Tetragon Financial Group Limited (TFG) Performance Report for Period Ended 30 June 2012
LONDON, July 31, 2012 /PRNewswire/ --
July 31, 2012
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 June 30, 2012.
- Executive Summary:
Q2 2012 saw another strong set of quarterly results, with U.S. CLO performance leading the way.
- Earnings per Share: TFG generated EPS of $0.69 during Q2 2012 (Q1 2012: $0.46).
- Distributions: TFG declared a Q2 2012 dividend of $0.115 per share, up from Q1 2012. Inclusive of the Q2 dividend, the rolling 12-month dividend growth rate (year-on-year) was 18.1%. The company also used over $7.8 million to buy back shares below NAV during the quarter.
- Net Asset Value ("NAV"): Rose to $1,570.3 million or $13.75 per share at the end of Q2 2012, the highest level to date, and an increase of 4.8%, on a per share basis, from Q1 2012.
Figure 1 below shows an historical summary of TFG's Net Assets, NAV per share and share price.
Figure 1
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
Consolidated
Net Assets
($ MM) $1,319.0 $1,348.0 $1,142.0 $723.4 $693.1 $720.8 $807.0 $867.0 $909.40
NAV / Share $10.44 $10.69 $9.06 $5.75 $5.50 $5.71 6.47 $7.02 $7.44
Price/ Share $4.75 $5.00 $2.87 $1.01 $1.18 $1.90 $3.91 $4.50 $4.14
(Table Continued)
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Consolidated
Net Assets
($ MM) $1,018.6 $1,137.5 $1,298.0 $1,368.3 $1,413.6 $1,474.4 $1,510.1 $1,570.3
NAV / Share $8.43 $9.47 $10.85 $11.52 $12.06 $12.71 $13.12 $13.75
Price/ Share $4.39 $5.70 $7.60 $8.30 $6.40 $6.25 $7.10 $7.37
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 as of that date.
- Net Income: Consolidated net income of $79.2 million for Q2 2012 (Q1 2012: consolidated net income of $53.4 million).
This Performance Report constitutes TFG's half-yearly financial report as required pursuant to Section 5:25d 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).
- Asset Breakdown: The figures below illustrate the split of net assets by asset class at the end of Q2 2012 ($1,570,273,629) and Q1 2012 ($1,510,100,263), respectively.
Figures 2a and 2b
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
Q1 2012
U.S. CLOs $1,044,065,006 $1,510,100,263 96%
Euro CLOs $116,213,800
CLO Mezz $1,308,650
Direct Loans $120,342,760
Asset Managers $10,066,576
Real Estate Funds $7,477,705
Cash Less Net Liabilities 210625766
Investment Portfolio Performance Highlights
TFG's U.S. CLOs continue to outperform in terms of collateral performance, providing the catalyst for strong Q2 2012 results.
- Cash Flows: TFG generated $110.0 million of cash flows from its CLO equity investment portfolio in Q2 2012 (Q1 2012: $102.6 million).
- Collateral Performance: TFG's average CLO portfolio statistics performed well during Q2 2012 with low default and CCC-asset holding levels. This was driven by continued improvements in the credit quality of TFG's U.S. CLOs, which offset the credit deterioration experienced by TFG's European CLOs.
- CLO Returns: Weighted-average IRRs on CLO equity investments remained broadly unchanged at 17.6% (Q1 2012: 17.5%) with U.S. CLO average IRRs remaining at 19.7% while the average IRR of TFG's European CLOs increased to 8.0% (Q1 2012: 7.9%).
Figure 3 below shows an historical summary of the weighted-average IRR on TFG's CLO equity investments.
Figure 3
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
ALL Weighted
TFG -Average IRR
on TFG's CLO
Investments 16.6% 16.9% 13.8% 10.6% 9.2% 10.3% 11.9% 12.3% 13.1%
U.S. U.S. IRR 17.2% 17.5% 14.4% 11.3% 10.4% 12.4% 14.1% 14.3% 14.9%
EUR EUR IRR 14.6% 14.7% 11.4% 7.8% 4.8% 2.0% 2.5% 3.5% 4.2%
(Table Continued)
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
ALL Weighted
TFG -Average IRR
on TFG's CLO
Investments 13.7% 15.1% 15.8% 16.3% 16.8% 17.6% 17.5% 17.6%
U.S. U.S. IRR 15.8% 17.0% 17.8% 18.4% 18.8% 19.6% 19.7% 19.7%
EUR EUR IRR 4.6% 6.7% 8.0% 8.1% 8.4% 8.6% 7.9% 8.0%
Source: TFG as of the outlined quarter-end date.
- New CLO Equity Investments: During Q2 2012, LCM XI, a new issue CLO managed by LCM, was successfully closed. TFG invested $22.7 million in the equity tranche of this transaction, representing a majority position of the tranche.
- Direct Loans: TFG held direct loans with a fair value of $87.4 million at the end of Q2 2012, down from $120.3 million as of the end of Q1 2012. Overall, the direct loan portfolio performed in-line with expectations during this period experiencing no defaults.
- Real Estate Investments: During Q2 2012, TFG invested a further $0.7 million into GreenOak-managed real estate. The total amount of capital invested in GreenOak-managed real estate since inception is approximately $8.2 million as of the end of the second quarter.
We continue to seek to diversify the investment portfolio across asset classes and types, industries, geographies and investment duration.
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.
LCM: LCM continued to perform well during Q2 2012, with all LCM Cash Flow CLOs (2) that were still within their reinvestment periods(3) continuing to pay senior and subordinated management fees. With the addition of LCM XI, LCM's total loan assets under management rose to approximately $4.1 billion (Q1 2012: $3.7 billion).
