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Tetragon Financial Group Limited - Performance Report for August 2007
LONDON, September 19 /PRNewswire/ -- 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.
August 2007 results at a glance:
- Overview: The portfolio performed well in August 2007,
supported by stable fundamental credit conditions and opportune asset
selection decisions made by many of our portfolio managers. We anticipate
that the technically-driven dislocation witnessed by the loan market during
July and August 2007 will continue to create attractive reinvestment
opportunities for our portfolio managers via discounted secondary purchases,
which generate incremental par cushion and increase the yield of our assets,
as well as the gradual convergence of new issue spreads with those implied by
current secondary prices. Although any spread widening and par accretion
effects will take time to filter through the portfolio, we believe that our
transactions are in a strong position to take advantage of current market
conditions. Loan prepayments in the portfolio continued this month,
facilitated by M&A activity and the application of asset/division sale
proceeds to loan repayments. With secondary prices stabilizing at the end of
August, we believe the primary market remains poised for a more restrained
lending environment characterized by wider spreads and a lower tolerance for
highly leveraged and "covenant-lite" transactions.
- Net Assets: Consolidated net assets were US$1.28 billion as of
August 31, 2007. The issuance of additional shares pursuant to the Optional
Stock Dividend Plan contributed approximately US$2.65 million of additional
capital in August 2007.
- Income: Consolidated net income was US$13.5 million in August
2007. Net Investment Income continued to trend upwards to US$17.3 million.
- Earnings per Share: August 2007 EPS were approximately US$0.11
per share.
- NAV per Share: Net asset value (NAV) per share increased to
US$10.17 in August 2007, up from US$10.07 per share in July 2007.
- IRRs: The weighted-average IRR on closed CDO transactions
remained unchanged at 16.4%.
- Life-to-Date Actual vs. Accrued Collateral Gains/(Losses):
Despite the obvious market disruptions, we continued to build excess loss
reserves, which stood at US$80.2 million as of August 31, 2007.
- New Deals: Two new transactions closed in August 2007,
totaling approximately US$56 million in investment value.
- Deal Pipeline: Although we are fully invested, we are
actively evaluating a variety of potential investment opportunities for the
portfolio, continuing to focus on transactions with sustainable arbitrage and
structural flexibility.
- Leverage: Month-end leverage as of August 31, 2007 was 1.13x
compared to 1.10x at the end of July 2007.
Share Capital:
- Shares in issue in TFG: In August 2007, TFG distributed a
dividend of US$0.15 per share and implemented an Optional Stock Dividend Plan
allowing shareholders to elect to receive declared dividends in the form of
additional shares. A number of investors opted to receive the dividend via
additional shares, resulting in the issuance of 323,287 new shares. As a
result of the issuance of such new shares and other conversions from
investors in TFGLP, the number of total TFG shares in issue increased to
118,178,415. Total shares in the TFG Master Fund increased to 125,776,592.
Portfolio summary (please refer to page 4 for more details):
- Portfolio size: US$1.5 billion invested as of the end of
August 2007 across 67 settled transactions.
- Portfolio composition: The portfolio remains focused on
senior secured loans with approximately 97% of risk capital allocated to CDO
vehicles providing exposure to senior secured loans as of the end of August
2007.
Market summary (please refer to page 4 & 5 for more details):
- Defaults: The loan market saw no new defaults in August
2007, consistent with stable credit conditions but in contrast with the
secondary market correction and the pipeline of stalled primary transactions.
- Credit environment: Near-term fundamental credit conditions
and outlook remain benign, in line with strong year-to-date earnings growth
and the strategic asset management and de-leveraging undertaken by many bank
loan issuers.
- Prepayments: Loan prepayment rates continued at close to
average historic levels with US$9.6 billion of loans repaid during the month.
M&A activity, division spin-offs and asset sales served as the main sources
of repayment proceeds, despite the marked reduction in refinancing levels.
(1) TFG invests substantially all its capital through a
master fund, Tetragon Financial Group Master Fund Limited ("TFGMF"), in which
it holds a 93.6% share. Tetragon Financial Group LP (TFGLP), a U.S. "feeder
fund", holds the remaining 6.4% interest in TFGMF. TFG and TFGLP receive a
pro-rata allocation of the performance of TFGMF.
