% 140.8%
Transaction 19 US CLO 4.87% 4.77% 0.02% 22.1% 135.0%
Transaction 20 US CLO 3.44% 5.28% (0.35%) 21.0% 139.6%
Transaction 21 US CLO 3.10% 4.76% (0.31%) 18.8% 113.5%
Transaction 22 US CLO 3.59% 5.00% (0.30%) 19.9% 104.3%
Transaction 23 US CLO 3.52% 4.98% (0.32%) 19.5% 111.5%
Transaction 24 US CLO 4.80% 4.17% 0.12% 17.0% 93.7%
Transaction 25 US CLO 5.65% 4.13% 0.30% 21.6% 119.5%
Transaction 26 US CLO 3.40% 4.05% (0.14%) 17.8% 92.0%
Transaction 27 US CLO 10.04% 6.11% 0.79% 31.3% 160.2%
Transaction 28 US CLO 10.04% 6.11% 0.79% 39.5% 75.7%
Transaction 29 US CLO 3.60% 4.82% (0.20%) 19.6% 127.3%
Transaction 30 US CLO 2.19% 5.16% (0.54%) 17.7% 101.4%
Transaction 31 US CLO 3.38% 5.02% (0.25%) 16.0% 135.0%
Transaction 32 US CLO 4.32% 5.57% (0.29%) 18.7% 97.1%
Transaction 33 US CLO 4.08% 6.99% (0.50%) 13.9% 106.0%
Transaction 34 US CLO 4.48% 6.66% (0.43%) 17.6% 104.7%
Transaction 35 US CLO 2.17% 5.00% (0.51%) 20.8% 131.9%
Transaction 36 US CLO 2.66% 5.18% (0.53%) 20.0% 101.8%
Transaction 37 US CLO 3.56% 4.34% (0.13%) 15.7% 119.5%
Transaction 38 US CLO 3.93% 5.07% (0.24%) 25.9% 152.3%
Transaction 39 US CLO 3.64% 3.15% 0.08% 8.8% 73.6%
Transaction 40 US CLO N/A N/A N/A 22.1% 132.0%
Transaction 41 US CLO 5.87% 4.71% 0.22% 21.3% 121.6%
Transaction 42 US CLO 5.44% 3.92% 0.32% 19.7% 100.9%
Transaction 43 US CLO 4.25% 3.75% 0.12% 23.3% 29.2%
Transaction 44 US CLO 1.99% 4.16% (0.38%) 12.0% 91.4%
Transaction 45 US CLO 2.43% 4.46% (0.40%) 10.5% 68.6%
Transaction 46 US CLO 2.56% 4.33% (0.38%) 8.5% 52.3%
Transaction 47 US CLO 3.65% 4.34% (0.14%) 20.3% 122.6%
Transaction 48 US CLO 2.88% 5.71% (0.55%) 16.6% 85.5%
Transaction 49 US CLO 3.08% 3.94% (0.14%) 12.0% 84.8%
Transaction 50 US CLO 2.60% 4.25% (0.30%) 12.7% 81.1%
Transaction 51 US CLO 4.07% 4.47% (0.09%) 20.2% 108.2%
Transaction 52 US CLO 7.96% 3.20% 0.55% 278.6% 681.4%
Transaction 53 US CLO 8.80% 4.00% 0.67% 37.2% 233.0%
Transaction 54 US CLO 4.73% 3.69% 0.16% 57.9% 529.6%
Transaction 55 US CLO 4.26% 3.59% 0.11% 61.2% 483.0%
Transaction 56 US CLO 4.57% 4.53% 0.01% 22.2% 119.7%
Transaction 57 US CLO 4.57% 4.53% 0.01% 47.2% 498.7%
Transaction 58 US CLO 3.46% 4.04% (0.13%) 24.0% 122.1%
Transaction 59 US CLO 3.46% 4.04% (0.13%) 49.9% 684.2%
Transaction 60 US CLO 4.43% 4.50% (0.07%) 9.6% 12.3%
Transaction 61 US CLO 2.88% 4.04% (0.25%) 16.3% 79.2%
Transaction 62 US CLO 4.07% 5.20% (0.24%) 20.1% 114.7%
Transaction 63 US CLO 3.10% 4.78% (0.38%) 17.7% 94.2%
Transaction 64 US CLO N/A N/A N/A 20.2% 79.0%
Transaction 65 US CLO 3.01% 4.96% (0.38%) 12.8% 70.1%
Transaction 66 US CLO 3.67% 4.05% (0.07%) 20.6% 123.1%
Transaction 67 US CLO 4.63% 4.38% 0.05% 18.9% 97.8%
