Tetragon Financial Group Limited (TFG) - Performance Report for Period Ended 30 September 2012
LONDON, October 29, 2012 /PRNewswire/ --
Tetragon Financial Group Limited ("TFG") is a Guernsey closed-ended investment company traded on NYSE Euronext in Amsterdam under the ticker symbol "TFG." (1)
In this report we provide an update on TFG's results of operations for the period ending September 30, 2012.
- Executive Summary:
Q3 2012 results reflect continued strength of the U.S. CLO portfolio
Distributions: TFG
declared a Q3 2012
dividend of $0.115 per
share, unchanged from
Q2 2012. Inclusive of Net Asset Value
the Q3 dividend, the ("NAV"): Rose to
rolling 12-month $1,623.6 million or
dividend growth rate $14.29 per share at the
(year-on-year) was end of Q3 2012, the
Earnings per Share: TFG 15.8%. TFG also used highest level to date,
generated EPS of $0.62 over $6.7 million to and an increase of 3.9%,
during Q3 2012 (Q2 2012: buy back shares below on a per share basis,
$0.69). NAV during the quarter. from Q2 2012.
Figure 1 below shows an historical summary of TFG's Net Assets, NAV per share and share price.
Figure 1
Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
Consolidated Net Assets ($
MM) $1,348.0 $1,142.0 $723.4 $693.1 $720.8
NAV / Share $10.69 $9.06 $5.75 $5.50 $5.71
Price/ Share $5.00 $2.87 $1.01 $1.18 $1.90
Figure 1
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
Consolidated Net Assets ($
MM) $807.0 $867.0 $909.40 $1,018.6 $1,137.5
NAV / Share 6.47 $7.02 $7.44 $8.43 $9.47
Price/ Share $3.91 $4.50 $4.14 $4.39 $5.70
Figure 1
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
Consolidated
Net Assets
($ MM) $1,298.0 $1,368.3 $1,413.6 $1,474.4 $1,510.1 $1,570.3 $1,623.6
NAV / Share $10.85 $11.52 $12.06 $12.71 $13.12 $13.75 $14.29
Price/ Share $7.60 $8.30 $6.40 $6.25 $7.10 $7.37 $8.54
- Source: NAV per share based on TFG's financial statements as of the relevant quarter-end date; TFG's closing share price data as per Bloomberg as of the last trading day of each quarter. Please note that the NAV per share reported as of each quarter-end date excludes any shares held in treasury or in a subsidiary as of that date.
- Net Income: Consolidated net income of $70.8 million for Q3 2012 (Q2 2012: consolidated net income of $79.2 million).
This Performance Report constitutes TFG's interim management statement as required pursuant to Section 5:25e of the FMSA. Pursuant to Section 5:25d and 5:25m of the FMSA, this report is made public by means of a press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) and also made available to the public by way of publication on the TFG website (http://www.tetragoninv.com).
- Executive Summary (continued):
- Asset Breakdown: The figures below illustrate the split of net assets by asset class at the end of Q3 2012 ($1,623,626,806) and Q2 2012 ($1,570,273,629), respectively.
Figures 2a and 2b
Q3 2012 $1,623,626,806
U.S. CLOs $1,058,214,648 $1,623,626,806 100%
Euro CLOs $118,812,433
CLO Mezz $1,500,695
Direct Loans $107,554,223
Asset Managers $10,500,252
Real Estate Funds $10,518,839
Cash Less Net
Liabilities $316,525,716
Q2 2012 $1,570,273,630
U.S. CLOs $1,061,599,321 $1,570,273,630 100%
Euro CLOs $115,412,741
CLO Mezz $1,283,100
Direct Loans $87,423,004
Asset Managers $10,411,090
Real Estate Funds $8,065,210
Cash Less Net
Liabilities $286,079,164
Investment Portfolio Performance Highlights
TFG's underlying U.S. CLO collateral performance remains robust, supporting strong Q3 2012 results.
v CLO Returns:
Weighted-average IRRs
on CLO equity
v Collateral investments rose to
Performance: TFG's 17.9% (Q2 2012: 17.6%)
average CLO portfolio with the U.S. CLO
v Cash Flows: TFG statistics remained average IRR at 20.0%
generated $119.1 million strong during Q3 2012, (Q2 2012: 19.7%) while
of cash flows from its CLO despite registering a the average IRR of
equity investment modest pick-up in TFG's European CLOs
portfolio in Q3 2012 (Q2 CCC+/Caa1 or below increased to 8.1% (Q2
2012: $110.0 million). rated asset holdings. 2012: 8.0%).
- Executive Summary (continued):
Investment Portfolio Performance Highlights (continued):
Figure 3 below shows a historical summary of the weighted-average IRR on TFG's CLO equity investments.
Figure 3
Q3
Q3 2008 Q4 2008 Q1 2009 Q2 2009 2009
Weighted-Average IRR on TFG's CLO
Investments 16.9% 13.8% 10.6% 9.2% 10.3%
U.S. IRR 17.5% 14.4% 11.3% 10.4% 12.4%
EUR IRR 14.7% 11.4% 7.8% 4.8% 2.0%
Figure 3
Q4
Q4 2009 Q1 2010 Q2 2010 Q3 2010 2010
Weighted-Average IRR on TFG's CLO
Investments 11.9% 12.3% 13.1% 13.7% 15.1%
U.S. IRR 14.1% 14.3% 14.9% 15.8% 17.0%
EUR IRR 2.5% 3.5% 4.2% 4.6% 6.7%
Figure 3
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2011 2011 2011 2011 2012 2012 2012
Weighted-Average IRR on TFG's
CLO Investments 15.8% 16.3% 16.8% 17.6% 17.5% 17.6% 17.9%
U.S. IRR 17.8% 18.4% 18.8% 19.6% 19.7% 19.7% 20.0%
EUR IRR 8.0% 8.1% 8.4% 8.6% 7.9% 8.0% 8.1%
- Source: TFG as of the outlined quarter-end date.
- New CLO Equity Investments: During Q3 2012, TFG invested $21.7 million in a majority stake in the equity tranche of a new issue CLO transaction to be managed by a third-party manager previously represented within TFG's CLO portfolio. Additionally, on October 4, 2012, LCM successfully closed LCM XII, a $518.25 million new issue CLO(2) TFG invested $25.4 million in the equity tranche of LCM XII, representing a majority position of the tranche.
- Direct Loans: TFG held direct loans with a fair value of $107.6 million at the end of Q3 2012, up from $87.4 million as of the end of Q2 2012. Overall, the direct loan portfolio performed in-line with expectations during this period experiencing no defaults.
- Real Estate Investments: During Q3 2012, TFG invested a further $1.5 million into GreenOak-managed real estate. The total amount of capital invested in GreenOak-managed real estate since inception is approximately $9.7 million as of the end of Q3 2012.
We continue to seek to diversify the investment portfolio across asset classes and types, industries, geographies and investment duration.
- Executive Summary (continued):
Asset Management Segment: Third-party AUM continues to grow.
We believe that TFG owning or having stakes in asset management businesses may provide repeatable income streams and reduce fees paid to third-party managers.
Figure 4
LCM Asset Management LLC - CLO
AUM - $MM
Deal Name Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011
Pre-Acquisition CLOs 2,353.7 2,340.5 2,314.0 2,268.2 2,238.1
Post-Acquisition CLOs 0.0 0.0 0.0 671.1 671.3
Total 2,354 2,341 2,314 2,939 2,909
Figure 4
LCM Asset Management LLC - CLO
AUM - $MM
Deal Name Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
Pre-Acquisition CLOs 2,161.2 2,075.8 2,035.9 1,984.6 1,889.4 1,778.6
Post-Acquisition CLOs 1,322.5 1,323.0 1,323.2 1,725.0 2,196.6 2,164.3
Total 3,484 3,399 3,359 3,710 4,086 3,943
LCM: LCM continued to perform well during Q3 2012, with all LCM Cash Flow
CLOs (3) continuing to pay senior and subordinated management fees. As
of the end of Q3 2012 LCM's total loan assets under management stood at
$3.9 billion (Q2 2012: $4.1 billion). With the closing of LCM XII CLO in
early October 2012, LCM's assets under management stood at $4.4 billion as
of October 5, 2012.