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
(Table Continued)
LCM Asset Management LLC - CLO AUM - $MM
Deal Name Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Pre-Acquisition CLOs 2,161.2 2,075.8 2,035.9 1,984.6 1,889.4
Post-Acquisition CLOs 1,322.5 1,323.0 1,323.2 1,725.0 2,196.6
Total 3,484 3,399 3,359 3,710 4,086
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 Q2 2012, an increase from the prior quarter. As of June 30, 2012, inclusive of the dividend declared with respect to Q2 2012, the rolling 12-month dividend growth rate (year-on-year) was 18.1%.(4)
Since its public listing TFG has distributed or declared a cumulative amount of approximately $2.01 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 Q2 2012, TFG repurchased a total of 1,063,825 shares at an aggregate cost of approximately $7.8 million, at an average price of $7.34 per share. Since the inception of the buy-back program, TFG has repurchased a total of 18,521,994 shares, at an aggregate cost of approximately $98.9 million, at an average price of $5.34 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
Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
NAV / Share $10.08 $10.29 $10.03 $10.25 $10.44 $10.69 $9.06
Cumulative DPS $ 0.15 $ 0.30 $ 0.45 $ 0.60 $ 0.75 $ 0.90 $ 0.93
(Table Continued)
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010
NAV / Share $$5.75 $5.50 $5.71 6.47 $7.02 $7.44 $8.43
Cumulative DPS $ 0.96 $ 0.99 $ 1.02 $ 1.08 $ 1.14 $ 1.22 $ 1.30
(Table Continued)
Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
NAV / Share $9.47 $10.85 $11.52 $12.06 $12.71 $13.12 $13.75
Cumulative DPS $ 1.39 $ 1.48 $ 1.58 $ 1.68 $ 1.79 $ 1.89 $ 2.01
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.
Figure 7
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
Quarterly #
of Shares
Repurchased
(in '000s) 233 732 1,000 484 94 85 1,758 1,378 1,582
Average Purchase
Price of Shares
Repurchased $ 4.79 $ 5.62 $ 3.37 $ 1.60 $ 1.10 $ 1.25 $ 3.22 $ 3.87 $ 4.67
(Table Continued)
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Quarterly #
of Shares
Repurchased
(in '000s) 1,815 967 662 1,287 1,695 1,432 1,358 1,064
Average Purchase
Price of Shares
Repurchased $ 4.27 $ 5.23 $ 7.25 $ 7.84 $ 6.73 $ 6.23 $ 6.73 $ 7.34
The Average Purchase Price of Shares Repurchased is a weighted-average using the number of shares repurchased each quarter and including commissions.
- Performance Fee
A performance fee of $22.5 million was accrued in Q2 2012 in accordance with TFG's investment management agreement and based on a "Reference NAV" of Q1 2012. The hurdle rate for the Q3 2012 incentive fee has been reset at 3.1085% (Q2 2012: 3.1160%) 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 Q2 2012, the estimated total fair value of TFG's CLO equity investment portfolio was approximately $1,177.0 million ($1,061.6 million of U.S. and $115.4 million of European investments), up from $1,160.3 million as of the end of the prior quarter ($1,044.1 million of U.S. and $116.2 million of European investments). TFG's total indirect exposure to leveraged loans through its CLO equity investments was approximately $18.9 billion as ofthe end of Q2 2012.(6)
- CLO Portfolio Composition: 79 transactions as of the end of Q2 2012, up from 78 as of the end of the prior quarter, reflecting the closing of one new issue CLO equity investment. The number of deals in the portfolio increased to 70 from 69 as of the end of the prior quarter. The number of external CLO managers remained unchanged from Q1 2012, at 27.(7)
- CLO Collateral Performance: At the end of Q2 2012, approximately 98% of TFG's CLO investments were passing their junior-most O/C tests, weighted by fair value.(8) Similarly, 66 or approximately 94% were passing when weighted by the number of deals. At the end of the previous quarter, 97% of TFG's CLO investments were passing their junior-most O/C tests, weighted by fair value, or 64 and 93% when weighted by the number of deals.
100% of TFG's U.S. CLOs were passing their junior-most O/C tests as of June 30, 2012 (note that U.S. CLOs represented approximately 90% of the total fair value of TFG's CLO equity investment portfolio).(9)(10) In comparison, the market-wide average of U.S. CLOs estimated to be passing their junior O/C tests as of the end of Q2 2012 was approximately 95.8% (when measured on a percentage of deals basis).(11) Please refer to Figure 8 below for a summary of TFG's investments' historical junior O/C test performance.
Figure 8
ALL DEALS
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
Gross Cash
Receipts from
Investments
($MM) $ 118.0 $ 77.7 $ 75.6 $ 47.1 $ 31.9 $ 35.3 $ 38.4 $ 51.1 $ 60.9
% CLOs Passing
Junior-Most O/C
Test (# Deals) 100% 100% 95% 60% 58% 60% 68% 80% 84%
Cash Flows
from Operations
($MM) $ 90.1 $ 102.0 $ 67.5 $ 42.2 $ 36.6 $ 27.7 $ 32.5 $ 20.5 $ 43.2
(Table Continued)
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Gross Cash
Receipts from
Investments ($MM) $ 71.8 $ 78.9 $ 90.9 $ 102.4 $ 105.1 $ 113.2 $ 102.7 $ 110.0
% CLOs Passing
Junior-Most O/C
Test (# Deals) 88% 94% 95% 96% 96% 94% 93% 94%
Cash Flows from
Operations ($MM) $ 55.3 $ 34.8 $ 52.2 $ 30.2 $ 78.7 $ 92.8 $ 80.7 $ 89.6
(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.
- CLO Portfolio Credit Quality: The weighted-average WARF across all of TFG's CLO equity investments stood at approximately 2,578 as of the end of Q2 2012. Each of these foregoing statistics represents a weighted-average summary of all of our 70 deals.(12) Each individual deal's metrics will differ from these averages and vary across the portfolio.
