LONDON, January 31, 2011 /PRNewswire-FirstCall/ --
- Tetragon Financial Group Limited (TFG) Performance Report for Period Ended 31 December 2010
Tetragon Financial Group Limited (TFG) is a Guernsey closed-ended investment company traded on Euronext Amsterdam by NYSE Euronext under the ticker symbol "TFG." ([1]) In this report we provide an update on TFG's results of operations for the period ending December 31, 2010. Please note that the Q4 2010 dividend announcement and accompanying capital distributions data, among other information, will be disclosed in the 2010 Annual Report expected to be published along with 2010 annual audited financial statements on or around March 2, 2011.
Investors will also note that in this report we have endeavored to provide more granular performance as well as structural and credit quality details on TFG's CLO investment portfolio in response to feedback from certain of our investors. We welcome any further suggestions as we continue to seek to better meet investors' reporting needs.
- Executive Summary:
Corporate-Level Results
- Operating Results: Through strong portfolio performance and against a backdrop of improving outlook for CLOs, during the fourth quarter of 2010, TFG recorded its best quarter to date. The company generated EPS of $1.09 (Q3 2010: $1.03 EPS), consolidated net income of $132.0 million (Q3 2010: consolidated net income of $125.0 million) and grew consolidated net assets to $1,137.5 million or $9.47 per share (Q3 2010: consolidated net assets of $1,018.6 million or $8.43 per share). Certain modeling assumption changes, which are described in more detail later in the document, contributed approximately $24.5 million to net income, or EPS of $0.20. Please refer to Figure 1 below for a historical summary of TFG's Net Assets, NAV per share and share price.
- Executive Summary (continued):
Corporate-Level Results
- Cash Receipts and Balances: Cash flows from TFG's CLO investments continued to grow in Q4 2010, totaling $78.9 million (Q3 2010: $71.8 million). The cash balance on December 31, 2010 was $140.6 million, down from $187.9 million as of the end of the prior quarter, reflecting the settlement of new loan and CLO transactions, with approximately $45.9 million earmarked to pay certain short-term liabilities. In addition, TFG held approximately $97.6 million in market value of liquid U.S. leveraged loans as of the end of the year, up from $72.7 million as of the end of Q3 2010.
Investment Portfolio Performance Highlights
- CLO Collateral Performance: TFG's CLO average portfolio statistics continued to outperform market-wide default and CCC-asset holding averages, as credit fundamentals improved during the quarter.
- CLO IRRs: The weighted-average IRR of TFG's CLO investments rose to 15.1% at the end of Q4 2010, up from 13.7% at the end of Q3 2010. This reflected, among other factors, certain changes in TFG's modeling assumptions (please refer to pages 8-9 of this document for additional information) and improvements in the credit quality of certain of our CLOs' underlying investments. Please refer to Figure 2 below for a historical summary of the weighted-average IRR on TFG's CLO investments.
- Executive Summary (continued):
Investment Portfolio Performance Highlights (continued)
- New CLO Investments: During Q4 2010, we invested approximately $18.8 million in the equity tranche of a new issue CLO to be managed by LCM Asset Management LLC ("LCM"), LCM VIII, which, consistent with our investment strategy, represented a majority of the tranche. This transaction added approximately $300.0 million of capital to LCM's asset management platform. In addition to being one of the few CLOs that was successfully issued during the year, we believe that LCM VIII was the only arbitrage CLO completed in 2010 that sold a significant portion of the equity tranche to investors that were unaffiliated with the collateral manager. In addition, we made a small secondary investment of approximately $0.2 million in the equity tranche of another U.S. CLO during the quarter.
- Direct Loan Investments: TFG's direct holdings of bank loans increased to a fair value of approximately $97.6 million as of the end of Q4 2010, up from $72.7 million as of the end of the prior quarter, as the company made additional purchases. The direct loan portfolio performed well during this period, experiencing no defaults or downgrades and benefiting from market value gains.
Asset Management Platform
- LCM: LCM continued to perform well during Q4 2010, with all of LCM Cash Flow CLOs ([2]) continuing to pay senior and subordinated management fees. As of the end of the year, total loan assets under management were approximately $3.0 billion, up from $2.7 billion in the prior quarter, reflecting the addition of a new issue CLO - LCM VIII.
- GreenOak: As reported previously, TFG expanded its asset management platform early in Q3 2010 through the acquisition of a 10% interest in the GreenOak real estate venture. GreenOak continues to build its team and execute on its business strategy in-line with expectations.
- Investment Portfolio Performance Details:
- CLO Portfolio Size: As of the end of Q4 2010, the estimated total fair value of TFG's CLO investment portfolio was approximately $932.7 million, up from approximately $820.4 million as of the end of the prior quarter. TFG's indirect exposure to leveraged loans through its CLO investments was approximately $17.5 billion as of the end of Q4 2010.([3])
- CLO Portfolio Composition: With the addition of LCM VIII and a secondary CLO equity purchase, the CLO portfolio increased to 70 investments during the fourth quarter from 68 as of the end of Q3 2010. The number of external CLO managers fell to 28, owing to certain manager consolidations that were announced during Q4 2010.([4])
- Investment Portfolio Performance Details (continued):
- CLO Collateral Performance: As of the end of Q4 2010, approximately 98% of TFG's CLO investments were passing their junior-most O/C tests, weighted by fair value, up from approximately 96% at the end of Q3 2010.([5]) When measured on a number of transactions basis, 62, or approximately 94%, of the company's CLO investments were passing their junior-most O/C tests, an increase from approximately 56, or 88%, at the end of Q3 2010.
