Tetragon Financial Group Limited: Corporate Profile
Corporate Profile
In this performance report, unless otherwise stated, we report on the consolidated business incorporating
Investment Objective
TFG's investment objective is to generate distributable income and capital appreciation. To achieve this objective, and to aim to provide stable returns to investors across various interest rate and credit cycles,
(1) TFG invests substantially all its capital through the
Contents Letter to Shareholders 2010 Performance at a Glance Investment Manager's 2010 Highlights Financial Results Investment Portfolio Summary Investment Manager's Report Investment Portfolio Overview Fair Value Determination of TFG's CLOs Cash Flow Modeling Assumptions Application of Discount Rate Portfolio Corporate Actions Financing Sources and Hedging Activity Capital Distributions 2010 Asset Management Platform Summary, Outlook and Strategy Financial Review 2010 Description of Business Risk Factors End Notes Appendix I:Tetragon Financial Group Limited 2010 Audited Consolidated Financial Statements Appendix II:Tetragon Financial Group Master Fund Limited 2010 Audited Consolidated Financial Statements TO OUR SHAREHOLDERS
We are pleased to present what we believe are very strong operating and financial results for 2010, which reflect the following key themes:
- TFG's portfolio of collateralized loan obligation ("CLO") equity has generally weathered the financial storms of 2008 and 2009 well and has recovered strongly. Key performance metrics for the Company's U.S. CLO investments have, on average, returned to, or exceeded, expected long-term norms. European CLOs, which constitute a significantly smaller share of TFG's portfolio and have mostly lagged behind the performance of U.S. CLOs, are also beginning to show some encouraging signs of potential recovery.
- Cash flows from CLO investments increased significantly year-over-year in 2010, and we believe there is further potential for growth in the coming year.
- TFG also continued to execute on its current strategy of diversifying its income stream into asset management platforms and investments both within and beyond the leveraged loan market.
- The completion of the acquisition and integration ofLCM Asset Management LLC ("LCM") in early 2010 was successful and has, as planned, provided a platform for TFG to take what we believe is a leading role in the new issue CLO market and to exploit CLO manager consolidation opportunities. - During Q3 2010, after reviewing many investment opportunities in asset management platforms, TFG entered into a venture withGreenOak Real Estate ("GreenOak"), which has provided for an equity interest in the business as well as co-investment opportunities at discounted fee levels in future investment programs.
- The strong investment performance experienced during 2010 has enabled the company to increase dividends throughout the year and to continue its share buy-back program.
In contrast to the volatility and uncertainty which characterized the prior two years, 2010 witnessed a gradual stabilization of macroeconomic conditions and improvements in corporate credit quality, particularly in
These portfolio-wide improvements helped drive the significant increase of TFG's investment cash flows from approximately
2010 was also a year of strategic expansion of TFG's asset management platform. The integration of LCM into TFG's platform has been smooth and we believe that the LCM team had a very successful 2010. LCM's assets under management grew from approximately
The successful execution of LCM VIII was a considerable achievement for the team as we believe it was the only arbitrage-driven U.S. CLO closed in 2010 where a significant portion of the equity tranche was sold to investors unaffiliated with the collateral manager. We believe that this was a testament to LCM's strong market reputation and ability to attract third-party capital. In addition, during Q1 2010, TFG launched a direct U.S. loan investment program leveraging LCM's credit expertise to generate attractive risk-adjusted returns while seeking to ensure appropriate liquidity.
In an effort to continue its transformation into a broad-based financial services firm that functions not only as an investment holding company, but also as a firm that owns interests in multiple operating businesses, TFG acquired a 10% interest in a new multi-jurisdictional real estate venture, GreenOak, in Q3 2010, along with access to future co-investment opportunities in investment programs managed by GreenOak at discounted fee levels.(2) Having evaluated a number of opportunities during the year, we chose to invest in GreenOak because we believe this investment will strengthen TFG's asset management capabilities and along with LCM, form a foundation for the platform as we look for opportunities both within and beyond the leveraged loan asset class.