Q2 Q1 Q4 Q3 Q2 Q1 Q4
ALL CLOs 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+ or Below Obligors: 5.70% 6.20% 7.00% 7.00% 7.20% 7.60% 8.30%
WARF: 2,578 2,588 2,624 2,614 2,642 2,664 2,671
Q3 Q2
ALL CLOs 2010 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009
Caa1/CCC+ or Below Obligors: 9.60% 10.50% 11.10% 12.00% 12.60% 11.60%
WARF: 2,658 2,706 2,762 2,809 2,813 2,800
Q2 Q1 Q4 Q3 Q2 Q1 Q4
US CLOs 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+ or Below Obligors: 4.20% 4.80% 5.50% 5.50% 5.80% 6.50% 6.90%
WARF: 2,491 2,504 2,533 2,522 2,542 2,591 2,622
Q3 Q2
US CLOs 2010 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009
Caa1/CCC+ or Below Obligors: 7.90% 8.40% 9.40% 12.00% 12.80% 11.90%
WARF: 2,610 2,648 2,719 2,799 2,824 2,831
Q2 Q1 Q4 Q3 Q2 Q1 Q4
EUR CLOs 2012 2012 2011 2011 2011 2011 2010
Caa1/CCC+ or Below Obligors: 11.60% 11.10% 12.30% 12.00% 12.30% 11.40% 13.10%
WARF: 2,910 2,900 2,948 2,941 2,997 2,914 2,837
Q3 Q2
EUR CLOs 2010 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009
Caa1/CCC+ or Below Obligors: 15.30% 17.40% 16.80% 15.60% 12.00% 10.80%
WARF: 2,817 2,898 2,907 2,845 2,779 2,696
- TFG and Market Default Rates: TFG's lagging 12-month corporate loan default rate rose marginally to 0.9% during Q2 2012, from 0.8% the prior quarter.(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 2.8%. By comparison, the lagging 12-month U.S. institutional loan default rate rose to 1.04% by principal amount as of June 30, 2012, according to S&P/LCD, up from approximately 0.21% during the prior quarter.(14) The lagging 12-month default rate for the S&P European Leveraged Loan Index ("ELLI") stood 5.5% as of the end of June 30, 2012.(15) Please refer to Figure 9 on the following page for a historical summary of TFG's CLO equity and direct loan investments' default performance.
Figure 9
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
TFG Trailing
12-Month Loan
Rate 1.3% 1.5% 2.5% 4.0% 5.1% 6.7% 6.5% 4.9% 3.6%
S&P/LCD
Trailing 12-Month
Default Rate 1.7% 1.9% 3.8% 7.8% 9.2% 9.8% 9.6% 5.8% 4.0%
(Table Continued)
Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
TFG Trailing
12-Month Loan Rate 2.2% 1.7% 1.1% 0.8% 0.6% 0.4% 0.8% 0.9%
S&P/LCD Trailing
12-Month Default Rate 3.6% 1.9% 1.1% 0.9% 0.3% 0.2% 0.2% 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 June 30, 2012, TFG owned liquid U.S. bank loans with an aggregate par amount of approximately $88.8 million and total fair value of $87.4 million. The size of the portfolio was reduced during the second quarter in order to, among other factors, de-risk the portfolio ahead of a potential further deterioration of European macroeconomic conditions on the heels of the Greek sovereign debt crisis. All positions were sold above their original purchase prices. The underlying businesses performed well during the quarter, with the loan portfolio trading at approximately 98% of par compared with an average purchase price of 98% of par, and with no defaults registered in the portfolio. For the quarter, there were net realized losses of approximately $0.1 million. In addition, the portfolio earned $1.5 million of interest income and discount premium during the second quarter.
- Real Estate Investments: TFG has funded a small portion of its investment capital commitments to GreenOak's investment projects, totaling approximately $8.2 million from inception through the end of Q2 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 Q2 2012, with all LCM Cash Flow CLOs that were within their reinvestment periods(16) remaining current on their senior and subordinated management fees as of June 30, 2012.Taking into account all LCM-managed vehicles, the gross income for Q2 2012 for LCM totaled $4.4 million. Pre-tax profit for the entire LCM business, of which TFG owns 75%, was approximately $2.1 million as of the same period (2011 quarterly average of $2.1 million). TFG continues to leverage and benefit from the LCM team's expertise in the ongoing management of the company's direct loan investment portfolio.
LCM Asset Management Performance Snapshot
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
2012 2012 2011 2011 2011 2011 2010 2010 2010 2010
Gross Fee Income ($MM) $4.4 $4.4 $4.3 $4.4 $3.9 $3.8 $3.4 $3.0 $2.9 $3.3
Pre-tax Income ($MM) $2.1 $2.0 $2.2 $2.2 $1.9 $1.9 $1.1 $1.4 $1.4 $1.9
- GreenOak Real Estate Developments: GreenOak continued to execute on its business growth strategy, including increasing investor commitments to its funds. The company had a second closing of its Japan fund in June 2012 and also acquired its first investment for the Japan fund during the quarter. 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:
- U.S. leveraged loan defaults up during Q2 2012, but below the historical average: The U.S. lagged 12-month loan default rate rose to 1.04% by principal amount as of June 30, 2012, up from 0.21% as of the end of Q1 2012.(17) Despite reaching a near-term high, the U.S. leveraged loan default rate remained below the historical average of approximately 3.4% by principal amount.(18)
- U.S. and European repayments rise: The U.S. S&P/LSTA Leveraged Loan Index repayment rate rose to 8.2% during Q2 2012, up from 7.6% in Q1 2012.(19)Repayments within the S&P European Leveraged Loan Index ("ELLI") rose to €6.0 billion during Q2 2012, up from €2.9 billion in Q1 2012.(20)
- "Maturity wall" reduction continues: During Q2 2012, U.S. S&P/LSTA Index issuers repaid or extended approximately 23.2% of loan maturities due by the end of 2014, up from 21.2% in Q1 2012.(21) The majority of these reductions was achieved via repayments, with amend-to-extends and high yield bond take-outs constituting a smaller share of maturity reduction sources during the quarter.(22)
- U.S. and Euro loan returns positive despite macro uncertainty: U.S. secondary loan prices struggled to hold-on to early gains, as the U.S. S&P/LSTA Leveraged Loan Index returned a modest 0.69% in Q2 2012.(23) Similarly, the S&P European Leveraged Loan Index returned 0.55%, as worries about the Euro sovereign debt crisis and viability of the U.S. recovery weighed on the markets.(24)
- U.S. loan issuance down, European volumes up but still subdued: Institutional U.S. loan issuance declined to $56.6 billion in Q2 2012, down from $68.0 billion in Q1 2012.(25) European primary institutional loan issuance rose modestly with €4.3 billion of institutional loans issued in Q2 2012 compared with €3.6 billion in Q1 2012, but remained low by historical standards.(26)
- U.S. CLO O/C ratios improve while European deals remain under pressure: During Q2 2012, 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 rose to 4.37% as of June 30, 2012(27) up from 4.09% as of the end of the prior quarter.(28) The median junior O/C test cushion for European CLOs, however, declined to 0.77% as of the end of Q2 2012,(29) down from 0.95% as of the end of Q1 2012.(30)
- U.S. CLO debt spreads widen: Average secondary U.S. CLO debt spreads widened marginally at the end of Q2 2012 vs. the prior quarter reflecting a broader risk-off move in the capital markets.(31)
- Primary arbitrage CLO volumes up in Q2 2012 despite challenging markets: U.S. arbitrage CLO issuance rose during Q2 2012 as 27 deals totaling $12.1 billion were priced, up from $5.8 billion and 15 deals priced in Q1 2012, bringing the YTD volume to $17.9 billion via 42 deals.(32) The CLO market showed resilience during the quarter in the face of weakening macro conditions, rising volatility and widening CLO liability spreads. Although the forward CLO pipeline is robust, the pace of issuance may decelerate during the second half as deal execution becomes more opportunistic, reflecting the unpredictability of the capital markets, volatility of CLO and loan spreads, and fickle equity arbitrage.