TFG's U.S. CLOs performed well during the quarter with 100% of them by fair value and by number passing their junior-most O/C tests (note that U.S. CLOs represented approximately 89.4% of the total fair value of TFG's investment portfolio as of December 31, 2010).([6])([7]) 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 2010 was approximately 91.8% (when measured on a percentage of transactions basis).([8]) Please refer to Figure 3 below for a historical summary of TFG's investments' junior O/C test performance.
- CLO Portfolio Credit Quality: As of December 31, 2010, the weighted-average percentage of corporate obligors rated Caa1/CCC+ or below in TFG's 70 CLO investments was 8.3% compared to an approximate 7.9% weighted-average maximum level permitted under the terms of our investments.([9]) In comparison, the market-wide median CCC asset holdings of U.S. CLOs was estimated to be approximately 8.6% as of the end of Q4 2010.([10]) TFG's weighted-average WARF stood at approximately 2,671 as of the end of Q4 2010. Each of these foregoing statistics represents a weighted-average summary of all of our 70 investments.([11]) Each individual investment's metrics will differ from this average and vary across the portfolio.
- Investment Portfolio Performance Details (continued):
TFG Investment Weighted-Average Summary
Q1 Q2 Q3 Q4 Q1 Q2
2008 2008 2008 2008 2009 2009
Caa1/CCC+ orBelow
Obligors: 3.4% 4.4% 4.9% 7.6% 11.4% 11.6%
WARF: 2,443 2,472 2,490 2,577 2,758 2,800
(table continues)
Q3 Q4 Q1 Q2 Q3 Q4
2009 2009 2010 2010 2010 2010
Caa1/CCC+ orBelow
Obligors: 12.6% 12.0% 11.1% 10.5% 9.6% 8.3%
WARF: 2,813 2,809 2,762 2,706 2,658 2,671
- TFG and Market Default Rates: TFG's lagging 12-month corporate loan default rate decreased to 1.7% during the fourth quarter.([12]) The lagging 12-month U.S. institutional loan default rate, by comparison, fell to 1.9% by principal amount as of December 31, 2010, according to S&P/LCD, down from approximately 3.6% during the prior quarter.([13]) Please refer to Figure 4 below for a historical summary of TFG's CLO investments' default performance.
- Investment Portfolio Performance Details (continued):
- Direct Loan Investments: As of December 31, 2010, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $100.0 million and total fair value of $97.6 million. This portfolio continued to perform well during the quarter, benefitting from early prepayments, spread increases as well as an overall improvement in loan prices. No defaults or downgrades were registered in the portfolio. From inception through the end of Q4 2010, the portfolio made approximately $1.1 million of net realized gains. In addition, the portfolio earned $2.7 million of interest income and discount premium over the same period.
- Asset Management Platform Details:
- LCM Developments: LCM's strong operating and financial performance continued during Q4 2010. As of December 31, 2010, all senior and subordinated CLO management fees on LCM Cash Flow CLOs ([14]) were current and taking into account all LCM-managed vehicles, the gross income year-to-date for LCM totaled $12.6 million. Pre-tax profit for the entire LCM business, of which TFG owns 75%, reached approximately $5.8 million as of the same period. On October 8, 2010, LCM assumed the management of a U.S. CLO with the consent of TFG (as a majority equity holder) and certain other debt investors (see "CLO Corporate Actions" for details). As mentioned earlier, LCM also closed a new issue CLO, LCM VIII, on November 23, 2010. TFG also continues to leverage and benefit from the LCM team's expertise in the ongoing support of the company's direct loan investments.