Transaction 68 US CLO 5.97% 4.41% 0.31% 26.6% 145.7%
Transaction 69 US CLO 7.18% 5.61% 0.33% 25.3% 127.8%
Transaction 70 US CLO 6.51% 6.21% 0.06% 18.2% 99.6%
Transaction 71 US CLO 2.60% 4.25% (0.30%) 24.7% 29.6%
Transaction 72 US CLO 4.57% 4.53% 0.01% 18.1% 23.9%
Transaction 73 US CLO 4.57% 4.53% 0.01% 18.1% 23.9%
Transaction 74 US CLO 3.46% 4.04% (0.13%) 18.1% 25.2%
Transaction 75 US CLO 4.20% 4.05% 0.28% 15.1% 8.6%
Transaction 76 US CLO 2.43% 2.43% - 43.6% 0.0%
Transaction 77 US CLO 4.01% 4.01% - 13.5% 0.0%
US CLO Subtotal: 4.06% 4.65% (0.11%) 103.5%
Total CLO Portfolio: 3.34% 4.69% (0.27%) 91.3%
TETRAGON FINANCIAL GROUP LIMITED (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(Unless Otherwise Stated)
As of December 31, 2011
TFG Share TFG Group Net TFG Group No. of Closed
Report Date Price ($) Market Cap ($MM)(1) Net Assets ($MM) CLO Transactions
31 December 2011 $6.25 $724.8 $1474.4 77 (2)
Risk Capital Investment
Capital Allocation by Asset Class Allocation Fair Value
($MM)(3)(4)
Broadly Syndicated Senior Secured Loans: US 74.9% $939.7
Broadly Syndicated Senior Secured Loans: Europe 9.8% $123.4
Middle Market Senior Secured Loans: US 15.3% $191.4
CDOs Squared: US 0.0% $0.0
ABS and Structured Finance: US 0.0% $0.0
Total 100.0% $1254.5
Asia
Geographic Allocation by Asset Class USA Europe Pacific Total
Broadly Syndicated Senior Secured Loans 88.4% 11.6% 0.0% 100.0%
Middle Market Senior Secured Loans 100.0% 0.0% 0.0% 100.0%
CDOs Squared 0.0% 0.0% 0.0% 0.0%
ABS and Structured Finance 0.0% 0.0% 0.0% 0.0%
90.2% 9.8% 0.0% 100.0%
Top 15 Underlying Bank Loan Credits Bank Loan Exposure (5)
Univision Communications 0.92%
Community Health 0.84%
HCA Inc 0.82%
First Data Corp 0.80%
SunGard Data Systems Inc 0.76%
Charter Communications 0.75%
UPC Broadband 0.74%
Aramark Corp 0.70%
Federal-Mogul 0.68%
Cablevision Systems Corp 0.66%
Las Vegas Sands 0.66%
Sabre Holdings Corp 0.64%
Huntsman ICI 0.64%
Nielsen Company 0.63%
TXU Corp 0.61%
TOP 10 INDUSTRY
Healthcare, Education & Childcare 12.1%
Broadcasting & Entertainment 8.2%
Diversified/Conglomerate Service 6.5%
Retail Stores 6.4%
Telecommunications 6.0%
Chemicals, Plastics & Rubber 4.8%
Finance 3.9%
Printing & Publishing 3.9%
Automobile 3.7%
Leisure, Amusement, Motion Pictures
& Entertainment 3.5%
EUR-USD FX: 1.29
(1) Calculated using TFG shares outstanding (net of 7.6 million shares held in
treasury and 8.5 million shares held by a subsidiary) and month end exchange
price.
(2) Excludes CDO-squared and ABS CDO transactions which were written off in October
2007. TFG continues to hold the economic rights to 3 of these written-off
transactions.