TFG's strong performance during 2010 has allowed the Company to continue to return value to its shareholders. In the first quarter of the year TFG paid a dividend of
Turning to the broader landscape, U.S. corporate credit and macroeconomic fundamentals are projected to continue to improve over the near to mid-term. With this in mind, we are optimistic in our outlook for both TFG's investment portfolio and its asset management platform, which we will look to continue to expand. We expect that TFG's U.S. CLO investments will continue to improve in 2011, and although substantial systemic problems remain unresolved in
While we expect that cash flows from the Company's CLO investments will remain substantial in 2011, we are nonetheless mindful that CLO equity tranches, like their underlying loan assets, are amortizing instruments, with reinvestment periods typically ending six to seven years before their legal maturities. Our expectation of considerable, but naturally declining cash flows will necessitate the redeployment of the Company's capital over the next several years in order to maintain our desired returns. This redeployment may come in the form of, among others, investments in new issue or secondary CLOs and loans, investments in asset management firms and capital distributions to shareholders. We are particularly focused on growing our asset management platform by supporting LCM and GreenOak, and by seeking other investment opportunities both within and outside the leveraged loan asset class. We believe that TFG's transition beyond an investment holding company to an owner of interests in multiple operating companies across diversified asset classes will ultimately create significant value for our fellow shareholders.
With regards, Board of Directors28 February 2011 2010 PERFORMANCE AT A GLANCE Investment Manager's 2010 Highlights:
In the context of improving fundamental, corporate credit and capital markets conditions, TFG achieved the following:
Cash Flow: The Company experienced a significant improvement in cash generation in 2010, with CLO investment cash receipts of approximately
CLO Investment Performance: The Company's portfolio of CLO investments as a whole out-performed market-wide averages across several key performance metrics, including:
- Defaults: TFG's 2010 corporate loan default rate fell to approximately 1.7%, down from 6.5% recorded as of the end of Q4 2009, and approximately 11% below the 1.9% lagging 12-month institutional U.S. loan default rate, based on the total par amount outstanding, reported by S&P/LCD for the 12-months ending on 31 December 2010.(5) TFG's 2010 corporate loan default rate was also approximately 24% below the 2.2% annual WARF-implied default rate used as a historical average rate within TFG's cash flow modeling framework. - Collateral Coverage Test (O/C) Compliance: As of31 December 2010 , 100% of TFG's U.S. CLOs and approximately 94% of TFG's CLO investments on a portfolio-wide basis were passing their junior most O/C tests, when measured on a number of transactions basis.(6) This compared favorably with the U.S. market-wide average of approximately 92.0% of U.S. CLOs estimated to be in compliance with their junior O/C tests as of the end of 2010.(7)(8) - Credit Quality: The weighted-average percentage of corporate obligors rated Caa1/CCC+ or below in our 70 CLO investments ended the year at 8.3% compared to an approximate 7.9% weighted-average maximum level permitted under the terms of our investments.(9) This statistic was considerably lower than the market-wide median level of CCC-rated asset holdings among U.S. CLOs - estimated to be approximately 8.6% as of the end of Q4 2010.(10)
Direct Loan Investments: In Q1 2010, TFG launched a direct U.S. loan investment program leveraging LCM's credit expertise to generate attractive risk-adjusted returns while ensuring appropriate liquidity. As of
Cash Reserves and Corporate-Level Borrowings: The Company had no outstanding corporate-level borrowings during all of 2010 and its net cash position stood at
Capital Distributions, Dividends and Share Repurchases: The Company maintained dividends throughout 2010 and increased its dividend for Q4 2010 to
2010 PERFORMANCE AT A GLANCE (continued)
Investment Manager's 2010 Highlights (continued):
Asset Management Platform
TFG also continued to execute on its current strategy of diversifying its income stream into asset management platforms.
LCM Developments: LCM achieved strong operating and financial performance during 2010. Assets under management grew from approximately
Financial Results:
Net Income: Consolidated net income of
Earnings per Share (EPS): Consolidated EPS for 2010 was
Cash Flows from Operations: Total cash receipts from CLO investments in 2010 reached approximately
Dividend: During 2010, TFG paid a dividend of
Leverage: TFG had no outstanding borrowings during all of 2010.