- U.S. CLO equity distributions remain robust: U.S. CLO equity payments remained strong during Q2 2012 thanks to low credit losses, the growing prevalence of LIBOR floors, and healthy repayments which allowed managers to reinvest into wider spread and/or below par assets, among other factors.
- Fair Value 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 Q2 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 Q2 2012 385 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 365 bps on broadly syndicated U.S. loans, 288 bps on European loans, and 422 bps on middle market loans.(33)
U.S. CLOs - Unchanged
Variable Year Current Assumptions
CADR
1.0x WARF-implied default
2012-2013 rate (2.2%)
1.5x WARF-implied default
2014-2016 rate (3.3%)
1.0x WARF-implied default
Thereafter rate (2.2%)
Recovery Rate
Until deal maturity 73%
Prepayment Rate
20.0% p.a. on loans; 0.0%
Until deal maturity on bonds
Reinvestment Price
2012 98%
Thereafter 100%
Variable Year Current Assumptions
CADR
1.5x WARF-implied default
2012-2014 rate (3.1%)
1.0x WARF-implied default
Thereafter rate (2.1%)
Recovery Rate
Until deal maturity 68%
Prepayment Rate
20.0% p.a. on loans; 0.0%
Until deal maturity on 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 Q2 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 marginally increased. For example, according to Citibank research, the spread on originally BB-rated tranches increased from approximately 10% at the end of Q1 2012 to 11% as of June 2012.(34)
- Although the aforementioned spreads increased marginally over the quarter, they continue to fluctuate within a relatively narrow range and we believe that TFG's discount rates for U.S. CLOs of 20% for strong deals, and 25% for the others, continue to represent an appropriate spread over mezzanine tranches.
- Per Citibank research, European originally BB-rated tranche yields rose to 22% from 21% as of June 2012, which is lower than the yield of 24% at the end of 2011.(35) 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 Q2 2012, the total ALR stands at $109.3 million, consisting of $11.7 million for U.S. deals and $97.6 million for European deals, as compared to $120.7 million at the end of Q1 2012 ($16.5 million for U.S. deals and $104.2 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 $0.77 on the dollar at the end of Q2 2012, the same level as at the end of Q1 2012.
- The average carrying value of the European deals rose from €0.40 per Euro as of the end of Q1 2012 to €0.42 per Euro as of the end of Q2 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 €0.06 to €0.62 per Euro.
- 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 Q2 2012, the weighted average discount rate (and IRR) on these deals was 10.4%. Such deals represented approximately 11.3% of the CLO equity portfolio by fair value (up from 9.4% at the end of Q1 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 June 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 Euro-USD foreign exchange risk and a potential significant increase in U.S. inflation and/or nominal interest rates, respectively. We review our hedging strategy on an on-going basis as we seek to address identified risks to the extent practicable and in a cost-effective manner.
- Directors' Statements:
The Directors of TFG confirm that (i) this Performance Report constitutes the TFG management review for the six month period ended 30 June 2012 and contains a fair review of that period and (ii) the financial statements in the accompanying unaudited interim report for the six month period ended 30 June 2012 for TFG have been prepared in accordance with applicable laws and in conformity with accounting principles generally accepted in the United States of America.
- Summary and Outlook:
TFG posted strong results during Q2 2012 and cash generation from the CLO portfolio remained robust. The U.S. CLO portfolio, which continues to benefit from, among other things, high spread reinvestment opportunities and low default rates (each of which have yet to revert to more normalized levels), drove NAV appreciation. In particular, pre-2010 vintage U.S. CLOs have also benefitted from their historically low cost of funding compared to newer vintage deals. Cash flow from our CLO equity investments has allowed for capital distributions through the dividend and the ongoing share buyback program.
TFG's asset management businesses also performed well and added AUM during the quarter. We successfully closed LCM XI, a $486.0 million CLO. TFG invested approximately $22.7 million in the deal, with the remainder of the capital coming from third-party investors. GreenOak, TFG's real estate management business, also added assets, with total assets under management ending the quarter at over $1.7 billion.
The regulatory and tax landscape continues to evolve and we are monitoring developments to assess their impact on TFG, including the impact of the Foreign Account Tax Compliance Act ("FACTA"), a U.S. tax regulation. Unfortunately, FATCA was not drafted with the CLO product in mind and accordingly, its application to CLOs remains unclear. We believe, however, that TFG and LCM will be able to avail themselves of certain FATCA provisions to alleviate its impact. We will continue to closely monitor the regulatory and tax environment as it relates to CLOs and securitizations.
Although Europe's macroeconomic woes continue to provide headwinds, we are optimistic on the performance outlook for TFG. We believe the new issue CLO market may be conducive throughout the remainder of the year to new deals managed by well-established managers, such as LCM. This may serve to benefit both our investment portfolio, by allowing us to replace amortizing assets, and our CLO management business, by growing fee-paying third-party assets under management. 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 August 8, 2012 at 15:00 GMT/16:00 CET/10:00 EST to discuss Q2 2012 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=184557
Additional call details are as follows:
Event title: Tetragon Investor Call
Conference ID: 920147
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 920147 and as an MP3 recording on the TFG website.