Figure 5
GreenOak - AUM
calculations
AUM
Q4 2010 Q4 2011 Q1 2012 Q2 2012 Q3 2012
Europe 505 491 1,602 1,573 1688
U.S. - 96 114 129 188
Japan - 17 16 39 23
Total GreenOak AUM 505 605 1,732 1,741 1,899
GreenOak: GreenOak continued to execute on its business growth strategy,
including increasing investor commitments to its funds.
- Corporate-Level Performance Details:
- Capital Distributions: TFG's Board approved a dividend of $0.115 per share with respect to Q3 2012, unchanged from the prior quarter. As of September 30, 2012, inclusive of the dividend declared with respect to Q3 2012, the rolling 12-month dividend growth rate (year-on-year) was 15.8%.(4). Since its public listing TFG has distributed or declared a cumulative amount of approximately $2.12 per share via quarterly dividends. In addition, TFG's NAV per share, as reported each quarter, among other things, reflects value created for shareholders via the repurchase of shares below NAV. During Q3 2012, TFG repurchased a total of 886,721 shares at an aggregate cost of approximately $6.7 million, at an average price of $7.51 per share. Since the inception of the buy-back program, TFG has repurchased a total of 19.4 million shares, at an aggregate cost of approximately $105.5 million, at an average price of $5.44 per share. Please refer to Figure 6 and Figure 7 for a summary of TFG's historical NAV per share, dividend distributions, and share buy-back program.
Figure 6
Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
NAV / Share $10.69 $9.06 $5.75 $5.50 $5.71
Cumulative DPS $ 0.90 $ 0.93 $ 0.96 $ 0.99 $ 1.02
Figure 6
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
NAV / Share 6.47 $7.02 $7.44 $8.43 $9.47
Cumulative DPS $ 1.08 $ 1.14 $ 1.22 $ 1.30 $ 1.39
Figure 6
Q4 Q2
Q1 2011 Q2 2011 Q3 2011 2011 Q1 2012 2012 Q3 2012
NAV / Share $10.85 $11.52 $12.06 $12.71 $13.12 $13.75 $14.29
Cumulative DPS $ 1.48 $ 1.58 $ 1.68 $ 1.79 $ 1.89 $ 2.01 $ 2.12
- Source: NAV per share and Cumulative DPS as per TFG's financial disclosures for each relevant quarter-end date. The cumulative DPS reflect dividends announced with respect to each relevant quarter. Please note that dividends announced with respect to each quarter are typically not distributed to shareholders until the beginning of the following quarter. Please note further that the NAV per share reported as of each quarter-end date excludes any shares held in treasury as of that date. Performance Fee
Figure 7
Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
Quarterly # of Shares Repurchased
(in '000s) 732 1,000 484 94 85
Average Purchase Price of Shares
Repurchased $ 5.62 $ 3.37 $ 1.60 $ 1.10 $ 1.25
Figure 7
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
Quarterly # of Shares Repurchased
(in '000s) 1,758 1,378 1,582 1,815 967
Average Purchase Price of Shares
Repurchased $ 3.22 $ 3.87 $ 4.67 $ 4.27 $ 5.23
Figure 7
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2011 2011 2011 2011 2012 2012 2012
Quarterly # of Shares
Repurchased (in '000s) 662 1,287 1,695 1,432 1,358 1,064 887
Average Purchase Price of Shares $ $ $ $ $ $ $
Repurchased 7.25 7.84 6.73 6.23 6.73 7.34 7.51
- The Average Purchase Price of Shares Repurchased is a weighted-average using the number of shares repurchased each quarter including commissions.
- Performance Fee
A performance fee of $19.5 million was accrued in Q3 2012 in accordance with TFG's investment management agreement and based on a "Reference NAV" of Q2 2012. The hurdle rate for the Q4 2012 incentive fee has been reset at 3.0031% (Q3 2012: 3.1085%) as per the process outlined in TFG's 2011 Audited Financial Statements and in accordance with TFG's investment management agreement. (5)
- Investment Portfolio Performance Details:
- CLO Portfolio Size: At the end of Q3 2012, the estimated total fair value of TFG's CLO equity investment portfolio was approximately $1,177.0 million ($1,058.2 million of U.S. and $118.8 million of European investments), broadly unchanged from $1,177.0 million ($1,061.6 million of U.S. and $115.4 million of European investments) at the end of Q2 2012. TFG's total indirect exposure to leveraged loans through its CLO equity investments was approximately $18.7 billion as ofthe end of Q3 2012. (6)
- CLO Portfolio Composition: 80 transactions as of the end of Q3 2012, up from 79 as of the end of the prior quarter, reflecting the closing of one new issue CLO equity investment. The number of deals in the portfolio increased to 71 from 70 as of the end of the prior quarter. The number of external CLO managers remained unchanged from Q2 2012, at 27. (7)
- CLO Collateral Performance: At the end of Q3 2012, approximately 97% of TFG's CLO investments were passing their junior-most O/C tests, weighted by fair value.(8) Similarly, 66 or approximately 93% were passing when weighted by the number of deals. At the end of the previous quarter, 98% of TFG's CLO investments were passing their junior-most O/C tests, weighted by fair value, or 66 and 94% when weighted by the number of deals.
100% of TFG's U.S. CLOs were passing their junior-most O/C tests as of September 30, 2012 (note that U.S. CLOs represented approximately 90.0% of the total fair value of TFG's CLO equity investment portfolio). (9)(10). In comparison, the market-wide average of U.S. CLOs estimated to be passing their junior O/C tests as of the end of Q3 2012 was approximately 96.3% (when measured on a percentage of deals basis). (11).Please refer to Figure 8 below for a summary of TFG's investments' historical junior O/C test performance.
Figure 8: TFG's Gross Investment and Operating Cash Flows ($MM) vs. of CLOs Passing Junior-Most O/C Tests (i)(ii)
Figure 8
ALL DEALS
Q4
Q3 2008 2008 Q1 2009 Q2 2009 Q3 2009
Gross Cash Receipts from
Investments ($MM) $ 77.7 $ 75.6 $ 47.1 $ 31.9 $ 35.3
% CLOs Passing Junior-Most O/C Test
(# Deals) 100% 95% 60% 58% 60%
Cash Flows from Operations ($MM) $ 102.0 $ 67.5 $ 42.2 $ 36.6 $ 27.7
Figure 8
ALL DEALS
Q2 Q4
Q4 2009 Q1 2010 2010 Q3 2010 2010
Gross Cash Receipts from
Investments ($MM) $ 38.4 $ 51.1 $ 60.9 $ 71.8 $ 78.9
% CLOs Passing Junior-Most O/C Test
(# Deals) 68% 80% 84% 88% 94%
Cash Flows from Operations ($MM) $ 32.5 $ 20.5 $ 43.2 $ 55.3 $ 34.8
Figure 8
ALL DEALS
Q1 Q2 Q3 Q2 Q3
2011 2011 2011 Q4 2011 Q1 2012 2012 2012
Gross Cash Receipts from $ $ $ $
Investments ($MM) $ 90.9 102.4 105.1 $ 113.2 $ 102.7 110.0 119.1
% CLOs Passing
Junior-Most O/C Test (#
Deals) 95% 96% 96% 94% 93% 94% 93%
Cash Flows from $
Operations ($MM) $ 52.2 $ 30.2 $ 78.7 $ 92.8 $ 80.7 $ 89.6 102.0
(i) The percentage of TFG's CLOs passing their junior-most O/C tests has been calculated as the ratio of the number of deals passing their junior O/C tests to the total number of CLO deals held by TFG as of the applicable quarter-end date.
(ii) Gross Cash Receipts from Investments refer to the actual cash receipts collected during each quarter from TFG's CLO investments. Cash Flows from Operations refer to cash inflows from investments less expenses and net cash settlements on FX and credit hedges.
- Investment Portfolio Performance Details (continued):
- CLO Portfolio Credit Quality: The weighted-average WARF across all of TFG's CLO equity investments stood at approximately 2,605 as of the end of Q3 2012. Each of these foregoing statistics represents a weighted-average summary of all of our 71 deals. (12) Each individual deal's metrics will differ from these averages and vary across the portfolio.