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TETRAGON FINANCIAL GROUP
Performance Report for August 2007
Performance Metrics and Drivers
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Performance Metrics Q1 2007 Q2 2007 Jul-07 Aug-07
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Pre IPO return - Class C shares 3.7% N/A N/A N/A
Return on average equity for the period 4.7% 3.5% 1.4% 1.1%
EPS (US$) US$0.35 US$0.33 US$0.14 US$0.11
Dividend (US$M) N/A 18.8(1) N/A N/A
DPS (US$) N/A 0.15 N/A N/A
Operating cost - income ratio (2) 31.4% 29.6% 38.2% 26.5%
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Performance Drivers Q1 2007 Q2 2007 Jul-07 Aug-07
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Number of investments 56 65 66 67
Weighted Average IRR on completed
transactions 16.3% 16.5% 16.4% 16.4%
Leverage at end of period 1.12 1.08 1.10 1.13
Net assets (US$M) US$989 US$1,265US$1,264US$1,279
Number of shares in issue (million) 89.1 125.5 125.5 125.8
Life to date accrued collateral
losses (US$M) (37.0) (60.6) (76.2) (86.2)
Life to date actual collateral
gains/(losses) (US$M) 0.8 0.4 0.6 (6.0)
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(1) Dividend for Q2 was declared in July 2007 and the liability was
recognised in Net Assets at that point.
(2) "Operating cost-income ratio" replaces "cost-income ratio" as a more
meaningful metric.
Operating cost includes operating expenses and performance fees but
excludes hedging costs.
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Expected Upcoming Events Date
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Q3 financial results reported
(including dividend announcement) October 18, 2007
October monthly results reported November 20, 2007
November monthly results reported December 18, 2007
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TETRAGON FINANCIAL GROUP LIMITED
Portfolio and Market Commentary for August 2007
Portfolio Size and Composition
- Portfolio size: US$1.5 billion invested across 67 settled
transactions
The investment portfolio increased to US$1.5 billion as of the
end of August 2007, invested in 67 settled transactions managed by 37
portfolio managers. On a look-through basis, the portfolio's exposure to
leveraged loans rose to approximately US$16.3 billion invested in over 1650
distinct corporate obligors.
- Portfolio composition: Continued bias towards senior secured
bank loans
As of the end of August 2007, we invested 95.2% of our capital
in transactions providing exposure to broadly syndicated and middle market
senior secured loans across the U.S. and Europe. 3.6% has been invested in
CDO2 transactions and 1.2% in ABS and Structured Finance CDOs. Of the CDO2
transactions, 52% is primarily exposed to senior secured bank loan risk.
Market Developments
- Defaults: Default-free August highlights the technical
nature of the recent market correction
The loan market experienced no new defaults during August
2007, leaving the lagging 12-month default rate unchanged from July 2007's
level at 0.42% by number of loans and 0.21% by principal amount. These levels
are below 2006 year-end figures of 0.79% and 0.48%, by number of loans and
principal amount respectively, and are well within the historical average of
3.45% (by principal amount). TFG's inception-to-date loan default rate
remained unchanged at 0.04% as of the end of August 2007 (0.02% on an
annualized basis), given no payment defaults or bankruptcy filings in the
portfolio, as we continued to build reserves against future losses.
With stable credit conditions and defaults largely absent from
the bank loan universe, the secondary market correction witnessed during July
and August 2007 appears to have been largely technical in nature. The
combination of a record supply of new issue loans, credit risk re-pricing by
investors (including rejection of "covenant-lite" structures and historically
low spreads), as well as reduced demand for loans on the heels of broader
dislocations in the global financial markets, led to a significant pricing
correction. The average price of S&P/LSTA Index loans ended July 2007 at
95.7% with an implied average discounted spread of L+385 bps (assuming a
three-year average life). Secondary pricing levels appeared to find
equilibrium in late August at a 95%-97% range, implying spreads of L+300-365
bps.
- Credit environment and near-term fundamental outlook remain positive
Although we anticipate that default levels and credit spreads
will trend toward historical average levels and are monitoring the quality of
our portfolio closely, a number of factors suggest that, barring any
unexpected shocks to the economy, corporate balance sheets will remain
resilient in the near-term with default rates increasing gradually.