Expected Upcoming Events Date
Q2 2012 Ex-Dividend Date August 1, 2012
Q2 2012 Dividend Record Date August 3, 2012
Quarterly Investor Call August 8, 2012
July 2012 Monthly Report August 20, 2012 (approx)
Q2 2012 Dividend Payment Date August 27, 2012
TETRAGON FINANCIAL GROUP
Financial Highlights
Q2 2012 Q1 2012 Q4 2011
Net income ($MM) $79.2 $53.4 $80.3
EPS ($) $0.69 $0.46 $0.69
CLO Cash receipts ($MM) (1) $110.0 $102.6 $113.2
CLO Cash receipts per share ($) $0.96 $0.89 $0.97
Net cash balance ($MM) $299.1 $224.8 $211.5
Net assets ($MM) $1,570.3 $1,510.1 $1,474.4
Number of shares
outstanding (million) (2) 114.2 115.1 116.0
NAV per share ($) $13.75 $13.12 $12.71
DPS ($) $0.115 $0.105 $0.105
Weighted average IRR on
completed transactions (%) 17.6% 17.5% 17.6%
Number of CLO investments (3) 79 78 77
ALR Fair Value Adjustment ($MM) ($109.3) ($120.7) ($128.7)
(Table Continued)
Quarerly
Q3 2011 Q2 2011 Q1 2011 Average
Net income ($MM) $67.3 $88.1 $174.7 $90.5
EPS ($) $0.57 $0.74 $1.46 $0.77
CLO Cash receipts ($MM) (1) $105.1 $102.4 $90.9 $104.0
CLO Cash receipts per share ($) $0.89 $0.86 $0.76 $0.89
Net cash balance ($MM) $155.6 $67.7 $147.0 $184.3
Net assets ($MM) $1,413.6 $1,368.3 $1,298.0 $1,439.1
Number of shares
outstanding (million) (2) 117.2 118.8 119.6 116.8
NAV per share ($) $12.06 $11.52 $10.85 $12.34
DPS ($) $0.10 $0.10 $0.09 $0.10
Weighted average IRR on
completed transactions (%) 16.8% 16.3% 15.8% 16.9%
Number of CLO investments (3) 75 75 74 76
ALR Fair Value Adjustment ($MM) ($118.0) ($133.8) ($155.7) ($127.7)
(1) Gross cash receipts from CLO portfolio.
(2) Excludes shares held in treasury.
(3) Excludes CDO-squared and ABS CDO transactions written off in October 2007.
TFG continues to hold the economic rights to 3 of these written-off transactions.
TETRAGON FINANCIAL GROUP
Quarterly Statement of Operations as at 30 Jun 2012
Q2 Q1 Q4 Q3
2012 2012 2011 2011
Statement of Operations ($MM) ($MM) ($MM) ($MM)
Interest income 58.3 57.5 55.1 53.6
CLO management fee income 4.4 4.4 4.3 4.4
Other income 1.8 1.3 2.9 0.8
Investment income 64.5 63.2 62.3 58.8
Management and performance fees (28.3) (19.5) (28.6) (24.3)
Admin / custody and other fees (4.6) (4.8) (7.6) (9.0)
Total operating expenses (32.9) (24.3) (36.2) (33.3)
Net investment income 31.6 38.9 26.1 25.5
Net change in unrealised appreciation in investments 52.1 16.2 58.5 50.5
Realised (loss) / gain on investments (0.1) 0.1 0.3 -
Realised and unrealised losses from hedging and fx (2.9) (0.7) (3.3) (7.1)
Net realised and unrealised gains from investments and fx 49.1 15.6 55.5 43.4
Income taxes (1.0) (0.6) (0.7) (1.1)
Noncontrolling interest (0.5) (0.5) (0.6) (0.5)
Net increase in net assets from operations 79.2 53.4 80.3 67.3
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 Jun 2012
Jun-12
$MM
Assets
Investments in securities, at fair value 1,284.1
Intangible assets - CLO management contracts 0.1
Cash and cash equivalents 299.1
Amounts due from brokers 6.6
Derivative financial assets - interest rate swaptions 4.1
Amounts receivable on sale of investments 2.0
Derivative financial assets - forward contracts 4.5
Other receivables 2.9
Total Assets 1,603.4
Liabilities
Other payables and accruals 26.9
Amounts payable on Treasury Shares 0.7
Amounts payable on Share Options 2.7
Income and deferred tax payable 2.4
Total Liabilities 32.7
Net Assets Before Noncontrolling Interest 1,570.7
Noncontrolling interest 0.4
Total Equity Attributable to TFG 1,570.3
TETRAGON FINANCIAL GROUP
Statement of Cash Flows for the period ended 30 Jun 2012
Jun-12
$MM (YTD)
Operating Activities
Operating cash flows before movements in working capital after
dividends paid to Guernsey feeder 172.6
Change in payables/receivables (2.3)
Cash flows from operating activities 170.3
Investment Activities
Amounts payable for purchase of investments 0.0
Proceeds on sales of investments
- Proceeds sale of CLOs 0.2
- Proceeds from the sale of Bank Loans 32.3
Purchase of investments
- Purchase of CLO Equity (65.0)
- Purchase of CLO Mezz (1.1)
- Purchase of bank loans (34.3)
- Investments in Real Estate (5.8)
- Investments in Asset Managers (2.7)
Maturity and prepayment of investments 21.7
Cash flows from operating and investing activities 115.6
Amounts due from broker 9.3
Net Purchase of shares (12.3)
Dividends paid to shareholders (24.2)
Distributions paid to noncontrolling interest (0.7)
Cash flows from financing activities (27.9)
Net increase in cash and cash equivalents 87.8
Cash and cash equivalents at beginning of period 211.5
Effect of exchange rate fluctuations on cash and cash equivalents (0.2)
Cash and cash equivalents at end of period 299.1
Tetragon Financial Group Limited (TFG)
CLO Portfolio Details
As of June 30, 2012
Original
Original Deal End of Wtd Avg Cost of
Invest. Cost Closing Year of Reinv Spread Funds
Transaction Deal Type ($MM USD)(1) Date Maturity Period (bps)(2) (bps)(3)
Transaction 1 EUR CLO 37.5 2007 2024 2014 320 55