Q3 Q1
ALL CLOs 2012 Q2 2012 2012 Q4 2011 Q3 2011 Q2 2011
Caa1/CCC+ or Below Obligors: 6.4% 5.7% 6.2% 7.0% 7.0% 7.2%
WARF: 2,605 2,578 2,588 2,624 2,614 2,642
Q1 Q4 Q3
ALL CLOs 2011 2010 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009
Caa1/CCC+ or Below Obligors: 7.6% 8.3% 9.6% 10.5% 11.1% 12.0% 12.6%
WARF: 2,664 2,671 2,658 2,706 2,762 2,809 2,813
Q3 Q1
US CLOs 2012 Q2 2012 2012 Q4 2011 Q3 2011 Q2 2011
Caa1/CCC+ or Below Obligors: 4.9% 4.2% 4.8% 5.5% 5.5% 5.8%
WARF: 2,528 2,491 2,504 2,533 2,522 2,542
Q1 Q4 Q3
US CLOs 2011 2010 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009
Caa1/CCC+ or Below Obligors: 6.5% 6.9% 7.9% 8.4% 9.4% 12.0% 12.8%
WARF: 2,591 2,622 2,610 2,648 2,719 2,799 2,824
Q3
EUR CLOs 2012 Q2 2012 Q1 2012 Q4 2011 Q3 2011 Q2 2011
Caa1/CCC+ or Below Obligors: 12.2% 11.6% 11.1% 12.3% 12.0% 12.3%
WARF: 2,903 2,910 2,900 2,948 2,941 2,997
Q1 Q4 Q3
EUR CLOs 2011 2010 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009
Caa1/CCC+ or Below Obligors: 11.4% 13.1% 15.3% 17.4% 16.8% 15.6% 12.0%
WARF: 2,914 2,837 2,817 2,898 2,907 2,845 2,779
TFG and Market Default Rates: TFG's lagging 12-month corporate loan default rate was broadly unchanged from the prior quarter, ending Q3 2012 at 0.9%. (13)By geography, TFG's U.S. CLO equity and direct loan investments registered a lagging 12-month default rate of 0.6%, with European CLO equity investments at 3.3%. By comparison, the lagging 12-month U.S. institutional loan default rate fell slightly to 1.00% by principal amount as of September 30, 2012, according to S&P/LCD, down from approximately 1.04% as of the end of Q2 2012.(14). The lagging 12-month default rate for the S&P European Leveraged Loan Index ("ELLI"), however, rose to 6.2% as of the end of Q3 2012, (15)up from 5.5% as of the end of Q2 2012. (16). Please refer to Figure 9 on the following page for a summary of TFG's historical CLO equity and direct loan investments' default performance.
- Investment Portfolio Performance Details (continued):
- Firgure 9: TFG and U.S Market-Wide Trailing 12-Month Default Rates (i)(ii):
Figure 9
Q3
Q3 2008 Q4 2008 Q1 2009 Q2 2009 2009
TFG Trailing 12-Month Loan Rate 1.5% 2.5% 4.0% 5.1% 6.7%
S&P/LCD Trailing 12-Month Default
Rate 1.9% 3.8% 7.8% 9.2% 9.8%
Figure 9
Q4
Q4 2009 Q1 2010 Q2 2010 Q3 2010 2010
TFG Trailing 12-Month Loan Rate 6.5% 4.9% 3.6% 2.2% 1.7%
S&P/LCD Trailing 12-Month Default
Rate 9.6% 5.8% 4.0% 3.6% 1.9%
Figure 9
Q2 Q3 Q4 Q1 Q2 Q3
Q1 2011 2011 2011 2011 2012 2012 2012
TFG Trailing 12-Month Loan
Rate 1.1% 0.8% 0.6% 0.4% 0.8% 0.9% 0.9%
S&P/LCD Trailing 12-Month
Default Rate 1.1% 0.9% 0.3% 0.2% 0.2% 1.0% 1.0%
(i) Source: TFG as of the outlined quarter-end date. The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a "Selective Default" rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes approximately 9.1% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate.
(ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date.
- Direct Loan Investments: As of September 30, 2012, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $107.8 million and total fair value of $107.6 million. For the quarter, there were net realized gains of approximately $0.1 million. In addition, the portfolio earned $1.2 million of interest income and discount premium during the third quarter.
- Real Estate Investments: An early Japanese investment vehicle made its first distribution of approximately $0.8 million to TFG for a realized IRR of approximately 70%. Another $0.1 million is expected to be distributed in early 2013, which would result in a total projected return on this investment in the region of 116%. TFG has continued to fund its investment capital commitments to GreenOak's investment projects, and has now funded approximately $9.7 million from inception through the end of Q3 2012 to finance investments in Japan, the United States and Europe.
- Asset Management Platform Details:
- LCM Developments: LCM's operating results and financial performance remained strong throughout Q3 2012, with all LCM Cash Flow CLOs remaining current on their senior and subordinated management fees as of September 30, 2012.Taking into account all LCM-managed vehicles, the gross income for Q3 2012 for LCM totaled $5.4 million. Pre-tax profit for the entire LCM business, of which TFG owns 75%, was approximately $2.9 million as of the same period (2011 quarterly average of $2.1 million). TFG continues to leverage and benefit from the LCM team's expertise in the ongoing management of the company's direct loan investment portfolio.
LCM Asset Management Performance Snapshot
Q3 Q2 Q1 Q4
2012 2012 2012 2011
Gross Fee Income ($MM) $5.4 $4.4 $4.4 $4.3
Pre-tax Income ($MM) $2.9 $2.1 $2.0 $2.2
Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010 Q2 2010
Gross Fee Income ($MM) $4.4 $3.9 $3.8 $3.4 $3.0 $2.9
Pre-tax Income ($MM) $2.2 $1.9 $1.9 $1.1 $1.4 $1.4
- GreenOak Real Estate Developments: GreenOak continued to execute on its business growth strategy, including increasing investor commitments to its funds. GreenOak's investment team is actively building a pipeline of interesting opportunities in the United States, Japan, and Europe, which we expect to continue to materialize over the next several quarters.
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.
- Loan and CLO Market Developments:
Q3 2012 U.S. leveraged loan default rate eases as near-term outlook remains benign: The U.S. lagged 12-month loan default rate stood at 1.00% by principal amount as of Q3 2012, down slightly from 1.04% as of the end of Q2 2012. (17). Various loan managers believe that, absent a macro-economic shock, near-term U.S. loan default rates may remain below the historical average, as a number of near-term default catalysts, such as near-term maturities, have been addressed and the list of potential default risks remains concentrated in a few credits. (18)
U.S. and European repayments decline: The U.S. S&P/LSTA Leveraged Loan Index repayment rate averaged 7.4% during Q3 2012, down from 8.3% in Q2 2012.(19). Repayments within the S&P European Leveraged Loan Index ("ELLI") fell to €3.4 billion, down from €6.0 billion in Q2 2012. (20)
"Maturity wall" erosion continues: During Q3 2012, U.S. S&P/LSTA Index issuers took advantage of strong high yield bond and loan market conditions to repay or extend approximately $20.0 billion or 17% of loan maturities due by the end of 2015. (21.). High yield bond take-outs were a significant driver of this activity rising to $9.7 billion during Q3 2012 vs. $3.8 billion in Q2 2012. (22)
U.S. and Euro loan prices rise: U.S. secondary loan prices rose during Q3 2012, as the U.S. S&P/LSTA Leveraged Loan Index returned 3.43% for the quarter. (23) . Similarly, the S&P European Leveraged Loan Index ("ELLI") returned 2.28% during Q3 2012 (ex. currency effects). (24). We believe that strong technical market conditions, reduced uncertainty around the Euro sovereign debt crisis, and the Fed's announcement of QE3, among other factors, contributed to this demand-driven rally.