(3) Excludes TFG's investments in LCM Asset Management LLC, GreenOak Real Estate LP
and GreenOak related funds or investments.
(4) Equivalent to Investment in Securities at Fair Value in the US GAAP Financial
Statements.
(5) Includes par amount of loans held directly by TFG and also loan exposures via
TFG's investments in CLOs. With respect to CLO investments, calculated as a
percentage of total corporate loan assets that TFG has exposure to based on its
equity-based pro-rata share of each CLO's total portfolio. All calculations are
net of any single name CDS hedges held against that credit.
An investment in TFG involves substantial risks. Please refer to the Company's website at 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 US Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to US persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the US Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the Financial Markets Supervision Act ("FMSA") as a collective investment scheme from a designated country. This release constitutes regulated information ("gereglementeerde informatie") within the meaning of Section 1:1 of the FMSA.
Board of Directors
Paddy Dear Reade Griffith Byron Knief*
Rupert Dorey* David Jeffreys* Greville Ward*
*Independent Director
Shareholder Information
Registered Office of TFG and the Master Fund Issuing Agent, Dutch Paying and
Tetragon Financial Group Limited Transfer Agent
Tetragon Financial Group Master Fund Limited Kas Bank N.V.
1st Floor Dorey Court Spuistraat 172
Admiral Park 1012 VT Amsterdam, The Netherlands
St. Peter Port, Guernsey
Channel Islands GYI 6HJ Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
Investment Manager One Ropemaker Street
Tetragon Financial Management LP London EC2Y 9HR
399 Park Avenue, 22nd Floor United Kingdom
New York, NY 10022
United States of America Legal Advisor (as to Guernsey law)
Ogier
General Partner of Investment Manager Ogier House
Tetragon Financial Management GP LLC St. Julian's Avenue
399 Park Avenue, 22nd Floor St. Peter Port, Guernsey
New York, NY 10022 Channel Islands GYI 1WA
United States of America
Legal Advisor (as to Dutch law)
Investor Relations De Brauw Blackstone Westbroek N.V.
David Wishnow / Yuko Thomas Claude Debussylaan 80
[email protected] 1082 MD Amsterdam, The Netherlands
Press Inquiries Stock Listing
Brunswick Group Euronext Amsterdam by NYSE Euronext
Andrew Garfield/Gill Ackers/Pip Green
[email protected] Administrator and Registrar
State Street Guernsey Limited
Auditors 1st Floor Dorey Court
KPMG Channel Islands Ltd Admiral Park
20 New Street St. Peter Port, Guernsey
St. Peter Port, Guernsey Channel Islands GYI 6HJ
Channel Islands GYI 4AN
Sub-Registrar and Transfer Agent
Computershare
One Wall Street
New York, NY 10286
United States of America
ENDNOTES
(1) TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited (“TFGMF”), in which it holds 100% of the issued shares. In this report, unless otherwise stated, we report on the consolidated business incorporating TFG and TFGMF. References to “we” are to Tetragon Financial Management LP, TFG’s investment manager.
(2) Please note that the TFG portfolio-wide statistics presented in this report do not reflect the purchase of this mezzanine tranche as it was acquired after December 31, 2011.
(3) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, LCM VIII, and LXM IX CLOs are referred to as the “LCM Cash Flow CLOs.” The LCM VII CLO was a market value CLO previously managed by LCM, which was liquidated commencing in 2008, and is not included in the mentioned statistics. In addition, these statistics do not include the performance of certain transactions that were developed and previously managed by a third-party prior to being assigned to LCM, some of which continue to be managed by LCM.
(4)The hurdle rate is reset each quarter using 3M USD LIBOR plus a spread of 2.647858% in accordance with TFG’s investment management agreement. Please see the TFG website, http://www.tetragoninv.com, for more details.
(5) Includes only look-through loan exposures through TFG’s CLO investments.
(6) Excludes CDO-squared and ABS CDO transactions which were written off in October 2007. TFG continues to hold the economic rights to three of these written-off transactions.
(7) Based on the most recent trustee reports available for both our U.S. and European CLO investments as of December 31, 2011.