First, few signs of far-reaching fundamental distress are
visible. The share of loans in the S&P/LSTA Index trading at 70% or lower was
only 0.72% in August 2007, despite the secondary market correction.
Additionally, the share of first-lien loans that S&P rates "CCC+" or lower
was 0.76% in August 2007, up slightly from 0.64% in July 2007, but lower than
the lagging 12-month average of 0.97%.
- Credit environment and near-term fundamental outlook remain
positive (continued)
Second, earnings growth for publicly-filing issuers in the
S&P/LSTA Leveraged Loan Index remained strong through 2Q 2007, with these
issuers reporting year-over-year EBITDA growth of 17.6% during 2Q 2007, up
from 14.9% during 1Q 2007. The strong profitability of the first half of the
year is expected to provide companies with a near-term liquidity cushion if
earnings growth momentum slows from recent record levels. Finally, many
borrowers are taking active steps to reduce their costs, manage asset
inventories, and engage in defensive de-leveraging whenever possible.
- Prepayments: Core loan prepayment rate supported by asset
sales and M&A/division spin-offs
Despite the volatile market conditions, US$9.6 billion of loans
were repaid in August 2007. Whilst this level is down from US$12.5 billion in
July 2007, it brings year-to-date volume to US$68 billion, up from US$61
billion over the same period in 2006. With refinancing activity slowing
noticeably during this month, the continuation of repayment activity was
made possible by M&A events, corporate balance sheet re-structuring (e.g.
American Micro Devices' issuance of convertible bonds to repay the term
loan), as well as asset sales and strategic division spin-offs. This
pattern is consistent with the historical performance of loans which have
maintained core prepayments speeds of approximately 25% p.a., even during
the most difficult credit years. According to LCD data, the repayment rate
remained at 25% in 2001, despite the peak in loan defaults during that year.
As of the date of this letter, a number of additional repayments via asset
sales have been announced (e.g. Boise Cascade, Solo Cup), suggesting that
this dynamic will continue. These par loan repayments are particularly
valuable to our transactions in the current environment, as they allow our
mangers to reinvest principal proceeds at significant OID discounts and wider
spread levels, generating excess spread or par cushion that will mitigate the
impact of any future losses.
About Tetragon
Tetragon Financial Group Limited (TFG) currently invests
through long-term funding vehicles such as collateralized debt obligations
(CDOs) and collateralized loan obligations (CLOs) in selected securitized
asset classes and aims to provide stable returns to investors across various
interest rate and credit cycles.
Market data sources
S&P/LSTA August 2007 Review & Outlook
LCD Loan Stats Weekly, September 6, 2007
LCD News: "Dura: Distressed Postmortem," September 7, 2007
S&P/LCD Daily Loan Market Wrap-Up, September 10, 2007
Tetragon Financial Group Ltd
Snapshot of Portfolio Held by TFG Master Fund Limited
(unless otherwise stated)
as of August 31, 2007
Report Date TFG TFG TFG group No. of Closed
Share group Net Assets
Price Market (US$MM) Transactions
(US$) Cap
(US$MM)(1)
31 August 2007 US$8.40 US$1,056.5 US$1,279.4 67
Capital Allocation by Asset Risk Investment Investment Overall
Class Capital - - Leverage(4)
Allocation Amortized Amortized
Cost Cost B/Fwd
(US$MM)(2) (US$MM)(3)
Broadly Syndicated
Senior Secured Loans: US 60.2% US$900.4 US$871.7
Broadly Syndicated
Senior Secured Loans: Europe 19.7% US$293.9 US$282.5
Middle Market Senior
Secured Loans: US 15.3% US$228.0 US$218.5
CDOs Squared: US 3.6% US$54.1 US$52.2
ABS and Structured Finance: 1.2% US$18.2 US$17.9
US
Total 100% US$1,494.6 US$1,442.8 1.13
Geographic Allocation by USA Europe Asia Total
Asset Class Pacific
Broadly Syndicated Senior
Secured Loans 75% 25% 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% 0% 100%
Top 15 Underlying Bank Loan
Bank Loan Credits Exposure (5)
GEORGIA PACIFIC 0.83%
HCA 0.76%
IDEARC 0.68%
INEOS 0.63%
ARAMARK 0.60%
FREESCALE SEMICONDUCTOR 0.59%
OSHKOSH TRUCK 0.58%
UNIVISION 0.56%
VNU 0.55%
INTELSAT 0.48%
MGM GRAND 0.48%
LAS VEGAS SANDS 0.47%
CSC (CABLEVISION) 0.47%
HEXION 0.47%
SUNGARD 0.43%
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%
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)
Jan Feb Mar Apr May Jun
2007 EPS of US$0.35 for US$0.10 US$0.11 US$0.12
Q1(8)
2007 Jul Aug Sept Oct Nov Dec YTD
US$0.14 US$0.11 US$0.92
EUR-USD Fx: 1.36
(1) Includes exchange rights held by Tetragon Financial Group LP
investors as if they had been converted to TFG shares and valued at
the closing share price.