U.S. new issue loan volumes rise, European volumes decline: Institutional U.S. loan issuance rose to $81.0 billion in Q3 2012, up from approximately $52.0 billion in Q2 2012. (25). European primary loan issuance declined to €5.2 billion in Q3 2012 from €7.5 billion in Q2 2012, with sponsored transactions representing only €4.0 billion of Q3 2012 volume, the lowest level since Q4 2011.(26)
U.S. CLO and European O/C ratios improve quarter-on-quarter: During Q3 2012, O/C ratios of both U.S. and European CLOs improved on average. According to Morgan Stanley, the median junior O/C test cushion for U.S. CLOs rose to 4.54% at end of Q3 2012 (27) up from 4.37% in Q2 2012 (28.) while the median junior O/C test cushion for Euro CLOs rose to 0.91% (29) vs. 0.77% in Q2 2012.(30)
)
U.S. CLO debt spreads tighten: Average secondary U.S. CLO debt spreads tightened across the capital structure at the end of Q3 2012 vs. the prior quarter reflecting increased investor risk appetite, among other factors.(31)
CLO new issue spreads also tightened during the quarter. Although CLO AAA prices have been stickier than mezzanine tranches, market participants anticipate that AAA spreads will continue to tighten as they converge with the spread compression experienced by comparable securitized asset classes, such as CMBS, particularly in light of anticipated QE3 asset purchases. (32)
Q3 2012 new issue arbitrage CLO volumes pick-up: U.S. arbitrage CLO issuance rose during Q3 2012 as 33 deals totaling $14.3 billion were priced during the quarter, up from $12.4 billion and 28 vehicles priced during Q2 2012, bringing the YTD volume to $32.5 billion via 76 deals.(33). This pick-up in issuance was accompanied by continued expansion of the CLO buyer base and growing diversification of CLO managers, as the number of managers issuing deals rose from 24 in 2011 to 50 YTD 2012, including nine first-time CLO managers. (34)
- FairValue Determination for TFG's CLO Equity Investments:
- In accordance with the 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. Please refer to the 2011 Annual Report for a more detailed description of the cash flow projection and discounting process.
- Forward-looking CLO Equity Cash Flow Modeling Assumptions:
- The Investment Manager reviews, and adjusts in consultation with TFG's audit committee, as appropriate, the CLO equity investment portfolio's modeling assumptions as described above. At the end of Q3 2012, key assumptions relating to defaults, recoveries, prepayments and reinvestment prices were unchanged from the previous quarter.
- These key average assumption variables have been summarized in the table below. 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). Such weighted averages may change from month to month due to movements in the amortized costs of the deals, even without changes to the underlying assumptions. Each individual deal's assumptions may differ from this geographical average and vary across the portfolio.
In addition to the reinvestment price, reinvestment spread and reinvestment life assumptions are also input into the model to generate an effective spread over LIBOR. Newer vintage CLOs may have a higher weighted average reinvestment spread over LIBOR (as of the end of Q3 2012 387 bps for newer vintage CLOs and 274 bps for older vintage CLOs) or shorter reinvestment life assumptions than older deals. Across the entire CLO portfolio, the reinvestment price assumption of 98% for the remainder of 2012 for U.S. deals and 100% for European deals with their respective assumed weighted-average reinvestment spreads, generates an effective spread over LIBOR of approximately 344 bps on broadly syndicated U.S. loans, 272 bps on European loans, and 394 bps on middle market loans.(35)
- Forward-looking CLO Equity Cash Flow Modeling Assumptions (continued):
U.S. CLOs - Unchanged
Variable Year Current Assumptions
CADR
1.0x WARF-implied default rate
2012-2013 (2.2%)
1.5x WARF-implied default rate
2014-2016 (3.3%)
1.0x WARF-implied default rate
Thereafter (2.2%)
Recovery Rate
Until deal maturity 73%
Prepayment Rate
20.0% p.a. on loans; 0.0% on
Until deal maturity bonds
Reinvestment Price
2012 98%
Thereafter 100%
European CLOs - Unchanged
Variable Year Current Assumptions
CADR
1.5x WARF-implied default rate
2012-2014 (3.1%)
1.0x WARF-implied default rate
Thereafter (2.1%)
Recovery Rate
Until deal
maturity 68%
Prepayment Rate
Until deal 20.0% p.a. on loans; 0.0% on
maturity bonds
Reinvestment Price
Until deal
maturity 100%
- Application of Discount Rate to Projected CLO Equity Cash Flows and ALR:
In determining the applicable rates to use to discount projected cash flows, an analysis of observable risk premium data is undertaken. During Q3 2012 certain observable data and research, covering both CLO equity and debt tranches (including originally BB and BBB-rated debt tranches), suggested that risk premia on U.S. CLO equity decreased. For example, according to Citibank research, the spread on originally BB-rated tranches decreased from approximately 11% at the end of Q2 2012 to 8% as of the end of September 2012. (36)
- Although the aforementioned spreads decreased over the quarter, they have, until recently, fluctuated within a relatively narrow range, which we believe supports the maintenance of TFG's discount rates for U.S. CLOs of 20% for strong deals, and 25% for the others, as an appropriate spread over mezzanine tranches. As we look forward, we will continue to monitor the spreads on mezzanine tranches, as well as other publicly available data points, for evidence of any sustained shifts in risk premia. If recent trends continue we may consider a reduction in certain of the applicable discount rates in Q4 2012. Currently, all of the applicable U.S. deals are considered to be strong and are discounted at 20%.
Per Citibank research, European originally BB-rated tranche yields decreased significantly to 16% from 22% as of September 2012, which is lower than the yield of 24% at the end of 2011. (37). These spreads are still significantly above the equivalent U.S. CLO debt tranches and given the ongoing uncertainty surrounding Europe, we believe that there is sufficient support to maintain TFG's differentiated discount rate for all European deals at 30%.
- As a general rule, where the discount rate being applied to the future cash flows is greater than the IRR on a particular deal, the fair value for that deal will be lower than its 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". Through the process described above, as of the end of Q3 2012, the total ALR stands at $107.0 million, consisting of $9.1 million for U.S. deals and $97.9 million for European deals, as compared to $109.3 million at the end of Q2 2012 ($11.7 million for U.S. deals and $97.6 million for European deals).
- The average carrying value of TFG's U.S. CLO equity investments, which accounted for approximately 90.0% of the CLO equity investment portfolio by fair value, was approximately $0.75 on the dollar at the end of Q3 2012, down from $0.77 the end of Q2 2012.
- The average carrying value of the European deals rose from €0.42 per Euro as of the end of Q2 2012 to €0.43 per Euro as of the end of Q3 2012. This reflected, among other things, a recovery in the O/C cushions of some European deals, which all else being equal increase the value of future projected cash flows. 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 €0.67 per Euro.
- Application of Discount Rate to Projected CLO Equity Cash Flows and ALR (continued):
- As discussed in the 2011 Annual Report, the applicable discount rate for the new vintage deals is determined with reference to each deal's specific IRR, which, in the absence of other observable data points, is deemed to be the most appropriate indication of the current risk premium on these structures. At the end of Q3 2012, the weighted average discount rate (and IRR) on these deals was 12.2%. Such deals represented approximately 12.8% of the CLO equity portfolio by fair value (up from 11.3% at the end of Q2 2012). We will continue to monitor observable data on these newer vintage transactions to determine whether the IRR remains the appropriate discount rate.
- Hedging Activity:
- As of September 30, 2012, 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 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.
- Summary and Outlook:
TFG saw strong operating and financial results during Q3 2012, driven primarily by the performance of its U.S. CLO portfolio. During the quarter, TFG's U.S. CLO portfolio benefitted from widening loan spreads and low defaults as well as the continued prevalence of LIBOR floors, which became increasingly valuable as realized and forward LIBOR rates declined. As in prior quarters, TFG's European CLOs remained under pressure and faced difficult macro-economic conditions and a challenging reinvestment environment given the rally in quality secondary loan prices and limited supply of new issue European loans. Overall, however, cash flows from TFG's CLO equity investments remained healthy, permitting continued capital distributions to TFG's shareholders during the quarter.
