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LONDON, July 18 /PRNewswire-FirstCall/ -- Tetragon Financial Group Limited (TFG) is a Guernsey closed-ended investment company traded on the Euronext Amsterdam Exchange under the ticker symbol "TFG."
In this performance report, unless otherwise stated we report on the consolidated business incorporating TFG, Tetragon Financial Group LP and Tetragon Financial group Master Fund Limited (1). References to "we" are to Polygon Credit Management LP, TFG's investment manager.
June 2007 results at a glance:
- Overview: The portfolio performed well in June 2007. Average internal rates of return (IRRs) remained steady compared to May's levels. We have continued to selectively invest in collateralized debt obligation (CDO) vehicles providing exposure to senior secured loans and believe that we have positioned the portfolio to take advantage of potential credit spread widening and market dislocations.
- Net Assets: Consolidated net assets were US$1.26 billion as of June 30, 2007.
- Income: Consolidated net income rose to US$14.9 million in June 2007, up from US$13.8 million in May 2007.
- Earnings per Share: June 2007 EPS were US$0.12, up from US$0.11 per share in May 2007.
- NAV per Share: June 2007 net asset value (NAV) per share increased to US$10.08, up from US$9.96 per share in May 2007.
- IRRs: The weighted-average IRR on closed CDO transactions remained steady at 16.5% at the end of June 2007.
- Life-to-Date Actual vs. Accrued Collateral Gains/(Losses): The benign credit environment continued this month, allowing further loss reserves to be built up. Actual life-to-date collateral losses as of June 2007 remained well below accrued levels, with the portfolio registering a US$0.4 million gain relative to US$60.6 million of expected losses accrued to date.
- New Deals: Two new transactions closed in June 2007, totaling approximately US$60 million in investment value.
- Deal Pipeline: We expect to close two additional deals in July 2007, with a total investment value of approximately US$58 million.
- Leverage: Month-end leverage as of June 30, 2007 rose to 1.08x from 1.04x at the end of May 2007. We expect to prudently manage the leverage as we fund our forward pipeline of investments.
(1) TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited ("TFGMF"), in which it holds an 83.4% share. Tetragon Financial Group LP (TFGLP), a U.S. "feeder fund", holds the remaining 16.6% interest in TFGMF. TFG and TFGLP receive a pro-rata allocation of the performance of TFGMF.
Dividend Guidance:
- US$0.13 to US$0.15 per share: We expect that TFG will declare a quarterly dividend in the range of US$0.13 to US$0.15 per share. This is a preliminary estimate, and a final determination will be announced on July 31, 2007 after the close of trading activity on the Euronext Amsterdam Exchange.
- Optional Stock Dividend Plan: In connection with the payment of dividends, we expect that TFG will implement an Optional Stock Dividend Plan so that TFG shareholders may elect to receive any declared dividends in the form of additional TFG shares. In addition, it is expected that the Articles of Incorporation for TFG will be amended to permit pre-IPO TFG shareholders that are ERISA investors to participate in the plan. Additional details with respect to the Optional Stock Dividend Plan and the amendment to the Articles will be posted on TFG's website shortly.
Portfolio summary (please refer to page 5 for more details):
- Portfolio size: US$1.41 billion invested as of the end of June 2007 across 65 settled transactions.
- Portfolio composition: The portfolio focus remains on exposure to senior secured loans with approximately 97% of risk capital allocated to this asset class. Exposure to ABS and structured finance securities is limited at approximately 3%.
Market summary (please refer to page 5 & 6 for more details)
- Defaults: There were no defaults in the leveraged loan market in June 2007, as the default-free streak reached a record seven months.
- Volume: New issue loan and collateralized loan obligation (CLO) volumes remained strong through the end of the first half of 2007.
- Loan Structures: Recent developments in the loan market indicate a move away from "covenant-lite" structures.
- Credit exposure: We believe the portfolio has been defensively positioned to benefit from a spread-widening environment.