LCM Asset Management Performance Snapshot
Q4 2010 Q3 2010 Q2 2010 Q1 2010
Gross Fee Income ($MM) $3.4 $3.0 $2.9 $3.3
Pre-tax Income ($MM) $1.1 $1.4 $1.4 $1.9
- Loan and CLO Market Developments:
- U.S. leveraged loan default rates decline: The U.S. lagged 12-month loan default rate fell to 1.9% by principal amount as of December 31, 2010, down from 3.6% in the prior quarter and a high of 10.8% reached in November 2009, as credit fundamentals and capital market conditions recovered.([15])
- U.S. loan prepayments increase significantly: During Q4 2010, the U.S. S&P/LSTA Leveraged Loan Index quarterly prepayment rate increased to 9.5% from 5.3% the prior quarter, with repayment financing largely driven by bond-for-loan take-outs.([16])
- Secondary loan market prices rise: Secondary loan prices continued to increase in Q4 2010, during which the U.S. S&P/LSTA Leveraged Loan Index returned 3.09% as the average index price reached approximately $93.6. ([17])
- Maturity extensions continue apace: Approximately $17.7 billion of U.S. loans extensions were executed during Q4 2010, up from $6.5 billion during Q3 2010, as issuers took advantage of strong market conditions to diminish the size the so called "maturity cliff." ([18])
- Loan and CLO Market Developments (continued):
- Primary loan issuance volumes remain strong in the U.S. and Europe: Institutional U.S. loan issuance during the fourth quarter totaled $50.7 billion, compared with approximately $35.1 billion in Q3 2010.([19]) European primary loan issuance also increased quarter-over-quarter, with EUR15 billion leveraged loans issued in Q3 2010, compared with EUR11.5 billion during Q3 2010.([20])
- O/C ratios improve in both the U.S. and Europe: During Q4 2010, O/C ratios of U.S. CLOs strengthened on average. According to Morgan Stanley, the median junior O/C test cushion for U.S. CLOs increased to 2.89% as of December 31, 2010, up from 2.55% as of the end of the prior quarter.([21])([ 22]) The median junior O/C test cushion for European CLOs increased to 0.37% as of the end of Q4 2010, up from (0.18)% as of the end of Q3 2010. ([23])
- CLO new issuance market sees return of arbitrage-driven transactions: Global CLO issuance totaled approximately $89.0 billion in 2010 with over 50% of this volume consisting of European balance sheet CLOs.([24]) Nonetheless, several U.S. arbitrage CLOs totaling $3.3 billion were priced during the year.([25])
- Mezzanine CLO debt and equity tranche prices continue to post gains: Secondary mezzanine debt and equity tranche prices posted multiple point price gains during Q4 2010.([26]) These gains occurred in the context of a significant increase in traded volumes and liquidity with traded BWIC ("Bid Wanted in Comp") volume reportedly increasing by roughly 50% to $18.0 billion versus 2009. ([27])
- Fair Value Determination for TFG's CLO Investments:
- In accordance with the company's valuation policies as set forth on the company's website, the values of TFG's CLO investments are determined using a third-party cash flow modeling tool. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in historic, current and potential market developments on the performance of TFG's CLO investments. Since this involves modeling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter's historical data.
- Subject to the foregoing, when determining the U.S. GAAP-compliant fair value of TFG's portfolio, the company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark our inputs and resulting outputs to observable market data when available and appropriate. Fundamentally, the valuation process involves two stages. In stage one, future cash flows for each deal in the CLO portfolio are modeled, using our base case assumptions. This generates both the investment IRRs, which are used to drive the recognition of income, and the associated amortized cost. 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 investment. Due to elevated market risk premiums over the last two years, among other factors, this effective discount rate has typically been higher than the deal's IRR and therefore, in such instances, has resulted in a fair value which is lower than the deal's amortized cost. The difference between these two figures, on an aggregate basis across the CLO portfolio, has been characterized as the "ALR Fair Value Adjustment" or "ALR".([28])
- Forward-looking Cash Flow Modeling Assumptions Recalibrated in Q4 2010
- The Investment Manager reviews, and adjusts as appropriate the CLO investment portfolio's future modeling assumptions to factor in historic, current and potential market developments on the performance of TFG's CLO investments. When we reported at the end of Q3 2010, we noted strong deal performance but mixed economic and corporate data reported year-to-date with a continuing uncertain outlook. Consequently, we held off on recalibrating TFG's modeling assumptions pending, among other things, further evidence and consensus on the sustainability of such improvements.
- Various Q4 2010 economic indicators, such as continued GDP growth, stabilization of employment and declining defaults provided comfort around the sustainability of the recovery which began earlier in 2010. In addition, various research reports from rating agencies and investment banks have given greater consistency over the outlook for some of the projected model inputs over the next 12 months, in particular in relation to defaults. As a result of these and other factors, we have recalibrated certain of our assumptions for 2011, as indicated in the table below.
Variable Year Recalibrated Assumptions Prior Assumptions
CADR
2011 1.0x WARF-implied default 2.0x WARF-implied
rate (2.2%) default rate (4.3%)
2012-2014 1.5x WARF-implied default 1.5x WARF-implied
rate (3.2%) default rate (3.2%)
Thereafter 1.0x WARF-implied default 1.0x WARF-implied
rate (2.2%) default rate (2.2%)
Recovery Rate
2011 71% 55%
Thereafter 71% 71%
Prepayment Rate
2011 20.0% p.a. on loans; 0.0% 17.5% p.a. on loans;
on bonds 0.0% on bonds
Thereafter 20.0% p.a. on loans; 0.0% 20.0% p.a. on loans;
on bonds 0.0% on bonds
Reinvestment Price
2011 99% 95%
Thereafter 100% 100%
- Constant Annual Default Rate ("CADR"): The CADR for 2011 was reduced to 1.0x the WARF-implied default rate or approximately 2.2%. As mentioned previously, throughout the latter half of 2010, multiple research sources expressed a view that defaults would continue to fall through 2011 to levels significantly below the long-term average. In light of these consensus market expectations and the increasing confidence with which they were expressed, we believe that adjusting TFG's default assumptions in 2011 to 1.0x the long-term WARF-implied average was appropriate. Beyond 2011 the default assumption remains unchanged, reflecting, among other things, heightened risks in the mid-term as a result of both macro-economic uncertainty and the so-called "maturity cliff" between 2012 and 2014 (although progress continues to be made in addressing the maturity schedule).