Transaction 2 EUR CLO 29.7 2006 2023 2013 368 52
Transaction 3 EUR CLO 22.2 2006 2022 2012 374 58
Transaction 4 EUR CLO 33.0 2007 2023 2013 381 48
Transaction 5 EUR CLO 36.9 2007 2022 2014 371 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 360 51
Transaction 7 EUR CLO 38.5 2007 2023 2013 373 46
Transaction 8 EUR CLO 26.9 2005 2021 2011 345 53
Transaction 9 EUR CLO 41.3 2007 2023 2013 364 50
Transaction 10 EUR CLO 27.0 2006 2022 2012 348 50
EUR CLO Subtotal: 326.3 360 52
Transaction 11 US CLO 20.5 2006 2018 2012 359 45
Transaction 12 US CLO 22.8 2006 2019 2013 367 46
Transaction 13 US CLO 15.2 2006 2018 2012 389 47
Transaction 14 US CLO 26.0 2007 2021 2014 392 49
Transaction 15 US CLO 28.1 2007 2021 2014 433 52
Transaction 16 US CLO 23.5 2006 2020 2013 418 46
Transaction 17 US CLO 26.0 2007 2021 2014 357 40
Transaction 18 US CLO 16.7 2005 2017 2011 347 45
Transaction 19 US CLO 1.2 2005 2017 2011 347 45
Transaction 20 US CLO 26.6 2006 2020 2012 443 52
Transaction 21 US CLO 20.7 2006 2020 2012 421 53
Transaction 22 US CLO 37.4 2007 2021 2014 446 53
Transaction 23 US CLO 19.9 2007 2021 2013 374 66
Transaction 24 US CLO 16.9 2006 2018 2012 368 46
Transaction 25 US CLO 20.9 2006 2018 2013 388 46
Transaction 26 US CLO 27.9 2007 2019 2013 393 43
Transaction 27 US CLO 23.9 2007 2021 2014 534 51
Transaction 28 US CLO 7.6 2007 2021 2014 534 51
Transaction 29 US CLO 19.1 2005 2018 2011 437 66
Transaction 30 US CLO 12.4 2006 2018 2012 475 67
Transaction 31 US CLO 9.3 2005 2017 2012 339 52
Transaction 32 US CLO 24.0 2007 2021 2014 338 59
Transaction 33 US CLO 16.2 2006 2020 2012 360 56
Transaction 34 US CLO 22.2 2006 2020 2012 381 50
Transaction 35 US CLO 23.6 2006 2018 2012 447 52
Transaction 36 US CLO 28.4 2007 2021 2013 447 46
Transaction 37 US CLO 9.3 2005 2017 2011 331 50
Transaction 38 US CLO 23.7 2007 2021 2013 338 42
Transaction 39 US CLO 7.8 2005 2017 2011 364 70
Transaction 40 US CLO 13.0 2006 2020 2011 412 39
Transaction 41 US CLO 22.5 2006 2020 2013 367 48
Transaction 42 US CLO 22.4 2007 2021 2014 402 47
Transaction 44 US CLO 22.3 2006 2018 2012 320 54
Transaction 45 US CLO 23.0 2006 2018 2012 313 46
Transaction 46 US CLO 21.3 2007 2019 2013 363 51
Transaction 47 US CLO 28.3 2006 2021 2013 348 47
Transaction 48 US CLO 23.0 2006 2019 2013 358 46
Transaction 49 US CLO 12.6 2005 2017 2011 336 40
Transaction 50 US CLO 12.3 2006 2018 2012 343 40
Transaction 51 US CLO 18.0 2007 2020 2013 388 53
Transaction 52 US CLO 0.3 2003 2015 2008 294 93
Transaction 53 US CLO 0.6 2004 2016 2011 312 61
Transaction 54 US CLO 0.5 2005 2017 2012 337 56
Transaction 55 US CLO 0.3 2005 2017 2011 352 39
Transaction 56 US CLO 23.0 2007 2019 2014 378 42
Transaction 57 US CLO 0.6 2007 2019 2014 378 42
Transaction 58 US CLO 21.8 2007 2019 2014 381 49
Transaction 59 US CLO 0.4 2007 2019 2014 381 49
Transaction 60 US CLO 18.8 2010 2021 2014 417 198
Transaction 61 US CLO 29.1 2007 2021 2014 337 45
Transaction 62 US CLO 25.3 2007 2020 2013 374 42
Transaction 63 US CLO 27.3 2007 2021 2013 383 53
Transaction 64 US CLO 15.4 2007 2021 2013 446 38
Transaction 65 US CLO 26.9 2006 2021 2013 374 47
Transaction 66 US CLO 21.3 2006 2020 2013 342 49
Transaction 67 US CLO 27.3 2007 2022 2014 347 46
Transaction 68 US CLO 19.3 2006 2020 2013 439 48
Transaction 69 US CLO 28.2 2007 2019 2013 411 44
Transaction 70 US CLO 24.6 2006 2020 2013 320 52
Transaction 71 US CLO 1.7 2006 2018 2012 343 40
Transaction 72 US CLO 4.8 2007 2019 2014 378 42
Transaction 73 US CLO 1.9 2007 2019 2014 378 42
Transaction 74 US CLO 5.5 2007 2019 2014 381 49
Transaction 75 US CLO 32.7 2011 2022 2014 415 168
Transaction 76 US CLO 1.9 2006 2018 2012 313 46
Transaction 77 US CLO 14.5 2011 2023 2016 391 212
Transaction 78 US CLO 22.9 2012 2023 2015 474 217
Transaction 79 US CLO 19.4 2012 2022 2015 449 215
Transaction 80 US CLO 22.7 2012 2022 2016 404 185
US CLO Subtotal: 1,235.3 390 64
Total CLO Portfolio: 1,561.5 384 62
(Table Continued)
Current Current Jr- Jr-Most O/C Annualized ITD Cash
Cost of Funds Most O/C Cushion at (Loss) Gain Received as
Transaction (bps)(4) Cushion(5) Close(6) of Cushion(7) IRR(8) % of Cost(9)
Transaction 1 58 (2.78%) 3.86% (1.33%) - 29.6%
Transaction 2 53 0.93% 3.60% (0.48%) 9.9% 52.2%
Transaction 3 63 2.59% 5.14% (0.39%) 12.8% 94.1%
Transaction 4 47 3.63% 5.76% (0.40%) 13.9% 74.1%
Transaction 5 60 2.70% 5.74% (0.62%) 8.4% 50.8%
Transaction 6 58 0.25% 4.70% (0.73%) 6.5% 49.7%
Transaction 7 46 (1.65%) 3.64% (1.01%) 4.7% 31.9%
Transaction 8 56 (1.74%) 4.98% (0.98%) 10.3% 87.1%
Transaction 9 1.34% 6.27% (0.94%) 7.7% 32.8%
Transaction 10 52 (2.06%) 4.54% (1.12%) 7.1% 32.7%
EUR CLO
Subtotal: 53 0.30% 4.84% (0.82%) 50.7%
Transaction 11 45 5.40% 4.55% 0.15% 20.7% 140.7%
Transaction 12 46 5.59% 4.45% 0.20% 20.8% 135.4%
Transaction 13 47 6.32% 4.82% 0.25% 21.2% 147.0%
Transaction 14 50 4.36% 5.63% (0.24%) 18.5% 111.6%
Transaction 15 48 3.48% 4.21% (0.15%) 28.6% 159.5%