TFG's asset management businesses also performed well during the third quarter. Including the recently closed LCM XII deal, both LCM and GreenOak grew their assets under management from the end of the second quarter and saw positive investment portfolio quality trends. We seek to grow our asset management businesses by, among other things, providing capital to our management segments, either directly or via seed or equity investments in the funds that they may manage. We believe that doing so may help attract significant third-party fee-paying capital onto our management platforms and increase the income streams available to TFG. The successful closing of the $518.25 million LCM XII transaction in early October 2012 (priced during Q3 2012) exemplifies this strategy, as TFG took a majority equity position in the deal by investing $25.4 million, with the remainder of the deal's capital coming from third-party investors. GreenOak also added assets in the U.S. and Europe, with total AUM rising to $1.9 billion at the end of Q3 2012, up from $1.7 billion at the end of Q2 2012.
Our outlook for the near-term performance of TFG remains constructive, as we anticipate that the recent stabilization of capital market conditions may continue to provide a favorable environment for TFG's U.S. CLO investment portfolio and asset management platform. On the investment portfolio front, we remain focused on maximizing the returns of our older vintage CLO transactions as they exit their reinvestment periods and on identifying attractive risk-adjusted returns in the new issue and secondary CLO markets. Despite the recent improvement in market sentiment, we are mindful of a number of unresolved systemic risks ranging from slow growth in Europe and the fiscal cliff in the United States to geopolitical instability in the Middle East. We, therefore, seek to remain selective and opportunistic in the timing of our investments with the goal of obtaining attractive risk-adjusted returns while preserving the ability to mitigate certain downside risks.
We anticipate that LCM and GreenOak will look to grow their AUM during the remainder of the year and to continue to capitalize on their current momentum and increased investor appetite. As we have stated in the past, we remain focused on growing the company's asset management business as we believe this may create value for the company's shareholders by strengthening and diversifying TFG's income streams.
- Quarterly Investor Call:
We will host a conference call for investors on November 5, 2012 at 15:00 GMT/16:00 CET/10:00 EST to discuss Q3 2012 results and to provide an update on TFG.
The conference call may be accessed by dialing +44-(0)20-7162-0125 and +1-334-323-6203 (a passcode is not required). Participants may also register for the conference call in advance via the following link
https://eventreg2.conferencing.com/webportal3/reg.html?Acc=515826&Conf=209349
Additional call details are as follows:
Event title: Tetragon Investor Call
Conference ID: 923889
Moderator: David Wishnow
A replay of the call will be available for 30 days by dialing +44 (0) 20 7031 4064 and +1 954 334 0342, conference ID 923889 and as an MP3 recording on the TFG website.
Expected Upcoming Events Date
Q3 Dividend Record Date October 31, 2012
Quarterly Investor Call November 5, 2012
October 2012 Monthly Report November 20, 2012 (approx)
Q3 Dividend Payment Date November 20, 2012
TETRAGON FINANCIAL GROUP
Financial Highlights
Q3 2012 Q2 2012 Q1 2012
Net income ($MM) $70.8 $79.2 $53.4
EPS ($) $0.62 $0.69 $0.46
CLO Cash receipts ($MM) (1) $119.1 $110.0 $102.6
CLO Cash receipts per share ($) $1.05 $0.96 $0.89
Net cash balance ($MM) $353.1 $299.1 $224.8
Net assets ($MM) $1,623.6 $1,570.3 $1,510.1
Number of shares outstanding (million) (2) 113.6 114.2 115.1
NAV per share ($) $14.29 $13.75 $13.12
DPS ($) $0.115 $0.115 $0.105
Weighted average IRR on completed
transactions (%) 17.9% 17.6% 17.5%
Number of CLO investments (3) 80 79 78
ALR Fair Value Adjustment ($MM) ($107.0) ($109.3) ($120.7)
(1) Gross cash receipts from CLO portfolio.
(2) Excludes shares held in treasury and in
a subsidiary.
(3) Excludes CDO-squared and ABS CDO transactions written off in
October 2007. TFG continues to hold the economic rights to 3 of these
written-off transactions.
TETRAGON FINANCIAL GROUP
Financial Highlights
Quarterly
Q4 2011 Q3 2011 Q2 2011 Average
Net income ($MM) $80.3 $67.3 $88.1 $73.2
EPS ($) $0.69 $0.57 $0.74 $0.63
CLO Cash receipts ($MM) (1) $113.2 $105.1 $102.4 $108.7
CLO Cash receipts per share ($) $0.97 $0.89 $0.86 $0.94
Net cash balance ($MM) $211.5 $155.6 $67.7 $218.6
Net assets ($MM) $1,474.4 $1,413.6 $1,368.3 $1,493.4
Number of shares outstanding
(million) (2) 116.0 117.2 118.8 115.8
NAV per share ($) $12.71 $12.06 $11.52 $12.91
DPS ($) $0.11 $0.10 $0.10 $0.11
Weighted average IRR on completed
transactions (%) 17.6% 16.8% 16.3% 17.3%
Number of CLO investments (3) 77 75 75 77
ALR Fair Value Adjustment ($MM) ($128.7) ($118.0) ($133.8) ($119.7)
(1) Gross cash receipts from CLO
portfolio.
(2) Excludes shares held in
treasury and in a subsidiary.
(3) Excludes CDO-squared and ABS CDO transactions written off
in October 2007. TFG continues to hold the economic rights to
3 of these written-off transactions.
TETRAGON FINANCIAL GROUP
Quarterly Statement of Operations as at 30 Sep
2012
Q2 2012
Statement of Operations Q3 2012 ($MM) ($MM)
Interest income 59.4 58.3
CLO management fee income 5.4 4.4
Other income 1.4 1.8
Investment income 66.2 64.5
Management and performance fees (25.5) (28.3)
Admin / custody and other fees (5.5) (4.6)
Total operating expenses (31.0) (32.9)
Net investment income 35.2 31.6
Net change in unrealised appreciation in
investments 38.3 52.1
Realised gain / (loss) on investments 0.5 (0.1)
Realised and unrealised losses from hedging and
fx (1.7) (2.9)
Net realised and unrealised gains from
investments and fx 37.1 49.1
Income taxes (0.8) (1.0)
Noncontrolling interest (0.7) (0.5)
Net increase in net assets from operations 70.8 79.2
TETRAGON FINANCIAL GROUP
Quarterly Statement of Operations as at 30 Sep
2012
Q4 2011
Statement of Operations Q1 2012 ($MM) ($MM)
Interest income 57.5 55.1
CLO management fee income 4.4 4.3
Other income 1.3 2.9
Investment income 63.2 62.3
Management and performance fees (19.5) (28.6)
Admin / custody and other fees (4.8) (7.6)
Total operating expenses (24.3) (36.2)
Net investment income 38.9 26.1
Net change in unrealised appreciation in
investments 16.2 58.5
Realised gain / (loss) on investments 0.1 0.3
Realised and unrealised losses from hedging and
fx (0.7) (3.3)
Net realised and unrealised gains from
investments and fx 15.6 55.5
Income taxes (0.6) (0.7)
Noncontrolling interest (0.5) (0.6)
Net increase in net assets from operations 53.4 80.3
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 Sep 2012
Sep-12
$MM
Assets
Investments in securities, at fair value 1,307.1
Cash and cash equivalents 353.1
Amounts due from brokers 13.1
Derivative financial assets - interest rate swaptions 3.1
Other receivables 3.2
Total Assets 1,679.6
Liabilities
Amounts payable for purchase of investments 16.9
Other payables and accruals 26.6
Amounts payable on Share Options 4.2
Income and deferred tax payable 2.5
Derivative financial assets - forward contracts 4.8
Total Liabilities 55.0
Net Assets Before Noncontrolling Interest 1,624.6
Noncontrolling interest 1.0
Total Equity Attributable to TFG 1,623.6
TETRAGON FINANCIAL GROUP
Statement of Cash Flows for the period ended 30 Sep 2012
Sep-12
$MM (YTD)
Operating Activities
Operating cash flows before movements in working capital after
dividends paid to Guernsey feeder 272.6
Change in payables/receivables (0.3)
Cash flows from operating activities 272.3
Investment Activities
Amounts payable for purchase of investments
Proceeds on sales of investments
- Proceeds sale of CLOs 0.2
- Proceeds from the sale of Bank Loans 43.0
- Proceeds from Real Estate 0.8
Purchase of investments
- Purchase of CLO Equity (86.7)
- Purchase of CLO Mezz (1.1)
- Purchase of Bank Loans (44.6)
- Investments in Real Estate (9.8)
- Investments in Asset Managers (2.7)
Maturity and prepayment of investments 22.6
Cash flows from operating and investing activities 194.0
Amounts due from broker 2.8
Net purchase of shares (17.3)
Dividends paid to shareholders (37.3)
Distributions paid to noncontrolling interest (0.8)
Cash flows from financing activities (52.6)
Net increase in cash and cash equivalents 141.4
Cash and cash equivalents at beginning of period 211.5
Effect of exchange rate fluctuations on cash and cash
equivalents 0.2
Cash and cash equivalents at end of period 353.1
CLO Equity Portfolio Details
As of September 30, 2012
Wtd
Original Deal End of Avg
Invest.