Net Asset Value (NAV) per Share: NAV per share at the end of 2010 was
Portfolio Size: As of the end of 2010, the fair value of TFG's CLO investment portfolio totaled approximately
2010 PERFORMANCE AT A GLANCE (continued)
Investment Portfolio Summary:
CLO Portfolio Composition: As of the end of 2010, TFG's performing CLO portfolio consisted solely of 70 CLO investments managed by 28 external CLO managers and LCM. The number of external CLO managers fell to 28, owing to certain manager consolidations that were announced during the year.
IRRs: The weighted-average IRR as of the end of 2010 was 15.1%, up from 11.9% at the end of 2009.
Performance Fee: Performance fees of
INVESTMENT MANAGER'S REPORT
PORTFOLIO OVERVIEW
As of
Having gone through the financial storms of 2008-2009, the Company's CLO investments rebounded strongly during the year, benefiting from improving fundamental and capital market conditions, particularly in
In the U.S., we believe that the positive credit trends of 2010 were mainly grounded in improving corporate earnings as well as greater capital markets liquidity, which facilitated significant reductions in the size of the so called "maturity wall." Within the sample universe of publicly filling S&P/LSTA Index issuers, for example, Q3 2010 EBITDA rose by approximately 24%, on the heels of the implementation of cost rationalization measures and/or top-line growth.(22) Furthermore, the stabilization of macroeconomic fundamentals and low interest rates drove strong investor demand for leveraged loan and high yield bond assets, fueling a surge of new issue activity in those markets. Accordingly, 2010 total U.S. institutional loan volumes was up over 300% on the year, totaling
With accelerating U.S. loan prepayments, which rose from approximately 15.6% in 2009 to 27.7% in 2010,(29) many U.S. CLOs were able to rotate a meaningful share of their portfolios into wider-spread new issue loans. In addition, U.S. CLO portfolios continued to benefit from amendment fees, spread increases, and the introduction of LIBOR floors, which further increased the excess interest margin available for distribution to equity tranche holders, such as TFG. Accordingly, equity distributions of U.S. CLOs improved significantly in 2010, as reflected in the over 70% increase in cash receipts from investments experienced by TFG's CLO portfolio during 2010 versus the prior year. TFG's direct bank loan portfolio also benefited from these constructive trends, generating
The European leveraged loan market, on the other hand, continued to be weighted-down by sluggish E.U. GDP growth and sovereign debt problems in a number of member countries. Nonetheless, European primary issuance volumes recovered from their 2009 lows. During 2010, approximately
Consistent with the significant credit quality and price gains experienced by the leveraged loan market, secondary CLO debt and equity prices posted an impressive rally during 2010, particularly during the latter half of the year. Mezzanine debt and equity tranches experienced the most significant gains - with mezzanine tranches gaining from 13-26 points in 2010.(34) Bid-list activity rose by approximately 50% to
Primary CLO issuance activity also began to recover during 2010, with a pick-up in the issuance of arbitrage-driven transactions in the U.S. During 2010, 39 CLO transactions were priced globally totaling approximately
FAIR VALUE DETERMINATION OF TFG's CLO INVESTMENTS
In accordance with the Company's valuation policies as set forth on the Company's website, the values of TFG's CLO investments are determined using a third-party cash flow modeling tool. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in historic, current and potential market developments on the performance of TFG's CLO investments. Since this involves modeling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter's historical data.