- Forward-looking cash flow modeling assumptions recalibrated in Q4 2010
(continued):
- Recovery Rate: Consistent with a 2011 default assumption of 1.0x the long-term WARF-implied average default rate, the recovery rate assumption has been recalibrated to reflect its long-term average. Historically, defaults and recoveries have been inversely related, therefore a continued decline in defaults would be expected to be accompanied by relatively high recovery rates.
- Prepayment Rate: Observable loan prepayment rates continued the pick-up during 2010 reaching a peak in Q4 2010 to a level significantly above the long-term average. Since prepayment rates can experience significant volatility, we increased the assumption for 2011, but only up to 20% per annum which was already being applied for 2012 and beyond. As in the prior set of assumptions, we have assumed a 0% prepayment rate 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 2011 has been increased to 99% (from 95%), a level that generates an effective spread over LIBOR of approximately 285 bps on broadly syndicated U.S. loans, 316 bps on European loans, and 355 bps on middle market loans. From 2012 the reinvestment price assumption remains at par until the maturity of our investments.
- Effect of Assumption Changes on Fair Value: The four assumption changes outlined above had the impact of increasing future projected cash flows on an aggregate portfolio level, which when discounted at the TFG discount rates (see below), resulted in an increase in fair value of approximately $32.7 million relative to the immediately preceding assumptions utilized.
- Application of Discount Rate to Projected Cash Flows and ALR
- At the end of Q3 2010 discount rates applied to projected cash flows were reduced to 23% for the stronger portion of TFG's investment portfolio. Whilst this represented a significant spread over observable yields on BB-rated CLO tranches, it reflected a recognition that the risk premium demanded on CLO equity had fallen from the peak levels reached during the financial crisis. For the remainder of the portfolio we maintained the application of a 30% discount rate.
- Over the course of Q4 2010 and into early 2011 certain observable data and research suggested that this risk premium has been declining further, as evidenced by significant tightening of credit and CLO debt spreads. From a valuation perspective, however, we are mindful of potential volatility, and have therefore maintained the existing discount rates for the purposes of the Q4 2010 valuation. Going forward, if, among other things, the observable risk premium data demonstrates sustainability at these reduced levels it is likely that the aforementioned discount rates will be reduced.
- In addition to reviewing the level of discount rates, the split of deals between the two discount rate categories is also reviewed in the context of each deal's structural strength and credit quality. During the course of the quarter, four deals migrated from the 30% to the 23% category, increasing total portfolio fair value by approximately $7.0 million.
- Through the valuation process described above, as of the end of Q4 2010, the ALR has been reduced to approximately $258.0 million as compared to $274.7 million at the end of Q3 2010.
- Certain Company Information
A performance fee of $41.5 million was accrued in Q4 2010 in accordance with TFG's investment management agreement and based on a "Reference NAV" of Q3 2010. The hurdle rate for Q1 2011 incentive fee has been reset at 2.9507% (Q3 2010: 2.9385%) as per the process outlined in TFG's 2009 Audited Financial Statements and in accordance with TFG's investment management agreement.([29])
- Quarterly Investor Call
We will host a conference call for investors on March 7, 2011 at 15:00 GMT/16:00 CET/11:00 EDST to discuss Q4 2010 results and to provide a company update.
The conference call may be accessed by dialing +44(0)20-7162-0025 and +1-334-323-6201 (a passcode is not required). Participants may also register for the conference call in advance via the following link https://eventreg1.conferencing.com/webportal3/reg.html?Acc=247751&Conf=176930 .
A replay of the call wll be available for 30 days by dialing +44(0)20-7031-4064 and +1-954-334-0342, access code 876111 and as an MP3 recording on the TFG website.