TETRAGON FINANCIAL GROUP LIMITED
Performance Metrics and Drivers
Performance Metrics Q1 2007 Apr-07 May-07 Jun-07
Pre IPO return -
Class C shares 3.7% N/A N/A N/A
Return on average
equity for the period 4.7% 1.1% 1.1% 1.2%
EPS (US$) US$0.35 US$0.10 US$0.11 US$0.12
Dividend (US$M) N/A N/A N/A N/A(1)
DPS (US$) N/A N/A N/A N/A(1)
Cost-income ratio 32.5% 36.0% 26.2% 11.24%
Performance Drivers Q1 2007 Apr-07 May-07 Jun-07
Number of investments 56 57 63 65
Weighted Average
IRR on completed
transactions 16.3% 16.4% 16.5% 16.5%
Leverage at end of
period 1.12 0.95 1.04 1.08
Net assets (US$M) US$989 US$1,236 US$1,250 US$1,265
Number of shares
in issue (million) 89.1 125.5 125.5 125.5
Life to date
accrued collateral
losses (US$M) (US$37.0) (US$42.7) (US$51.9) (US$60.6)
Life to date actual
collateral gains/
(losses) (US$M) US$0.8 (US$0.5) (US$0.3) US$0.4
(1) TFG will announce a quarterly dividend declaration on July 31, 2007, after the close of trading activity on the Euronext Amsterdam Exchange.
Expected Upcoming Events Date
Board meeting July 30, 2007
June mid-year financials reported July 30, 2007
Dividend declaration date July 31, 2007
Quarterly investor conference call
(details to be posted on website) July 31, 2007
Ex-dividend date August 1, 2007
July monthly results reported August 16, 2007
Dividend payment date August 27, 2007
Portfolio and Market Commentary for June 2007
Portfolio Size and Composition
- Portfolio size: US$1.41 billion invested as of the end of June 2007 across 65 settled transactions.
The current portfolio stands at US$1.41 billion invested across 65 closed and settled positions. On a look-through basis, the portfolio has exposure to approximately US$15 billion of leveraged loans diversified across approximately 1,600 corporate obligors, up from approximately US$13.5 billion at the end of May 2007. We are currently evaluating potential investments and have approved a near-term pipeline of transactions (closing within the next four months) totaling over US$175 million.
- Portfolio composition: We remain focused on exposure to senior secured loans.
The portfolio continues to be largely composed of exposure to senior secured loans, with 94.8% of risk capital invested in broadly syndicated and middle market senior secured loans across both the U.S. and European markets. The balance of risk capital has been invested in CDO2 transactions (3.9%), and ABS and structured finance CDOs (1.3%). Over half of the CDO2 positions are primarily exposed to secured bank loan risk.
Market Developments
- Defaults: There were no defaults in the leveraged loan market in June, as the default-free streak reached a record seven months.
As of June 30, 2007, the S&P lagging 12-month default rate fell to 0.15% on a principal-weighted basis and 0.29% by number of loans. Since July 2006, only two issuers have defaulted in the S&P LSTA Index, well below the historical per-annum average of 3.17% since June 2003. Our portfolio is currently running at an approximate default rate of 0.02% per-annum (given total actual defaults since inception of 0.04%) which is 87% below the S&P lagging 12-month rate and over 99% below the historical average since June 2003. More importantly, our portfolio's actual default experience is a fraction of the approximately 2% per-annum default rate used to project losses on our investments, allowing us to continue building reserves against future losses.
- Volume: New loan and CLO deal volumes remain strong.