Cost Closing Year of Reinv Spread
Deal ($MM (bps)
Transaction Type USD) (1) Date Maturity Period (2)
Transaction EUR
1 CLO 37.5 2007 2024 2014 354
Transaction EUR
2 CLO 29.7 2006 2023 2013 387
Transaction EUR
3 CLO 22.2 2006 2022 2012 386
Transaction EUR
4 CLO 33.0 2007 2023 2013 402
Transaction EUR
5 CLO 36.9 2007 2022 2014 395
Transaction EUR
6 CLO 33.3 2006 2022 2012 367
Transaction EUR
7 CLO 38.5 2007 2023 2013 374
Transaction EUR
8 CLO 26.9 2005 2021 2011 359
Transaction EUR
9 CLO 41.3 2007 2023 2013 384
Transaction EUR
10 CLO 27.0 2006 2022 2012 354
EUR CLO
Subtotal: 326.3 377
Transaction US
11 CLO 20.5 2006 2018 2012 362
Transaction US
12 CLO 22.8 2006 2019 2013 369
Transaction US
13 CLO 15.2 2006 2018 2012 405
Transaction US
14 CLO 26.0 2007 2021 2014 410
Transaction US
15 CLO 28.1 2007 2021 2014 439
Transaction US
16 CLO 23.5 2006 2020 2013 421
Transaction US
17 CLO 26.0 2007 2021 2014 364
Transaction US
18 CLO 16.7 2005 2017 2011 351
Transaction US
19 CLO 1.2 2005 2017 2011 351
Transaction US
20 CLO 26.6 2006 2020 2012 452
Transaction US
21 CLO 20.7 2006 2020 2012 445
Transaction US
22 CLO 37.4 2007 2021 2014 456
Transaction US
23 CLO 19.9 2007 2021 2013 383
Transaction US
24 CLO 16.9 2006 2018 2012 410
Transaction US
25 CLO 20.9 2006 2018 2013 428
Transaction US
26 CLO 27.9 2007 2019 2013 433
Transaction US
27 CLO 23.9 2007 2021 2014 547
Transaction US
28 CLO 7.6 2007 2021 2014 547
Transaction US
29 CLO 19.1 2005 2018 2011 443
Transaction US
30 CLO 12.4 2006 2018 2012 480
Transaction US
31 CLO 9.3 2005 2017 2012 338
Transaction US
32 CLO 24.0 2007 2021 2014 349
Transaction US
33 CLO 16.2 2006 2020 2012 369
Transaction US
34 CLO 22.2 2006 2020 2012 388
Transaction US
35 CLO 23.6 2006 2018 2012 441
Transaction US
36 CLO 28.4 2007 2021 2013 457
Transaction US
37 CLO 9.3 2005 2017 2011 345
Transaction US
38 CLO 23.7 2007 2021 2013 353
Transaction US
39 CLO 7.8 2005 2017 2011 331
Transaction US
40 CLO 13.0 2006 2020 2011 419
Transaction US
41 CLO 22.5 2006 2020 2013 371
Transaction US
42 CLO 22.4 2007 2021 2014 411
Transaction US
44 CLO 22.3 2006 2018 2012 328
Transaction US
45 CLO 23.0 2006 2018 2012 315
Transaction US
46 CLO 21.3 2007 2019 2013 344
Transaction US
47 CLO 28.3 2006 2021 2013 346
Transaction US
48 CLO 23.0 2006 2019 2013 365
Transaction US
49 CLO 12.6 2005 2017 2011 358
Transaction US
50 CLO 12.3 2006 2018 2012 362
Transaction US
51 CLO 18.0 2007 2020 2013 402
Transaction US
52 CLO 0.3 2003 2015 2008 442
Transaction US
53 CLO 0.6 2004 2016 2011 312
Transaction US
54 CLO 0.5 2005 2017 2012 341
Transaction US
55 CLO 0.3 2005 2017 2011 352
Transaction US
56 CLO 23.0 2007 2019 2014 383
Transaction US
57 CLO 0.6 2007 2019 2014 383
Transaction US
58 CLO 21.8 2007 2019 2014 388
Transaction US
59 CLO 0.4 2007 2019 2014 388
Transaction US
60 CLO 18.8 2010 2021 2014 424
Transaction US
61 CLO 29.1 2007 2021 2014 351
Transaction US
62 CLO 25.3 2007 2020 2013 389
Transaction US
63 CLO 27.3 2007 2021 2013 400
Transaction US
64 CLO 15.4 2007 2021 2013 454
Transaction US
65 CLO 26.9 2006 2021 2013 378
Transaction US
66 CLO 21.3 2006 2020 2013 351
Transaction US
67 CLO 27.3 2007 2022 2014 352
Transaction US
68 CLO 19.3 2006 2020 2013 436
Transaction US
69 CLO 28.2 2007 2019 2013 416
Transaction US
70 CLO 24.6 2006 2020 2013 322
Transaction US
71 CLO 1.7 2006 2018 2012 362
Transaction US
72 CLO 4.8 2007 2019 2014 383
Transaction US
73 CLO 1.9 2007 2019 2014 383
Transaction US
74 CLO 5.5 2007 2019 2014 388
Transaction US
75 CLO 32.7 2011 2022 2014 421
Transaction US
76 CLO 1.9 2006 2018 2012 315
Transaction US
77 CLO 14.5 2011 2023 2016 424
Transaction US
78 CLO 22.9 2012 2023 2015 518
Transaction US
79 CLO 19.4 2012 2022 2015 465
Transaction US
80 CLO 22.7 2012 2022 2016 468
Transaction US
81 CLO 21.7 2012 2024 2016 462
US CLO
Subtotal: 1,257.0 402
Total CLO
Portfolio: 1,583.3 397
Current Jr-Most
Original Current Jr- O/C Annualized ITD Cash
Cost of Cost of Cushion Received
Funds Funds Most O/C at (Loss) Gain as
(bps) (bps) Cushion Close of Cushion IRR % of
Transaction (3) (4) (5) (6) (7) (8) Cost (9)
Transaction
1 55 59 (2.87%) 3.86% (1.28%) - 29.6%
Transaction
2 52 53 0.25% 3.60% (0.57%) 10.0% 65.1%
Transaction
3 58 67 1.76% 5.14% (0.50%) 12.3% 103.1%
Transaction
4 48 47 3.17% 5.76% (0.47%) 14.0% 74.1%
Transaction
5 60 60 3.03% 5.74% (0.52%) 9.8% 50.8%
Transaction
6 51 60 (0.60%) 4.70% (0.83%) 6.3% 49.7%
Transaction
7 46 46 (1.24%) 3.64% (0.89%) 5.0% 31.9%
Transaction
8 53 56 (1.67%) 4.98% (0.93%) 10.4% 87.1%
Transaction
9 50 45 0.94% 6.27% (0.97%) 7.6% 43.4%
Transaction
10 50 52 (1.11%) 4.54% (0.92%) 7.1% 32.7%
EUR CLO
Subtotal: 52 54 0.16% 4.84% (0.81%) 53.8%
Transaction
11 45 45 5.51% 4.55% 0.16% 20.9% 149.2%
Transaction
12 46 46 5.72% 4.45% 0.21% 21.0% 144.7%
Transaction
13 47 47 6.24% 4.82% 0.23% 21.5% 157.7%
Transaction
14 49 50 4.35% 5.63% (0.23%) 18.9% 122.1%
Transaction
15 52 48 3.71% 4.21% (0.09%) 28.7% 170.3%
Transaction
16 46 45 3.62% 4.44% (0.13%) 20.9% 152.7%
Transaction
17 40 40 9.48% 4.24% 0.94% 23.0% 146.6%