Expected Upcoming Events Date
January 2011 Monthly Report February 18, 2011 (approx)
2010 Annual Report and
audited financial statements March 2, 2011
Q4 2010 dividend (ex- date) March 2, 2011
Q4 2010 dividend record date March 4, 2011
Quarterly investor call March 7, 2011
February 2011 Monthly Report March 17, 2011 (approx)
Q4 2010 dividend payment date March 25, 2011
TETRAGON FINANCIAL GROUP
Financial Highlights
Q4 2010 Q3 2010 Q2 2010 Q1 2010
Net income ($MM) 132 125 55.6 72.5
EPS ($) 1.09 1.03 0.45 0.58
CLO Cash receipts ($MM) (1) 78.9 71.8 60.9 51.1
CLO Cash receipts per share ($) 0.66 0.59 0.50 0.41
Net cash balance ($MM) 140.6 187.9 156.2 172.6
Net assets ($MM) 1138 1019 909 867
Number of shares
outstanding (million) 120.1 120.8 122.2 123.6
NAV per share ($) 9.47 8.43 7.44 7.02
DPS ($) - 0.08 0.08 0.06
Weighted average IRR
on completed transactions (%) 15.1 13.7 13.1 12.3
Number of CLO investments (2) 70 68 68 68
ALR Fair Value Adjustment ($MM) -258.0 -274.7 -330.7 -339.5
TABLE CONTINUED BELOW
Q4 2009 Q3 2009 Q2 2009 Q1 2009
Net income ($MM) 94.7 31.2 -26.7 -414.3
EPS ($) 0.76 0.25 -0.21 -3.29
CLO Cash receipts ($MM) (1) 38.4 35.3 31.9 47.1
CLO Cash receipts per share ($) 0.31 0.28 0.25 0.37
Net cash balance ($MM) 174.4 149.7 123.8 94.3
Net assets ($MM) 807 721 693 723
Number of shares
outstanding (million) 124.8 126.2 125.9 125.7
NAV per share ($) 6.47 5.71 5.5 5.75
DPS ($) 0.06 0.03 0.03 0.03
Weighted average IRR
on completed transactions (%) 11.9 10.3 9.2 10.6
Number of CLO investments (2) 61 61 61 61
ALR Fair Value Adjustment ($MM) -349 -333.8 -254.1 -315
TFG Quarterly Statement of Operations
Statement of Operations Q4 2010 Q3 2010 Q2 2010 Q1 2010
($MM) ($MM) ($MM) ($MM)
Interest income 46.5 45.8 43.4 43.2
CLO management fee income 3.3 3.0 2.9 3.3
Other income 1.3 0.5 0.3 0.3
Investment income 51.1 49.3 46.6 46.8
Management and performance fees -45.5 -42.7 -19.8 -25.4
Admin/ custody and other fees -3.4 -2.6 -2.6 -1.9
Total operating expenses -48.9 -45.3 -22.4 -27.3
Net investment income 2.2 4 24.2 19.5
Net change in unrealised
appreciation/
(depreciation) in investments 128.7 121.3 31.4 54.5
Realised gain/(loss) on investments 0.6 0.3 0.3 -
Realised and unrealised gains/
(losses) from hedging and fx 1.2 0.3 0.8 -
Net realised and unrealised gains/
(losses) from investments and fx 130.5 121.9 32.4 54.5
Income taxes -0.4 -0.4 -0.4 -1.3
Noncontrolling interest -0.3 -0.3 -0.6 -0.2
Net increase/(decrease) in net
assets from operations 132.0 125.2 55.6 72.5
TETRAGON FINANCIAL GROUP
Balance Sheet as at 31 December 2010
$MM
Assets
Investments in securities, at fair value 1030.8
Intangible assets - CLO management contracts 0.210301
Cash and cash equivalents 140.6253
Amounts due from brokers 4.285552
Accrued fee income 1.46015
Loans to Green Oak Real Estate 4.520757
Amounts receivable on sale of investments 8.84821
Unrealised gain on forward contracts 2.883979
Other receivables 0.27734
Total Assets 1193.912
Liabilities
Amounts payable for purchase of investments 7.422999
Other payables and accrued expenses 45.65067
Unrealised loss on forward contracts 0
Bank Overdraft 0
Amounts payable to feeder fund 0
Amounts payable on Share Options 1.5
Income taxes payables 0.389849
Dividend Payable 0
Total Liabilities 54.96352
Net Assets Before Noncontrolling Interest 1138.948
Noncontrolling Interest 1.4
Total Equity Attributable to TFG 1137.548
CLO Portfolio Details
As of December 31, 2010
Original Wtd Avg
Invest. End of Wtd Avg Funding
Cost ($MM Year of Reinv Spread Cost
Investment Deal Type USD)(1) Maturity Period (bps)(2) (bps)(3)
Investment 1 EUR CLO 37.5 2024 2014 295 55
Investment 2 EUR CLO 29.7 2023 2013 312 52
Investment 3 EUR CLO 22.2 2022 2012 317 58
Investment 4 EUR CLO 33.0 2023 2013 318 48
Investment 5 EUR CLO 36.9 2021 2012 293 60
Investment 6 EUR CLO 33.3 2022 2012 304 51
Investment 7 EUR CLO 38.5 2023 2013 292 46
Investment 8 EUR CLO 26.9 2021 2011 328 53
Investment 9 EUR CLO 41.3 2023 2013 319 50
Investment 10 EUR CLO 27.0 2022 2012 299 50