Leveraged loan issuance volumes set new records again this month, with US$204 billion issued over the second quarter of 2007. First half 2007 volume was US$390 billion, an increase of 55% over the same period in 2006. Driven by increased levels of M&A activity, the forward loan pipeline is expected to remain healthy with an estimated US$200 billion projected to come to market over the next few months. New issue CLO volumes also continued to be robust both in the U.S. and Europe. Nearly US$23 billion was issued globally during June 2007, bringing total year-to-date issuance to US$125 billion. Despite the record-setting first half of the year, we expect to see a slowdown in CLO issuance over the next few months as the market becomes more discriminating with respect to the underlying credit quality and structures, as well as portfolio managers. We suspect that marginal CLO managers will find it increasingly difficult to issue new deals, a positive development in our view. As we only invest with managers who we feel are in the top 10% of the CLO universe, we remain confident that we will continue to be able to construct an attractive pipeline of investments.
- Loan Structures: Recent developments in the loan market indicate a move away from "covenant-lite" structures.
We were encouraged this past month by the difficulties of a number of highly leveraged, "covenant-lite" new issue loan transactions as investors began to turn their backs on issuer-friendly structures. Ten deals that were initially launched in June as "covenant-lite" were forced to add maintenance covenants to their first-lien loans in order to get executed. We expect that this trend will continue and that "covenant-lite" issuance will slow over the next few months as issuers are pressured across multiple fronts. Arrangers estimate that investors will demand a 50-100 bps premium for "covenant-lite" structures going forward, a stark reversal to earlier in the year when B+/B1 "covenant-lite" loans cleared on average at L+226 bps compared with L+230 bps for identically-rated loans with maintenance covenants. Additionally, with S&P changing its CLO rating methodology to reduce the recovery rate assigned to covenant-lite loans in CLO transactions closing after August 31, 2007, we anticipate that there will be a cap on the amount of "covenant-lite" paper that can be absorbed by the CLO market. We believe that all of these developments are much needed and help point the market in a healthy direction.
Our current "covenant-lite" exposure is approximately 15.2%, well below the current market level of 35% of new issue volume. Among "covenant-lite" names, we continue to be exposed to the largest and most liquid issuers, as our managers have screened such credits carefully. Our exposure to second liens and bonds, as compared to the general market level of 10-15% of new issue volume, remains below 10% through our vehicles' structurally-imposed limitations.
- Credit exposure: The portfolio is positioned to benefit from a spread widening environment.
Although defaults have remained at historically low levels, we are beginning to see a broad risk re-pricing in the credit markets. The widening of the LCDX index suggests that market participants are beginning to anticipate a market downturn, as the index closed the month of June at 97.75, down from a high of 100.64 post-launch in May 2007. In the cash loan market, the widening has been less pronounced but observable nonetheless. S&P estimates that new issue spreads widened by 25-50 bps during the second quarter with BB/BB- loans at roughly L+178 bps at the end of June and B+/B loans at L+243 bps. We think that this is an opportune environment for our portfolio for several reasons:
Arbitrage - While the loan market has experienced some volatility in the past month, we believe that this volatility was due primarily to technical pressures rather than fundamental credit deterioration. Therefore, as loan spreads widen without a corresponding rise in defaults, our "funding gap arbitrage" will increase, improving the yield of our equity positions.
Loss Reserve - Despite having experienced negligible defaults in the portfolio, we have been provisioning for losses as expected under a roughly 2% per-annum default environment since inception. As such, we have built up a sizable reserve to protect against future losses.
Hedging - We have been actively monitoring our portfolio and employing various hedges as safeguards when appropriate. To date, we have utilized single name CDS, both to reduce concentration risk and to hedge certain names that are on our internal credit watch list. We have also made use of the CDX indices as macro hedges designed to mitigate outsized portfolio defaults.
Structural Enhancements - We have been able to include certain structural features in our transactions which we believe will be beneficial during a stressed credit environment, including enhancements that may allow us to be active investors when others may be forced to be passive.
We believe that this defensive strategy around which we have structured the portfolio has put us in a stronger position during any potential credit downturn.
About Tetragon
Tetragon Financial Group Limited (TFG) currently invests through long-term funding vehicles such as collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) in selected securitized asset classes and aims to provide stable returns to investors across various interest rate and credit cycles.