(8) While the number of investments passing their junior-most O/C test has remained unchanged at 64 versus the prior quarter the percentage of deals passing, by number, declined as result of an additional European transaction breaching a junior O/C test during Q4 2011 while the denominator was increased by one additional CLO investment.
(9) As of December 31, 2011, European CLOs represented approximately 10.8% of TFG’s CLO equity investment portfolio; approximately 75% of the fair value of TFG’s European CLOs and 60%, when measured on a percentage of European transactions basis, were passing their junior-most O/C tests.
(10) As O/C tests are breached, CLO structures may divert excess interest cash flows away from the equity tranche holders, such as TFG, to pay down the CLO’s debt thereby curing the O/C breach via deleveraging. Accordingly, the affected investments ceased to generate cash flows to TFG or are expected to cease generating cash flows on the next applicable payment date. Once enough debt has been repaid to cure the O/C test breach, distributions of excess interest cash to equity holders may resume to the extent not precluded by the investments’ realized or unrealized losses.
(11) Morgan Stanley CDO Market Tracker, January 9, 2012; based on a sample of 461 U.S. CLO transactions.
(12) Excess Caa/CCC+ or below rated assets above transaction-specific permitted maximum holding levels are generally haircut in our transactions at market value in U.S. CLOs and recovery rate in European CLOs for purposes of the O/C or interest reinvestment test ratios.
(13) Morgan Stanley CDO Market Tracker, January 9, 2012; based on the lower of Moody’s and S&P rating. Furthermore, TFG’s CLO equity investment portfolio includes approximately 10.8% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG’s average CCC asset holdings.
(14) Weighted by the original USD cost of each investment.
(15) The calculation of TFG’s lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a “Selective Default” rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG’s CLO equity investment portfolio includes approximately 10.8% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG’s corporate default rate.
(16) S&P/LCD News, “Leveraged loan default rate holds near all-time low in December,” January 3, 2012.
(17) S&P/LCD News, “EUR) S&P ELLI: Default rate rises to 4.1% in December,” January 6, 2012. The ELLI default rate is calculated by defining “default” as (a) an event of default, such as a D public rating, a D credit estimate, a missed interest or principal payment, or a bankruptcy filing; or (b) the beginning stages of formal restructuring, such as the start of negotiations between the company and lenders, or hiring of financial advisors. The lagging 12-month default rate for the S&P European Leveraged Loan Index (ELLI) reached 4.48% in July 2011 as Eircom, one of the largest issuers in the Index, began undergoing a restructuring process.
(18) S&P/LCD News, “Leveraged loan default rate holds near all-time low in December,” January 3, 2012.
(19) S&P/LSTA Leveraged Lending Review 4Q 2011.
(20) S&P/LCD News, “(EUR) ELLI repayments slip to €1.4B in December,” January 10, 2012.
(21) S&P/LCD News, “Leveraged loans return 0.51% in December, 1.52% in 2011,” January 3, 2012.
(22) S&P/LCD News, “EUR) S&P ELLI: 2011 – The good, the bad and the flat,” January 10, 2012.
(23) S&P/LSTA Leveraged Lending Review 4Q 2011.
(24) S&P/LCD News,“2011 snapshot: Index returns, volume, default rates at a glance,” January 3, 2012.
(25) S&P/LCD Quarterly Review, Fourth Quarter 2011.
(26) Morgan Stanley CDO Market Tracker, January 9, 2012; based on a sample of 461 U.S. CLO transactions.
(27) Morgan Stanley CDO Market Tracker, October 5, 2011; based on a sample of 471 U.S. CLO transactions.
(28) Morgan Stanley CDO Market Tracker, January 9, 2012; based on a sample of 195 European CLO transactions.
(29) Morgan Stanley CDO Market Tracker, October 5, 2012; based on a sample of 195 European CLO transactions.
(30) Wells Fargo Securities, “The CLO Salmagundi: Senior Note Victory,” January 6, 2012.
(31) Morgan Stanley CDO Market Tracker, January 9, 2012.
For further information, please contact:
TFG:
David Wishnow/Yuko Thomas
Investor Relations
[email protected]
Press Inquiries:
Brunswick Group
Andrew Garfield/Gill Ackers/Pip Green
[email protected]
SOURCE Tetragon Financial Group Limited
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