EUR CLO Subtotal: 326.3 307 52
Investment 11 US CLO 20.5 2018 2012 315 45
Investment 12 US CLO 22.8 2019 2013 319 46
Investment 13 US CLO 15.2 2018 2012 315 47
Investment 14 US CLO 26.0 2021 2014 298 49
Investment 15 US CLO 28.1 2021 2014 333 52
Investment 16 US CLO 23.5 2020 2013 329 46
Investment 17 US CLO 26.0 2021 2014 317 40
Investment 18 US CLO 16.7 2017 2011 329 45
Investment 19 US CLO 1.2 2017 2011 329 45
Investment 20 US CLO 26.6 2020 2012 420 52
Investment 21 US CLO 20.7 2020 2012 354 53
Investment 22 US CLO 37.4 2019 2013 405 53
Investment 23 US CLO 19.9 2021 2013 334 66
Investment 24 US CLO 16.9 2018 2012 300 46
Investment 25 US CLO 20.9 2018 2013 310 46
Investment 26 US CLO 27.9 2019 2013 300 43
Investment 27 US CLO 23.9 2021 2014 403 51
Investment 28 US CLO 7.6 2021 2014 403 51
Investment 29 US CLO 19.1 2018 2011 461 66
Investment 30 US CLO 12.4 2018 2012 457 67
Investment 31 US CLO 9.3 2017 2012 346 52
Investment 32 US CLO 24.0 2021 2014 308 59
Investment 33 US CLO 16.2 2020 2012 346 56
Investment 34 US CLO 22.2 2020 2012 345 50
Investment 35 US CLO 23.6 2018 2012 407 52
Investment 36 US CLO 28.4 2021 2013 373 46
Investment 37 US CLO 9.3 2017 2011 303 50
Investment 38 US CLO 23.7 2021 2013 308 42
Investment 39 US CLO 7.8 2017 2011 372 70
Investment 40 US CLO 13.0 2020 2011 366 39
Investment 41 US CLO 22.5 2020 2013 324 48
Original Wtd Avg
Invest. End of Wtd Avg Funding
Cost ($MM Year of Reinv Spread Cost
Investment Deal Type USD)(1) Maturity Period (bps)(2) (bps)(3)
Investment 42 US CLO 22.4 2021 2014 344 47
Investment 43 US CLO 0.2 2021 2014 325 54
Investment 44 US CLO 22.3 2018 2012 303 54
Investment 45 US CLO 23.0 2018 2012 292 46
Investment 46 US CLO 21.3 2019 2013 289 51
Investment 47 US CLO 28.3 2021 2013 324 47
Investment 48 US CLO 23.0 2019 2013 322 46
Investment 49 US CLO 12.6 2017 2011 312 40
Investment 50 US CLO 12.3 2018 2012 312 40
Investment 51 US CLO 18.0 2020 2013 344 53
Investment 52 US CLO 0.3 2015 2008 260 93
Investment 53 US CLO 0.6 2016 2011 295 61
Investment 54 US CLO 0.5 2017 2012 323 56
Investment 55 US CLO 0.3 2017 2011 304 39
Investment 56 US CLO 23.0 2019 2014 324 42
Investment 57 US CLO 0.6 2019 2014 324 42
Investment 58 US CLO 21.8 2019 2014 327 49
Investment 59 US CLO 0.4 2019 2014 327 49
Investment 60 US CLO 18.8 2021 2014 403 198
Investment 61 US CLO 29.1 2021 2014 294 45
Investment 62 US CLO 25.3 2020 2013 339 42
Investment 63 US CLO 27.3 2021 2013 313 53
Investment 64 US CLO 15.4 2021 2013 355 38
Investment 65 US CLO 26.9 2021 2013 300 47
Investment 66 US CLO 21.3 2020 2013 316 49
Investment 67 US CLO 27.3 2022 2014 320 46
Investment 68 US CLO 19.3 2020 2013 357 48
Investment 69 US CLO 28.2 2019 2013 347 44
Investment 70 US CLO 24.6 2020 2013 284 52
US CLO Subtotal 1107.5 337 51
Total CLO Portfolio: 1 ,433.8 330 52
Table Continued Below
Jr-Most
Current O/C Annualized ITD Cash
Jr- Most Cushion (Loss) Received
O/C at Gain of as % of
Investment Cushion(4) Close(5) Cushion(6) IRR(7) Cost(8)
Investment 1 -5.64% 3.86% -2.71% 2.60% 29.60%
Investment 2 0.90% 3.60% -0.65% 7.30% 30.60%
Investment 3 3.09% 5.14% -0.41% 12.20% 69.20%
Investment 4 2.54% 5.76% -0.85% 10.90% 43.30%
Investment 5 1.51% 5.74% -1.24% 5.00% 25.70%
Investment 6 -8.01% 4.70% -2.75% 0.70% 49.70%
Investment 7 -8.18% 3.64% -3.15% 1.80% 31.90%
Investment 8 1.47% 4.98% -0.65% 12.10% 66.80%
Investment 9 0.69% 6.27% -1.49% 7.70% 23.90%
Investment 10 -1.80% 4.54% -1.44% 6.40% 31.50%
EUR CLO Subtotal: -1.65% 4.84% -1.64% 38.20%
Investment 11 4.79% 4 .55% 0 .05% 18.10% 90.30%
Investment 12 5.14% 4 .45% 0 .17% 18.10% 82.20%
Investment 13 5.97% 4 .82% 0 .26% 17.80% 91.10%
Investment 14 4.13% 5 .63% -0.39% 14.30% 59.20%
Investment 15 2.07% 4 .21% -0.61% 23.10% 92.80%
Investment 16 2.25% 4 .44% -0.48% 16.50% 82.40%
Investment 17 3.52% 4 .24% -0.19% 19.70% 79.10%
Investment 18 3.86% 4 .77% -0.18% 17.30% 106.60%
Investment 19 3.86% 4 .77% -0.18% 20.70% 100.80%
Investment 20 2.78% 5 .28% -0.59% 20.80% 106.30%
Investment 21 2.54% 4 .76% -0.50% 15.80% 85.60%