Investor and Press contact details
If you have questions on any aspect of the TFG business, please contact the Investor Relations team at ir@polygoninv.com (Related) . For press inquiries, please contact Finsbury at +44-(0)20-7251-3801.
Market data sources
LCD - "(EUR) CLO update: 3 vehicles price leaving pipeline at EUR9.3B" - July 3, 2007
LCD - "Loan defaults remain at all-time low in June" - July 3, 2007
LCD - "Weekly CLO pipeline falls to 28 vehicles and US$13.8B" - July 3, 2007
Morgan Stanley Fixed Income Research - CDO Market Update - July 12, 2007
S&P - "LCD Leveraged Lending Review, Second-quarter 2007"
Wachovia - "Market Summary Package" - July 3, 2007
Snapshot of Portfolio Held by TFG Master Fund Limited
(unless otherwise stated) as of June 30, 2007
Report Date TFG Share Price TFG group TFG No. of Closed
(US$) Market Cap group Transactions
(US$MM)(1) Net Assets
(US$MM)
30 June 2007 US$9.44 US$1,184.3 US$1,265.0 65
Capital Allocation
by Asset Class Risk Investment Investment Overall Asset
Capital Amortized Amortized Leverage(4)
Allocation Cost Cost B/Fwd
(US$MM)(2) (US$MM)(3)
Broadly
Syndicated
Senior Secured
Loans: US 60.2% US$847.7 US$822.4
Broadly Syndicated
Senior Secured
Loans: Europe 18.4% US$259.7 US$249.4
Middle Market
Senior Secured
Loans: US 16.2% US$228.9 US$220.3
CDOs
Squared: US 3.9% US$54.9 US$53.3
ABS and Structured
Finance: US 1.3% US$18.0 US$17.5
Total 100% US$1,409.1 US$1,362.9 1.08
Geographic Allocation by Asset Class USA Europe Asia Total
Pacific
Broadly Syndicated Senior Secured Loans 77% 23% 0% 100%
Middle Market Senior Secured Loans 100% 0% 0% 100%
CDOs Squared 100% 0% 0% 100%
ABS and Structured Finance 100% 0% 0% 100%
82% 18% 100%
Top 15 Underlying Bank Loan Credits Bank Loan
Exposure (5)
Georgia Pacific 0.86%
HCA 0.86%
Aramark 0.71%
Idearc 0.65%
Ineos 0.62%
Oshkosh Trucks 0.61%
Freescale Semiconductor 0.54%
CSC (Cablevision) 0.52%
VNU 0.52%
Univision 0.52%
Intelsat 0.50%
Hexion 0.48%
Health Management 0.46%
Lyondell Chemical 0.46%
West Corp 0.44%
Performance(6)
Illustrative Historical Hedge Fund Performance
Jan Feb Mar Apr May Jun Jul
2005
2006 1.34% 1.23% 1.44% 1.40% 1.22% 1.16% 1.13%
2007 1.32% 1.15% 1.14%
Earnings per
Share (7)
Jan Feb Mar Apr May Jun Jul
2007 EPS of US$0.35 for Q1(8) US$0.10 US$0.11 US$0.12
Performance(6)
Illustrative Historical Hedge Fund Performance (continued)
Aug Sept Oct Nov Dec YTD
2005 0.41% 0.64% 0.94% 1.13% 1.16% 4.34
2006 1.10% 1.00% 1.01% 1.21% 1.25% 15.48%
2007 3.66%
Earnings
per Share
(7)
Aug Sept Oct Nov Dec YTD
2007 US$0.67
EUR-USD Fx: 1.35
(1) Includes exchange rights held by Tetragon Financial Group LP investors as if they had been converted to TFG shares and valued at the closing share price.
(2) Equivalent to Investment in Securities at Fair Value in the US GAAP Financial Statements.
(3) Investments at Amortized Cost less interest accrued since last payment date. Internal Rate of Return (IRR) x Amortized Cost B/Fwd determines CDO income.
(4) Equals CDO Amortized Cost BFwd / Book Value.