Subject to the foregoing, when determining the U.S. GAAP-compliant fair value of TFG's portfolio, the Company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark our inputs and resulting outputs to observable market data when available and appropriate. Fundamentally, the valuation process involves two stages. In stage one, future cash flows for each deal in the CLO portfolio are modeled, using base case assumptions. This generates both the investment IRRs, which are used to drive the recognition of income, and the associated amortized cost. In stage two, a discount rate reflecting the perceived level of risk is applied to those future cash flows to generate a fair value for each investment. Due to elevated market risk premia over the last two years, among other factors, this effective discount rate has typically been higher than the deal's IRR and therefore, in such instances, has resulted in a fair value which is lower than the deal's amortized cost. The difference between these two figures, on an aggregate basis across the CLO portfolio, has been characterized as the "ALR Fair Value Adjustment" or "ALR."(38)
FORWARD-LOOKING CASH FLOW MODELING ASSUMPTIONS
The Investment Manager reviews, and adjusts as appropriate the CLO investment portfolio's future modeling assumptions to factor in historic, current and potential market developments on the performance of TFG's CLO investments. During this year certain key modeling assumptions were recalibrated at the end of Q1 2010 with a further recalibration at the end of Q4 2010.
At the end of Q4 2010, certain key assumptions were as indicated below (listed in no particular order): (39)
- Constant Annual Default Rate ("CADR"): The assumed CADR was approximately 2.2%, which is 1.0x the WARF-implied base-case default rate, until the end of 2011 and approximately 3.2%, or 1.5x the WARF-implied base-case default rate, for 2012-2014 before returning to 1.0x the WARF-implied base-case default rate thereafter.
- Recovery Rate: The assumed recovery rate was approximately 71%, or 1.0x the original base-case assumed weighted-average recovery rate for the life of each transaction.(40)
- Prepayment Rate: Loan prepayments were assumed to be 20% p.a. or 1.0x the original base-case prepayment rate with a 0% prepayment rate on bonds throughout the life of each transaction.
- Reinvestment Price and Spread: The assumed reinvestment price for 2011 was 99% of par, a level that generates an effective spread over LIBOR of approximately 285 bps on broadly syndicated U.S. loans, 316 bps on European loans, and 355 bps on middle market loans. From the beginning of 2012 onwards, the reinvestment price assumption remains at par until the maturity of each of our investments.
These recalibrations, which were described in more detail in the Q1 2010 and Q4 2010 Performance Reports, were intended to better align TFG's cash flow modeling assumptions with observable market data. The changes at the end of Q1 2010 did not have a significant impact on fair value and sought to reduce near-term loss assumptions whilst recognizing the heightened risk around the so-called "maturity cliff" of 2012-2014. Subsequently, the Q4 2010 recalibration continued the adjustment of near-term assumptions to reflect, among other things, the improving market default outlook, as well as the actual performance of TFG's CLO portfolio. These Q4 2010 changes resulted in an increase in fair value of approximately
APPLICATION OF DISCOUNT RATE TO PROJECTED CASH FLOWS AND ALR
Over the first half of the year the effective discount rate applied to the CLO portfolio was in the 28-30% range, which represented a significant spread over the prevailing BB-rated CLO tranche yields. As described in the Q3 2010 Performance Report a combination of a significant decline in observable risk premia and continued improvements in the credit quality and structural strength of many of TFG's CLOs, led to a modification of the discount rates being applied to future expected cash flows.
The 23% discount rate applied to the stronger portion of TFG's CLOs still represents a significant spread over observable yields on BB-rated CLO tranches, but also reflects a recognition that the risk premium demanded on CLO equity has fallen from the peak levels reached during the financial crisis. For the remainder of the portfolio a 30% discount rate has been maintained. When these changes were implemented in Q3 2010 the impact was to increase the carrying value of certain CLO investments and the aggregate portfolio fair value increased by approximately
Over the course of Q4 2010 and into early 2011 certain observable data and research suggested that this risk premium has been declining further, as evidenced by significant tightening of credit and CLO debt spreads. From a valuation perspective, however, we are mindful of potential volatility, and have therefore maintained the existing discount rates at the end of Q4 2010. Going forward, if, among other things, observable risk premia demonstrate sustainability at these reduced levels it is likely that the aforementioned discount rates will be reduced.