Investment 22 3.07% 5 .00% -0.51% 17.90% 71.60%
Investment 23 3.19% 4 .98% -0.50% 16.40% 78.60%
Investment 24 2.84% 4 .17% -0.30% 12.20% 60.50%
Investment 25 3.83% 4 .13% -0.07% 18.10% 84.10%
Investment 26 2.21% 4 .05% -0.49% 14.10% 58.90%
Investment 27 6.09% 6 .11% -0.01% 29.00% 125.10%
Investment 28 6.09% 6 .11% -0.01% 31.90% 35.60%
Investment 29 3.41% 4 .82% -0.27% 19.10% 95.00%
Investment 30 3.33% 5 .16% -0.40% 16.70% 73.10%
Investment 31 2.51% 5 .02% -0.45% 14.80% 97.80%
Investment 32 4.20% 5 .57% -0.41% 17.00% 60.00%
Investment 33 4.95% 6 .99% -0.42% 13.10% 70.20%
Investment 34 4.26% 6 .66% -0.59% 14.80% 71.30%
Investment 35 2.10% 5 .00% -0.64% 17.50% 100.40%
Investment 36 2.35% 5 .18% -0.75% 14.90% 71.70%
Investment 37 1.81% 4 .34% -0.48% 13.60% 87.30%
Investment 38 1.47% 5 .07% -0.94% 23.80% 109.60%
Investment 39 1.15% 3 .15% -0.38% 8.30% 60.10%
Investment 40 N/A N/A N/A 17.90% 79.10%
Investment 41 4.51% 4 .71% -0.05% 18.90% 84.10%
Jr-Most
Current O/C Annualized ITD Cash
Jr- Most Cushion (Loss) Received
O/C at Gain of as % of
Investment Cushion(4) Close(5) Cushion(6) IRR(7) Cost(8)
Investment 42 3.95% 3 .92% 0 .01% 18.20% 64.30%
Investment 43 3.63% 3 .75% -0.04% 18.70% 41.40%
Investment 44 1.79% 4 .16% -0.51% 9.40% 66.60%
Investment 45 1.09% 4 .46% -0.83% 7.00% 46.20%
Investment 46 1.77% 4 .33% -0.71% 4.20% 27.40%
Investment 47 2.72% 4 .34% -0.39% 18.20% 86.30%
Investment 48 2.01% 5 .71% -0.89% 14.20% 56.20%
Investment 49 0.27% 3 .94% -0.72% 5.90% 60.90%
Investment 50 0.84% 4 .25% -0.75% 7.80% 52.90%
Investment 51 3.49% 4 .47% -0.27% 18.80% 75.30%
Investment 52 1.17% 3 .20% -0.27% 278.60% 511.30%
Investment 53 4.67% 4 .00% 0.11% 4210.00% 5.60%
Investment 54 4.24% 3 .69% 0 .10% 5 0.1% 2 35.20%
Investment 55 3.82% 3 .59% 0 .04% 5 1.6% 1 87.00%
Investment 56 4.33% 4 .53% -0.05% 19.90% 86.10%
Investment 57 4.33% 4 .53% -0.05% 40.00% 219.40%
Investment 58 3.32% 4 .04% -0.20% 21.10% 86.10%
Investment 59 3.32% 4 .04% -0.20% 40.40% 297.80%
Investment 60 4.46% 4.46% 0.00% 10.10% 0.00%
Investment 61 2.19% 4 .04% -0.50% 13.60% 52.80%
Investment 62 3.89% 5 .20% -0.35% 17.70% 77.00%
Investment 63 2.14% 4 .78% -0.76% 14.00% 61.50%
Investment 64 N/A N/A N/A 16.60% 34.40%
Investment 65 2.57% 4 .96% -0.58% 9.10% 44.10%
Investment 66 3.31% 4 .05% -0.18% 18.10% 85.60%
Investment 67 3.20% 4 .38% -0.31% 16.20% 61.10%
Investment 68 5.08% 4 .41% 0 .16% 23.20% 98.10%
Investment 69 5.36% 5 .61% -0.07% 20.90% 81.20%
Investment 70 6.01% 6 .21% -0.05% 14.90% 75.60%
US CLO Subtotal 3.21% 4.68% -0.36% 74.60%
Total CLO Portfolio: 2.10% 4.72% -0.65% 66.30%
Tetragon Financial Group Limited (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(unless otherwise stated)
As of December 31, 2010
Report Date TFG Share TFG TFG No. of ClosedCLO
Price ($) group group Transactions
Market Net
Cap Assets
($MM)(1) ($MM)
31 December 2010 $5.70 $747.6 $1,137.5 70(2)
Capital Allocation by Asset Class Risk Investment
Capital - Fair
Allocation Value
($MM)(3)(4)
Broadly Syndicated Senior Secured Loans: US 74.1% $763.6
Broadly Syndicated Senior Secured Loans: Europe 9.6% $99.0
Middle Market Senior Secured Loans: US 16.3% $167.7
CDOs Squared: US 0.0% $0.0
ABS and Structured Finance: US 0.0% $0.0
Total 100% $1,030.3
Geographic Allocation by Asset Class USA Europe Asia Total
Pacific
Broadly Syndicated Senior Secured Loans 88.5% 11.5% 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%
90.4% 9.6% 0.0% 100.0%
Top 15 Underlying Bank Loan Credits Bank Loan
Exposure
(5)
Community Health 0.98%
Charter Communications 0.88%
TXU Corp 0.88%
Univision Communications 0.84%
HCA Inc 0.79%
First Data Corp 0.73%
Cablevision Systems Corp 0.71%
Aramark Corp 0.68%
SunGard Data Systems Inc 0.67%
Sabre Holdings Corp 0.65%
UPC Broadband 0.65%
Federal-Mogul 0.60%
Georgia Pacific Corp 0.60%
Nielsen Company 0.59%
Health Management Associates 0.58%
EUR-USD FX: 1.34
(1) Calculated using TFG shares outstanding 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 investment in LCM Asset Management LLC.