Transaction 16 45 3.32% 4.44% (0.19%) 20.9% 142.0%
Transaction 17 40 4.63% 4.24% 0.07% 22.9% 136.5%
Transaction 18 46 5.98% 4.77% 0.18% 19.4% 158.3%
Transaction 19 46 5.98% 4.77% 0.18% 23.2% 152.5%
Transaction 20 52 3.98% 5.28% (0.23%) 22.0% 155.8%
Transaction 21 52 3.26% 4.76% (0.25%) 18.6% 129.7%
Transaction 22 53 3.24% 5.00% (0.33%) 21.1% 121.8%
Transaction 23 66 3.66% 4.98% (0.26%) 20.4% 130.3%
Transaction 24 47 5.18% 4.17% 0.17% 17.1% 111.9%
Transaction 25 46 6.05% 4.13% 0.35% 22.1% 137.9%
Transaction 26 44 4.04% 4.05% (0.00%) 18.9% 110.6%
Transaction 27 51 12.14% 6.11% 1.10% 32.1% 178.9%
Transaction 28 51 12.14% 6.11% 1.10% 42.0% 97.1%
Transaction 29 84 4.05% 4.82% (0.12%) 18.9% 146.5%
Transaction 30 68 1.92% 5.16% (0.54%) 18.3% 118.7%
Transaction 31 50 3.38% 5.02% (0.23%) 16.3% 151.9%
Transaction 32 59 4.35% 5.57% (0.25%) 20.0% 115.0%
Transaction 33 72 4.42% 6.99% (0.41%) 14.6% 123.0%
Transaction 34 50 4.85% 6.66% (0.33%) 18.6% 123.8%
Transaction 35 52 2.07% 5.00% (0.49%) 21.1% 147.4%
Transaction 36 56 2.19% 5.18% (0.57%) 20.1% 118.4%
Transaction 37 59 5.17% 4.34% 0.12% 15.8% 137.1%
Transaction 38 42 3.92% 5.07% (0.22%) 26.8% 158.6%
Transaction 39 86 3.62% 3.15% 0.07% 9.8% 80.7%
Transaction 40 40 N/A N/A N/A 22.3% 152.8%
Transaction 41 49 4.66% 4.71% (0.01%) 21.4% 141.6%
Transaction 42 48 4.95% 3.92% 0.20% 21.1% 117.9%
Transaction 44 59 2.22% 4.16% (0.32%) 12.5% 103.4%
Transaction 45 46 2.61% 4.46% (0.33%) 10.5% 82.0%
Transaction 46 51 2.86% 4.33% (0.29%) 10.0% 66.9%
Transaction 47 43 3.62% 4.34% (0.13%) 21.0% 140.4%
Transaction 48 46 2.79% 5.71% (0.52%) 16.6% 100.9%
Transaction 49 40 2.55% 3.94% (0.21%) 12.4% 99.3%
Transaction 50 39 2.81% 4.25% (0.24%) 13.1% 95.5%
Transaction 51 53 4.29% 4.47% (0.04%) 20.9% 125.5%
Transaction 52 470 14.11% 3.20% 1.20% 278.6% 681.4%
Transaction 53 78 12.57% 4.00% 1.12% 37.2% 272.1%
Transaction 54 57 5.21% 3.69% 0.21% 59.6% 675.9%
Transaction 55 41 5.21% 3.59% 0.23% 63.3% 629.3%
Transaction 56 42 4.78% 4.53% 0.05% 22.8% 137.2%
Transaction 57 42 4.78% 4.53% 0.05% 48.9% 643.9%
Transaction 58 49 3.72% 4.04% (0.06%) 25.0% 140.6%
Transaction 59 49 3.72% 4.04% (0.06%) 52.6% 882.5%
Transaction 60 198 4.61% 4.50% 0.06% 11.0% 19.4%
Transaction 61 45 2.92% 4.04% (0.22%) 16.8% 95.1%
Transaction 62 42 4.22% 5.20% (0.19%) 21.3% 134.6%
Transaction 63 53 2.94% 4.78% (0.37%) 18.0% 111.5%
Transaction 64 38 N/A N/A N/A 21.8% 102.4%
Transaction 65 48 2.73% 4.96% (0.40%) 13.8% 84.2%
Transaction 66 49 3.71% 4.05% (0.06%) 21.4% 142.3%
Transaction 67 45 4.54% 4.38% 0.03% 20.0% 116.2%
Transaction 68 48 6.37% 4.41% 0.35% 27.1% 170.1%
Transaction 69 44 7.35% 5.61% 0.33% 25.8% 154.9%
Transaction 70 52 6.27% 6.21% 0.01% 18.7% 116.8%
Transaction 71 39 2.81% 4.25% (0.24%) 26.2% 49.3%
Transaction 72 42 4.78% 4.53% 0.05% 20.3% 40.8%
Transaction 73 42 4.78% 4.53% 0.05% 20.3% 40.8%
Transaction 74 49 3.72% 4.04% (0.06%) 22.1% 42.4%
Transaction 75 168 4.42% 4.05% 0.37% 12.6% 18.9%
Transaction 76 46 2.61% 2.43% 0.03% 44.1% 31.6%
Transaction 77 212 5.26% 5.04% 0.41% 10.3% 0.0%
Transaction 78 217 4.35% 4.00% 0.79% 9.9% 0.0%
Transaction 79 215 4.18% 4.00% 0.49% 7.2% 0.0%
Transaction 80 185 4.17% 4.17% (0.00%) 10.2% 0.0%
US CLO
Subtotal: 65 4.22% 4.63% (0.04%) 114.6%
Total CLO
Portfolio: 63 3.40% 4.68% (0.20%) 101.2%
Amount Amount Cushion Cushion Number of
Date Maturing Amortizing (Deficit) (Deficit) Transactions
2010 or Earlier 0.0 0.3 0.0% <= 0% 4
2011 0.0 107.5 2.0% 0% to 2% 4
2012 0.0 327.7 4.0% 2% to 4% 30
2013 0.0 611.1 6.0% 4% to 6% 30
2014 0.0 435.5 Over 6% 9
2015 0.3 42.3
2016 0.6 37.2
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 37.5 0.0
2025 0.0 0.0
2026 0.0 0.0
Tetragon Financial Group Ltd (TFG)
Portfolio Composition
Portfolio Held by Tetragon Financial Group Master Fund Limited
(unless otherwise stated)
As of June 30, 2012
TFG
group TFG
TFG Net group
Share Market Net No. of Closed CLO
Price Cap Assets Equity
Report Date ($) ($MM)(1) ($MM) Transactions
30 June 2012 $7.37 $841.5 $1,570.3 79 (2)
Risk Investment
Capital Fair Value
Capital Allocation by Asset Class Allocation ($MM)(2,3,4)
Broadly Syndicated Senior Secured Loans: US 76.4% $966.1
Broadly Syndicated Senior Secured Loans: Europe 9.1% $115.4
Middle Market Senior Secured Loans: US 14.5% $182.9
Total 100.0% $1,264.4 Asia
Geographic Allocation by Asset 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%
90.9% 9.1% 0.0% 100.0% Bank Loan
Top 15 Underlying Bank Loan Credits Exposure (5)
Univision Communications 0.95%
First Data Corp 0.89%
HCA Inc 0.89%
Community Health 0.78%
Las Vegas Sands 0.73%
UPC Broadband 0.73%
Federal-Mogul 0.72%
Charter Communications 0.69%
Aramark Corp 0.69%
Sabre Holdings Corp 0.68%
Cablevision Systems Corp 0.68%
Huntsman ICI 0.60%
Reynolds Group 0.60%
Royalty Pharma 0.58%
Asurion Corp 0.57%
EUR-USD FX: 1.27
(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 the Company's website at http://www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG.