Through the valuation process described above, as at the end of 2010, the ALR has been reduced to approximately
PORTFOLIO CORPORATE ACTIONS
TFG and the Investment Manager continued to leverage the Company's majority (or significant) ownership positions in certain CLO transactions to monitor the performance of its CLO investments and to affect the outcome of certain corporate actions so as to protect or enhance the value of those investments. During 2010, TFG consented to the transfer of the Hewett's Island IV CLO transaction onto the LCM platform. In addition, TFG facilitated the appointment of a sub-advisor on two of its CLOs and the outright assignment of collateral management responsibilities on four additional transactions. We expect that these management changes will have a positive effect on the long-term performance of the affected CLOs and will therefore enhance the value of TFG's investments. Due in large part to its majority (or significant) ownership strategy, TFG will also receive a significant share of ongoing management fees in these deals (in the case of Hewett's Island IV, LCM will receive 100% of the ongoing management fees), further improving the economics of these investments.
We believe that these developments highlight the ability of the Investment Manager to create and capitalize upon synergies between TFG's contractual rights, majority (or significant) ownership positions and access to an in-house asset management platform. We expect to continue to utilize these strategic assets to take advantage of similar opportunities to enhance the value of TFG's CLO investments and/or asset management platform in the coming years.
FINANCING SOURCES AND HEDGING ACTIVITY
As of
As of
The Investment Manager continues to examine ways to improve liquidity for TFG shares through, for example, improved analyst and broker coverage, investor communication and "non-deal" road shows. In 2010, the average daily trading volume for TFG shares on Euronext Amsterdam by
CAPITAL DISTRIBUTIONS 2010: DIVIDENDS AND SHARE REPURCHASES
The Company has sought to continue to return value to its shareholders. During 2010 TFG paid a dividend of
During 2010, the Company repurchased 5,742,119 TFG shares at an average price of
Finally, TFG remains focused on returning capital to its shareholders in a manner consistent with protecting the prospects of the Company and pursuing other investment opportunities, both within and beyond the leveraged loan asset class.
ASSET MANAGEMENT PLATFORM
The Company remains committed to its current strategy of expanding its asset management platform and its efforts to continue its transformation into a broad-based financial services firm that functions not only as an investment holding company, but also as a firm that owns interests in multiple operating businesses.
LCM
LCM achieved strong results during 2010, characterized by robust performance of its CLOs and growth of assets under management. As of
LCM Asset Management Performance Snapshot Q4 2010 Q3 2010 Q2 2010 Q1 2010 Gross Fee Income ($MM) $3.4 $3.0 $2.9 $3.3 Pre-tax Income ($MM) $1.1 $1.4 $1.4 $1.9
LCM's assets under management grew from approximately
In addition, during Q1 2010, TFG launched a direct U.S. loan investment program leveraging LCM's credit expertise to generate attractive risk-adjusted returns while ensuring appropriate liquidity.(42) The portfolio earned
Looking forward, we expect to continue to support the growth of LCM's business via primary CLO issuance, managed accounts, and CLO manager consolidation, as well as other strategic opportunities. We anticipate that, market conditions permitting, LCM will be able to continue to grow its assets under management in a measured and disciplined manner that leverages LCM's expertise, investment style, and performance track record.
GREENOAK
During Q3 2010, after evaluating a number of opportunities during the year, TFG acquired a 10% interest in a new multi-jurisdictional real estate venture, GreenOak.(43) GreenOak is a real estate focused principal investing and advisory firm formed in 2010 to capitalize on opportunities in the rapidly changing real estate investing landscape. The firm was founded by John Carrafiell,
In exchange for its 10% equity interest in GreenOak, TFG agreed to provide GreenOak with, among other things, a working capital loan of up to
We believe that the GreenOak investment is a continuation of the TFG model of seeking to partner with superior asset managers. In addition, the investment is expected to diversify the Company's income stream and underlying asset exposure by providing it with access to the global real estate markets at attractive fee levels. We believe this venture will strengthen TFG's asset management capabilities and along with LCM, will form a foundation for TFG's asset management platform as we look for opportunities both within and beyond the leveraged loan asset class.