(5) Calculated as a percentage of total Loan Assets that Tetragon has exposure to net of any single name CDS hedges held against that credit. The value of both the Loan Credit and the Total Loan exposure are calculated at cost of purchase.
(6) Actual performance for Tetragon Credit Income Fund Limited Class C, calculated as a change in Net Asset Value per Share for the period July 06 - Mar 07. Illustrative results for the period from Aug05 - Jun 06 as if Class C shares had been in place since the launch of the Company. Performance is net of (a) 1.5% management fee per annum, (b) incentive fees of 25% the increase in NAV over a hurdle rate of 8% per annum and (c) expenses, and reflect an investment in the company since inception without additions, withdrawals or redemptions.
(7) Number of shares is illustrative for the pre IPO period as the structure of the share classes changed at IPO closing.
(8) Q1 EPS is derived from the illustrative historical hedge fund performance during Q1 2007.
TETRAGON FINANCIAL GROUP LIMITED
Consolidated Performance (US$MM)
Statement of Operations Q1 Apr-07 May-07 Jun-07
2007 (US$MM) (US$MM) (US$MM)
(US$MM)
Interest Income from Investments 38.0 15.6 17.2 15.6
Interest Income from Cash 2.9 0.8 1.4 1.2
Investment Income 40.9 16.4 18.7 16.8
Management Fees (3.8) (1.6) (1.5) (1.6)
Admin/ Custody and Other Fees (0.3) (0.1) (0.1) (0.1)
Interest Expense (4.0) (1.5) (1.6) (1.6)
Total Operating Expenses Excluding (8.1) (3.2) (3.2) (3.3)
Performance Fee
Net Investment Income 32.8 13.2 15.4 14.5
Realised and Unrealised Gains/ (Losses) From (1.0) (0.9) 0.2 2.7
Hedging
Net Increase/(Decrease) in Unrealised 0.0 0.0 0.0 1.0(1)
Appreciation/(Depreciation) in Investments
Net Realised Gain on Investments 0.8 0.0 0.0 0.0
Net Realised and Unrealised Gains (Losses) (0.2) (0.9) 0.2 3.7
from Investments and FX
Net Increase in Net Assets From Operation 32.6 12.3 15.6 17.2
Before Performance Fees
Performance Fees (5.0) (1.8) (1.8) (2.3)
Net Increase in Net Assets from Operations 27.6 10.5 13.8 14.9
(1) In accordance with EITF 99-20 reclassed from Interest Income from
Investments.
Shareholdings at June 30, 2007 Number of % Holding
shares in Tetragon
(millions) Financial
Group
Master
Fund
Limited
Tetragon Financial Group Limited ("TFG") -
listed shares 104.64 83.4%
Tetragon Financial Group LP ("TFGLP") -
conversion rights 20.81 16.6%
TOTAL SHARES AND CONVERSION RIGHTS 125.45
This release includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements include all matters that are not historical facts, and include statements regarding the intentions, beliefs or current expectations of TFG concerning, among other things, the investment performance, results of operations, financial condition, liquidity and prospects of TFG. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. TFG's actual investment performance, results of operations, financial condition and liquidity may differ materially from the impression created by the forward-looking statements contained in this release. In addition, even if the investment performance, results of operations, financial condition and liquidity of TFG are consistent with the forward-looking statements contained in this release, those results or developments may not be indicative of results or developments in subsequent periods. TFG does not undertake to update any of these forward-looking statements.
This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States. 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.
Investor and Press contact details
If you have questions on any aspect of the TFG business, please contact the Investor Relations team at ir@polygoninv.com (Related) . For press inquiries, please contact Finsbury at +44-(0)20-7251-3801.
Tetragon Financial Group Limited
CONTACT: Investor Relations team at ir@polygoninv.com (Related) . For press
inquiries, please contact Finsbury at +44-(0)20-7251-3801.
Copyright © 2007 PR Newswire. All rights reserved.
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1 comment:
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