(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 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
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
Tudor House
Le Bordage
St. Peter Port, Guernsey
Channel Islands GYI 3PF
Investment Manager
Tetragon Financial Management LP
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Investor Relations
David Wishnow / Yuko Thomas
[email protected]
Press Inquiries
Citigate Dewe Rogerson
Michael Berkeley/Justin Griffiths/Clare Simonds
[email protected]
Auditors
KPMG Channel Islands Ltd
20 New Street
St. Peter Port, Guernsey
Channel Islands GYI 4AN
Sub-Registrar and Transfer Agent
BNY Mellon
One Wall Street
New York, NY 10286
United States of America
Issuing Agent, Dutch Paying and Transfer Agent
Kas Bank N.V.
Spuistraat 172
1012 VT Amsterdam, The Netherlands
Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
One Ropemaker Street
London EC2Y 9HR
United Kingdom
Legal Advisor (as to Guernsey law)
Ogier
Ogier House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GYI 1WA
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam, The Netherlands
Stock Listing
Euronext Amsterdam by NYSE Euronext
Administrator and Registrar
State Street Fund Services (Guernsey) Limited
Tudor House
Le Bordage
St. Peter Port, Guernsey
Channel Islands GYI 3PF
---------------------------------
([1]) TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the issued shares. In this report, unless otherwise stated, we report on the consolidated business incorporating TFG and TFGMF. References to "we" are to Tetragon Financial Management LP, TFG's investment manager.
([2]) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, and LCM VIII 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.
([3]) Includes only look-through loan exposures through TFG's CLO investments.
([4]) 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.
([5]) Based on the most recent trustee reports available for both our U.S. and European CLO investments as of December 31, 2010.
([6]) As of December 31, 2010, European CLOs represented approximately 9.6% of TFG's investment portfolio; approximately 83% 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.
([7]) 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.
([8]) Morgan Stanley CDO Market Tracker, January 5, 2011; based on a sample of 477 U.S. CLO transactions.
([9]) 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.
([10]) Morgan Stanley CDO Market Tracker, January 5, 2011; based on the lower of Moody's and S&P rating. Furthermore, TFG's investment portfolio includes approximately 9.6% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's average CCC asset holdings.
([11]) Weighted by the original USD cost of each investment.
([12]) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a "Selective Default" rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's investment portfolio includes approximately 9.6% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate.
([13]) S&P/LCD News, "With no December defaults 2010 rate falls to 5-year low of 1.87," January 3, 2011.
([14]) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, and LCM VIII 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.
([15]) S&P/LCD News, "With no December defaults 2010 rate falls to 5-year low of 1.87," January 3, 2011.
([16]) S&P/LSTA Leveraged Lending Review 4Q 2010.
([17]) S&P/LCD News, "Full Index Analysis: Loans return 10.13% in no-drama 2010," January 4, 2011.
([18]) S&P/LCD Quarterly Review, Fourth Quarter 2010.
([19]) S&P/LSTA Leveraged Lending Review 4Q 2010.
([20]) S&P/LCD Quarterly Review, Third Quarter 2010.
([21]) Morgan Stanley CDO Market Tracker, January 5, 2011; based on a sample of 477 U.S. CLO transactions.
([22]) Morgan Stanley CDO Market Tracker, October 8, 2010; based on a sample of 478 U.S. CLO transactions.
([23]) Morgan Stanley CDO Market Tracker, January 5, 2011; based on a sample of 196 European CLO transactions.
([24]) Morgan Stanley CDO Market Tracker, January 5, 2011.
([25]) Morgan Stanley CDO Market Tracker, January 5, 2011.
([26]) Morgan Stanley CDO Market Tracker, January 5, 2011.
([27]) Morgan Stanley CDO Market Tracker, January 5, 2011.
([28]) The Accelerated Loss Reserve is transaction specific. The Accelerated Loss Reserve is a direct adjustment to the fair value of an investment to account for the potential impact of certain potential losses and the cumulative value of such adjustments is evidenced in TFG's financial statements.
([29])The hurdle rate is reset each quarter using 3M USD LIBOR plus a spread of 2.647858% accordance with TFG's investment management agreement. Please see the TFG website, www.tetragoninv.com, for more details.
For further information, please contact:
TFG: Press Inquiries:
David Wishnow/Yuko Thomas Citigate Dewe Rogerson
Investor Relations Michael Berkeley/Justin
[email protected] Griffiths/Clare Simonds
[email protected]
SOURCE Tetragon Financial Group Limited
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