(2) Equivalent to Investment in Securities at Fair Value in the US
GAAP Financial Statements.
(3) Investments at Amortized Cost less interest accrued since last
payment date. Internal Rate of Return (IRR) x Amortized Cost B/Fwd
determines CDO income.
(4) Equals CDO Amortized Cost BFwd / Book Value.
(3) Calculated as a percentage of total Loan Assets that Tetragon has
exposure to net of any single name CDS hedges held against that credit.
The value of both the Loan Credit and the Total Loan exposure are
calculated at cost of purchase.
(6) Actual performance for Tetragon Credit Income Fund Limited Class C,
calculated as a change in Net Asset Value per Share for the period
July 06 - Mar 07. Illustrative results for the period from Aug 05
- Jun 06 as if Class C shares had been in place since the launch of the
Company. Performance is net of
(a) 1.5% management fee per annum, (b) incentive fees of 25% the increase
in NAV over a hurdle rate of 8% per annum and (c) expenses, and reflect
an investment in the company since inception without additions,
withdrawals or redemptions.
(7) Number of shares is illustrative for the pre IPO period as the
structure of the share classes changed at IPO closing.
(8) Q1 EPS is derived from the illustrative historical hedge fund
performance during Q1 2007.
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TETRAGON FINANCIAL GROUP LIMITED
Performance Highlights for August 2007
Consolidated Performance (USUS$MM)
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Statement of Operations Q1 Q2 Jul-07 Aug-07
2007 2007 (US$MM) (US$MM)
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Interest Income from Investments 38.0 48.4 19.2 20.3
Interest Income from Cash 2.9 3.5 1.1 1.1
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Investment Income 40.9 51.8 20.3 21.4
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Management Fees (3.8) (4.7) (1.6) (1.6)
Admin/ Custody and Other Fees (0.3) (0.3) (0.2) (0.3)
Interest Expense (4.0) (4.7) (2.0) (2.2)
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Total Operating Expenses Excluding
Performance Fee (8.1) (9.7) (3.8) (4.1)
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Net Investment Income 32.8 42.1 16.5 17.3
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Realised and Unrealised Gains/
(Losses) From Hedging (1.0) 2.0 6.8 (2.6)
Net Increase/(Decrease) in Unrealised
Appreciation/(Depreciation) in 0.0 1.0 (3.0) 0.5
Investments
Net Realised Gain on Investments 0.8 0.0 0.0 0.0
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Net Realised and Unrealised Gains/
(Losses) from Investments and FX (0.2) 3.0 3.8 (2.1)
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Net Increase in Net Assets From
Operation Before Performance Fees 32.6 45.1 20.3 15.2
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Performance Fees (5.0) (5.9) (2.8) (1.7)
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Net Increase in Net Assets from
Operations 27.6 39.1 17.5 13.5
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Shareholdings at August 31, 2007 Number of % Holding in
shares Tetragon
(millions) Financial
Group Master
Fund Limited
------------------------------------------------------------------------
Tetragon Financial Group Limited 118.18 94.0%
("TFG") - listed shares
Tetragon Financial Group LP 7.60 6.0%
("TFGLP") - conversion rights
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TOTAL SHARES AND CONVERSION RIGHTS 125.78 100.0%
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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
For press inquiries:
Please contact Simon Moyse at Finsbury
0n +44-20-7251-3801.