Transaction
18 45 48 8.44% 4.77% 0.53% 19.9% 166.2%
Transaction
19 45 48 8.44% 4.77% 0.53% 23.7% 160.5%
Transaction
20 52 52 4.14% 5.28% (0.19%) 22.3% 163.1%
Transaction
21 53 52 3.51% 4.76% (0.20%) 19.4% 138.7%
Transaction
22 53 53 3.39% 5.00% (0.29%) 21.3% 130.9%
Transaction
23 66 66 3.20% 4.98% (0.33%) 20.7% 140.4%
Transaction
24 46 47 5.21% 4.17% 0.17% 17.4% 120.6%
Transaction
25 46 46 6.12% 4.13% 0.35% 22.5% 147.9%
Transaction
26 43 44 4.09% 4.05% 0.01% 19.2% 120.7%
Transaction
27 51 51 11.35% 6.11% 0.92% 32.2% 188.9%
Transaction
28 51 51 11.35% 6.11% 0.92% 42.4% 108.6%
Transaction
29 66 93 5.52% 4.82% 0.10% 18.7% 154.9%
Transaction
30 67 68 2.19% 5.16% (0.47%) 19.3% 127.4%
Transaction
31 52 52 3.32% 5.02% (0.23%) 16.5% 159.7%
Transaction
32 59 59 4.21% 5.57% (0.27%) 20.4% 125.0%
Transaction
33 56 80 5.06% 6.99% (0.29%) 14.3% 130.7%
Transaction
34 50 50 5.01% 6.66% (0.28%) 18.8% 133.3%
Transaction
35 52 52 1.97% 5.00% (0.48%) 20.9% 156.0%
Transaction
36 46 56 2.30% 5.18% (0.52%) 20.2% 128.1%
Transaction
37 50 61 4.59% 4.34% 0.04% 15.9% 143.9%
Transaction
38 42 42 3.98% 5.07% (0.20%) 27.4% 163.8%
Transaction
39 70 88 4.02% 3.15% 0.13% 9.8% 84.4%
Transaction
40 39 41 N/A N/A N/A 22.5% 162.6%
Transaction
41 48 49 4.69% 4.71% (0.00%) 21.6% 151.0%
Transaction
42 47 48 5.12% 3.92% 0.22% 21.3% 127.3%
Transaction
44 54 62 2.38% 4.16% (0.28%) 12.5% 109.5%
Transaction
45 46 46 2.65% 4.46% (0.31%) 10.7% 88.9%
Transaction
46 51 51 2.95% 4.33% (0.26%) 10.2% 75.0%
Transaction
47 47 43 3.69% 4.34% (0.11%) 21.3% 149.9%
Transaction
48 46 46 2.79% 5.71% (0.49%) 16.9% 109.6%
Transaction
49 40 42 3.32% 3.94% (0.09%) 12.9% 105.7%
Transaction
50 40 39 2.90% 4.25% (0.21%) 13.6% 103.1%
Transaction
51 53 53 4.37% 4.47% (0.02%) 21.4% 135.8%
Transaction
52 93 N/A 30.64% 3.20% 2.94% 278.6% 974.4%
Transaction
53 61 84 17.47% 4.00% 1.71% 36.1% 287.8%
Transaction
54 56 59 5.68% 3.69% 0.27% 59.7% 745.4%
Transaction
55 39 43 5.97% 3.59% 0.33% 62.8% 700.9%
Transaction
56 42 42 4.76% 4.53% 0.04% 22.9% 146.5%
Transaction
57 42 42 4.76% 4.53% 0.04% 49.4% 721.6%
Transaction
58 49 49 3.72% 4.04% (0.06%) 25.1% 150.8%
Transaction
59 49 49 3.72% 4.04% (0.06%) 52.9% 992.4%
Transaction
60 198 198 4.52% 4.50% 0.01% 11.3% 23.4%
Transaction
61 45 45 3.00% 4.04% (0.19%) 17.2% 104.1%
Transaction
62 42 42 4.35% 5.20% (0.15%) 21.9% 145.4%
Transaction
63 53 53 2.85% 4.78% (0.37%) 19.3% 119.6%
Transaction
64 38 38 N/A N/A N/A 22.4% 116.2%
Transaction
65 47 48 2.88% 4.96% (0.35%) 14.2% 93.0%
Transaction
66 49 49 3.67% 4.05% (0.06%) 21.7% 152.3%
Transaction
67 46 45 4.61% 4.38% 0.04% 20.1% 126.0%
Transaction
68 48 48 6.30% 4.41% 0.32% 27.3% 181.7%
Transaction
69 44 44 7.51% 5.61% 0.35% 26.0% 165.6%
Transaction
70 52 52 6.22% 6.21% 0.00% 18.8% 126.3%
Transaction
71 40 39 2.90% 4.25% (0.21%) 28.2% 59.7%
Transaction
72 42 42 4.76% 4.53% 0.04% 21.0% 49.9%
Transaction
73 42 42 4.76% 4.53% 0.04% 21.0% 49.9%
Transaction
74 49 49 3.72% 4.04% (0.06%) 22.6% 52.0%
Transaction
75 168 168 4.43% 4.05% 0.30% 13.1% 24.1%
Transaction
76 46 46 2.65% 2.43% 0.04% 46.0% 47.9%
Transaction
77 212 213 5.38% 5.04% 0.43% 13.3% 5.0%
Transaction
78 217 217 4.45% 4.00% 0.64% 13.2% 10.7%
Transaction
79 215 215 4.13% 4.00% 0.20% 9.4% 6.4%
Transaction
80 185 185 4.17% 4.17% (0.00%) 13.2% 0.0%
Transaction
81 216 217 4.00% 4.00% - 11.6% 0.0%
US CLO
Subtotal: 67 68 4.42% 4.62% (0.01%) 121.4%
Total CLO
Portfolio: 64 65 3.54% 4.67% (0.18%) 107.5%
Notes
(1) The USD investment cost fixes the USD-EUR exchange rate of European
CLOs at the same rate to avoid the impact of skewed weightings and FX
volatility.
(2) Par weighted average spread over LIBOR or EURIBOR (as approproate)
of the underlying loan assets in each CLO's portfolio.
(3) Notional weighted average spread over LIBOR or EURIBOR (as
appropriate) of the debt tranches issued by each CLO, as of the closing
date of each transaction.
(4) Notional weighted average spread over LIBOR or EURIBOR (as
appropriate) of the debt tranches issued by each CLO, as of the most
recent trustee report date.
(5) The current junior-most O/C cushion is the excess (or deficit) of the
junior-most O/C test ratio over the test requirement, as of the latest
trustee report available as of the report date.
(6) The junior-most O/C cushion at close is the excess (or deficit) of the
junior-most O/C test ratio over the test requirement that was expected on
each deal's closing date. Please note
that two of TFG's investments are so called "par structures" which don't
include a junior O/C test. They have been marked by an "N/A" in the
relevant junior-most O/C test columns.
(7) Calculated by annualizing the change from the expected closing date
junior-most O/C cushion to the current junior-most O/C cushion.
(8) Calculated from TFG's investment date. Includes both historical cash
flows received to-date and prospective cash flows expected to be received,
based on TFG's base case
modeling
assumptions.
(9) Inception to report date cash flow received on
each transaction as a percentage of its original
cost.