This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the US Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to US persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the US Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the Financial Markets Supervision Act ("FMSA") as a collective investment scheme from a designated country. This release constitutes regulated information ("gereglementeerde informatie") within the meaning of Section 1:1 of the FMSA.
Board of Directors
Paddy Dear Reade Griffith Byron Knief*
Rupert Dorey* David Jeffreys* Greville Ward*
*Independent Director
Shareholder Information
Registered Office of TFG and the Master Fund Issuing Agent, Dutch Paying and
Tetragon Financial Group Limited Transfer Agent
Tetragon Financial Group Master Fund Limited Kas Bank N.V.
1st Floor Dorey Court Spuistraat 172
Admiral Park 1012 VT Amsterdam, The Netherlands
St. Peter Port, Guernsey
Channel Islands GYI 6HJ Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
Investment Manager One Ropemaker Street
Tetragon Financial Management LP London EC2Y 9HR
399 Park Avenue, 22nd Floor United Kingdom
New York, NY 10022
United States of America Legal Advisor (as to Guernsey law)
Ogier
General Partner of Investment Manager Ogier House
Tetragon Financial Management GP LLC St. Julian's Avenue
399 Park Avenue, 22nd Floor St. Peter Port, Guernsey
New York, NY 10022 Channel Islands GYI 1WA
United States of America
Legal Advisor (as to Dutch law)
Investor Relations De Brauw Blackstone Westbroek N.V.
David Wishnow / Yuko Thomas Claude Debussylaan 80
ir@tetragoninv.com 1082 MD Amsterdam, The Netherlands
Press Inquiries Stock Listing
Brunswick Group NYSE Euronext in Amsterdam
Andrew Garfield/Gill Ackers/Pip Green
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) 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.
(3) All of the LCM Cash Flow CLOs were current on their senior and subordinated management fees except for LCM I, which is significantly beyond its reinvestment period and has experienced material de-leveraging.
(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, http://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 June 30, 2012.
(9) As of June 30, 2012, European CLOs represented approximately 10% of TFG’s CLO equity investment portfolio; approximately 76% of the fair value of TFG’s European CLOs and 60%, 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, July 10, 2012; based on a sample of 481 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 9.1% 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, “Leveraged loan default rate by number hits 11-month high in June,” July 2, 2012.
(15) S&P/LCD News, “(EUR) S&P ELLI: Default rate climbs to 5.5% in June, “July 9, 2012. The ELLI default rate is calculated by defining “default” as (a) an event of default, such as a D public rating, a D credit estimate, a missed interest or principal payment, or a bankruptcy filing; or (b) the beginning stages of formal restructuring, such as the start of negotiations between the company and lenders, or hiring of financial advisors.
(16) All of the LCM Cash Flow CLOs were current on their senior and subordinated management fees except for LCM I, which is significantly beyond its reinvestment period and has experienced material de-leveraging.
(17) S&P/LCD News, “Leveraged loan default rate by number hits 11-month high in June,” July 2, 2012.
(18) S&P/LCD News, “Leveraged loan default rate by number hits 11-month high in June,” July 2, 2012.
(19) S&P/LSTA Leveraged Lending Review 2Q 2012.
(20) S&P/LCD News, “(EUR) Topical: European loans generate €9.3B in 2Q12,” July 4, 2012.
(21) S&P/LCD Quarterly Review, Second Quarter 2012.
(22) S&P/LCD Quarterly Review, Second Quarter 2012.
(23) S&P/LCD Quarterly Review, Second Quarter 2012.
(24) S&P/LCD News, “(EUR) Topical: European loans generate €9.3B in 2Q12,” July 4, 2012.
(25) S&P/LCD News, “Leveraged loan volume contracts in 2Q as clearing yields push higher,” June 29, 2012.
(26) S&P/LCD Quarterly Review, Second Quarter 2012.
(27) Morgan Stanley CLO Market Tracker, July 10, 2012; based on a sample of 481 U.S. CLO transactions.
(28) Morgan Stanley CLO Market Tracker, April 4, 2012; based on a sample of 473 U.S. CLO transactions.
(29) Morgan Stanley CLO Market Tracker, July 10, 2012; based on a sample of 195 European CLO transactions.
(30) Morgan Stanley CLO Market Tracker, April 4, 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) Wells Fargo Structured Products Research – CLOs. “The CLO Salmagundi: New Capital Rules May Benefit CLO Issuers,” June 28, 2012. Issuance volumes based on transactions priced, but not necessarily closed with the applicable time frame.
(33) 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.
(34) Citigroup, “Historical CLO Spreads”, June 1, 2012.
(35) Citigroup, “Historical CLO Spreads”, June 1, 2012.
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