CLO Equity Portfolio Details (continued)
As of September 30, 2012
Amount Amount Cushion Cushion Number of
Date Maturing Amortizing (Deficit) (Deficit) Transactions
2010 or
Earlier 0.0 0.3 0.0% <= 0% 5
2011 0.0 107.5 2.0% 0% to 2% 4
2012 0.0 327.7 4.0% 2% to 4% 28
2013 0.0 611.1 6.0% 4% to 6% 29
2014 0.0 435.5 Over 6% 12
2015 0.3 42.3
2016 0.6 58.9
2017 57.7 0.0
2018 189.6 0.0
2019 181.1 0.0
2020 253.2 0.0
2021 440.0 0.0
2022 221.4 0.0
2023 180.0 0.0
2024 59.2 0.0
2025 0.0 0.0
2026 0.0 0.0
Notes
(1) The USD investment cost fixes the USD-EUR exchange
rate of European CLOs at the same rate to avoid the
impact of skewed weightings and FX volatility.
(2) Par weighted average spread over LIBOR or
EURIBOR (as approproate) of the underlying
loan assets in each CLO's portfolio.
(3) Notional weighted average spread over LIBOR or
EURIBOR (as appropriate) of the debt tranches issued by
each CLO, as of the closing date of each transaction.
(4) Notional weighted average spread over LIBOR or
EURIBOR (as appropriate) of the debt tranches issued by
each CLO, as of the most recent trustee report date.
(5) The current junior-most O/C cushion is the excess (or
deficit) of the junior-most O/C test ratio over the test
requirement, as of the latest trustee report available as of
the report date.
(6) The junior-most O/C cushion at close is the excess (or
deficit) of the junior-most O/C test ratio over the test
requirement that was expected on each deal's closing date.
Please note
that two of TFG's investments are so called "par structures"
which don't include a junior O/C test. They have been marked
by an "N/A" in the relevant junior-most O/C test columns.
(7) Calculated by annualizing the change from
the expected closing date junior-most O/C
cushion to the current junior-most O/C
cushion.
(8) Calculated from TFG's investment date. Includes both
historical cash flows received to-date and prospective cash
flows expected to be received, based on TFG's base case
modeling
assumptions.
(9) Inception to report date cash
flow received on each transaction as
a percentage of its original cost.
Tetragon Financial Group Limited (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(unless otherwise stated)
As of September 30, 2012
TFG
group
Net
Market
TFG Share Cap TFG group Net
Report Date Price ($) ($MM)(1) Assets ($MM)
30
September
2012 $8.54 $970.2 $1,623.6
Capital Risk Investment
Allocation by Capital Fair Value
Asset Class Allocation ($MM)(2,3,4)
Broadly Syndicated Senior
Secured Loans: US 77.0% $989.1
Broadly Syndicated Senior
Secured Loans: Europe 9.2% $118.8
Middle Market Senior Secured
Loans: US 13.8% $176.6
Total 100.0% $1,284.6
Geographic Allocation by Asset Asia
Class USA Europe Pacific Total
Broadly Syndicated Senior Secured
Loans 89.3% 10.7% 0.0% 100.0%
Middle Market Senior Secured Loans 100.0% 0.0% 0.0% 100.0%
90.8% 9.2% 0.0% 100.0%
Bank Loan
Top 15 Underlying Bank Loan Credits Exposure (5)
HCA Inc 0.88%
Univision
Communications 0.86%
First Data
Corp 0.80%
UPC Broadband 0.74%
Federal-Mogul 0.73%
Aramark Corp 0.73%
Charter Communications 0.72%
Cablevision Systems
Corp 0.70%
Asurion Corp 0.65%
Las Vegas
Sands 0.62%
Sabre Holdings Corp 0.62%
Reynolds
Group 0.61%
Bausch & Lomb
Inc 0.60%
SunGard Data Systems
Inc 0.60%
Huntsman ICI 0.60%
EUR-USD
FX: 1.29
(1) Calculated using TFG shares outstanding (net of 10.0
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.
Excludes TFG's investments in CLO mezzanine
tranches.
(3) Excludes TFG's investments in
LCM Asset Management LLC,
GreenOak Real Estate LP and
GreenOak related funds or
investments, and CLO mezzanine
tranches.
(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 CLO
equity tranche investments. With respect to CLO
equity tranche 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 TFG's website atwww.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
ir@tetragoninv.com 1082 MD Amsterdam, The Netherlands
Press Inquiries Stock Listing
Brunswick Group NYSE Euronext in Amsterdam
Andrew Garfield/Gill Ackers/Brian Buckley
tetragon@brunswickgroup.com 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) $518.25 million of total securities were issued in LCM XII CLO with a corresponding $500.0 million target asset par amount.
(3) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, LCM VIII, LCM IX, LCM X, and LCM XI 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 rolling 12-month dividend growth rate is calculated by dividing the sum of the dividends per share distributed or declared over the last 12 months by the dividends per share distributed or declared over the prior 12 months, less one.
(5)The hurdle rate is reset each quarter using 3M USD LIBOR plus a spread of 2.647858% in accordance with TFG's investment management agreement. Please see the TFG website, www.tetragoninv.com, for more details.
(6) Includes only look-through loan exposures through TFG's CLO equity investments.
(7) 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.
(8) Based on the most recent trustee reports available for both our U.S. and European CLO investments as of September 30, 2012.
(9) As of September 30, 2012, European CLOs represented approximately 10% of TFG's CLO equity investment portfolio; approximately 66% of the fair value of TFG's European CLOs and 50%, when measured as a percentage of the total number of European deals, 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 CLO Market Tracker, October 5, 2012; based on a sample of 462 U.S. CLO transactions.
(12) Weighted by the original USD cost of each investment.
(13) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a "Selective Default" rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes approximately 9.2% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate.
(14) S&P/LCD News, "With no defaults in September, leveraged loan default rate eases," October 1, 2012.
(15) S&P/LCD News, "(EUR) S&P ELLI: Default rate climbs to 6.2% in September." 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.
(16) S&P/LCD News, "(EUR) S&P ELLI: Default rate climbs to 5.5% in June, "July 9, 2012.
(17) S&P/LCD News, "With no defaults in September, leveraged loan default rate eases," October 1, 2012.
(18) S&P/LCD News, "With no defaults in September, leveraged loan default rate eases," October 1, 2012.
(19) S&P/LSTA Leveraged Lending Review 3Q 2012.
(20) S&P/LCD News, "(EUR) ELLI repayments fall to two-year low," October 10, 2012.
(21) S&P/LCD Quarterly Review, Third Quarter 2012.
(22) S&P/LCD Quarterly Review, Third Quarter 2012.
(23) S&P/LCD Quarterly Review, Third Quarter 2012.
(24) S&P/LCD News, "(EUR) S&P ELLI gains 0.63% in September," October 8, 2012.
(25) S&P/LCD Quarterly Review, Third Quarter 2012.
(26) S&P/LCD News, "(EUR) (EUR) Topical: Loan volume lags 2011 despite strong technicals," October 3, 2012.
(27) Morgan Stanley CLO Market Tracker, October 5, 2012; based on a sample of 462 U.S. CLO transactions.
(28) Morgan Stanley CLO Market Tracker, July 10, 2012; based on a sample of 481 U.S. CLO transactions.
(29) Morgan Stanley CLO Market Tracker, October 5, 2012; based on a sample of 194 European CLO transactions.
(30) Morgan Stanley CLO Market Tracker, July 10, 2012; based on a sample of 195 European CLO transactions.
(31) Wells Fargo Structured Products Research - CLOs. "The CLO Salmagundi: New Capital Rules May Benefit CLO Issuers," June 28, 2012.
(32) J.P. Morgan U.S. Fixed Income Markets Weekly, September 21, 2012.
(33) Wells Fargo Structured Products Research - CLOs. "The CLO Salmagundi: WAL Tests," September 28, 2012. Issuance volumes based on transactions priced, but not necessarily closed with the applicable time frame.
(34) Morgan Stanley CLO Market Tracker, October 5, 2012.
(35) For U.S. broadly syndicated CLOs, and in particular deals issued post-2010, the assumed reinvestment effective spread may receive an additional benefit from LIBOR floors, with such benefit dependant on future LIBOR rates.
(36) Citi Global Structured Credit Strategy, October 4, 2012.
(37) Citi Global Structured Credit Strategy, October 4, 2012.
For further information, please contact:
TFG:
David Wishnow/Yuko Thomas
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Brunswick Group
Andrew Garfield/Gill Ackers/ Brian Buckley
+44-20-7404-5959
tetragon@brunswickgroup.com
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