GreenOak is currently executing on advisory assignments and continuing to evaluate funds in select markets where we believe the GreenOak Founders and local teams have deep, longstanding market presence, access and experience. As reported previously, we currently do not expect to see operating income benefits from the venture in the immediate future as it is a medium-term investment.
SUMMARY, OUTLOOK AND STRATEGY
2010 was a year of significant improvement in the U.S. leveraged loan markets, characterized by gains in both credit quality and price levels. Having withstood the impact of the U.S. recession and disruption in global capital markets experienced during 2007-2009, U.S. CLOs, on average, experienced significant improvements in collateral quality, structural strength and current yields. While
In the eyes of many market participants, the validity of the arbitrage cash-flow CLO model has therefore been once again tested and affirmed. Firstly, we believe that leveraged loans have proven to be an appropriate asset class for securitization, given their senior position in corporate capital structures and historically robust recoveries. Secondly, unlike market-value CLOs and total return swap (TRS) programs, which suffered from aggressive de-leveraging in the face of the price dislocation experienced in the depths of the crisis, cash flow CLOs generally benefited from being largely insulated from market-wide price declines.(45) Thirdly, structural protections which in the face of collateral quality deterioration diverted and/or shut off cash flows to junior and subordinated note holders in order to re-build asset coverage and/or de-leverage the structures, broadly performed as designed allowing for the restoration of cash flows to the equity tranches once the relevant O/C and/or reinvestment tests were brought back into compliance. Finally, and equally importantly in our view, the value of active management and manager selection has once again been borne out through this crisis, as evidenced by the wide range of performance outcomes among CLOs of the same vintage.
As outlined in previous reports, we believe that TFG's strategy of acquiring majority (or significant) equity positions, and maintaining an active, on-going dialogue with our portfolio collateral managers in monitoring the Company's CLO investments, has proven to be an appropriate investment approach to employ in the context of the CLO equity asset class. During 2010, this strategy has allowed us to facilitate the transfer of several CLO transactions to what we believe are more suitable management firms, including the transfer of a U.S. CLO transaction onto the LCM platform, and to appoint a sub-advisor on certain other CLOs. In addition to these management changes, which we believe will have a positive effect on the long-term performance of TFG's CLO investments, the Company will receive a significant share of ongoing management fees in these deals, further improving their economics.
With consensus default expectations for 2011 falling to historical average levels and growing confidence around the sustainability of the current macroeconomic recovery, we are encouraged about the prospects for TFG's investment portfolio. We anticipate that, absent an exogenous shock to certain key global economies or financial markets or other widespread financial market disruption, the Company's CLO investments will continue to generate significant cash flows during the upcoming year, supported by low credit losses, continued reinvestment at attractive yields, stable structural leverage, and the resumption of cash flows on certain CLO transactions which are currently breaching their junior-most O/C tests. In accordance with the Company's valuation policies, as set forth on the Company's website, we also expect to continue to evaluate the appropriateness of certain cash flow modeling assumptions used to generate the investment IRRs, which drive the recognition of income and the associated amortized cost, as well as the discount rates applied to those future cash flows to generate the fair value of each investment. We expect to remain particularly focused on monitoring the sustainability of the decline in observable risk premia on mezzanine CLO debt and equity tranches recorded during 2010, and expect that the aforementioned discount rates may be reduced should these reduced levels persist for a reasonable period of time.
We are also encouraged about the prospects for further growth of primary arbitrage CLO issuance, particularly in the U.S., which we believe will provide us with attractive third-party investments as well as opportunities to continue to grow LCM's asset management platform. Still a number of challenges remain on the horizon which we believe will need to be addressed before a return to normalized issuance levels is possible. First, the preservation of sufficient CLO equity arbitrage, driven primarily by the gap between asset spreads and liability costs, will require further tightening of CLO liability spreads, particularly at the AAA-rated level, as loan spreads trend lower in the context of improving economic conditions. Furthermore, regulatory uncertainty surrounding the implementation of risk retention rules in
Throughout 2008 and 2009, we were focused on preserving the Company's CLO investments, financial position, and long-term prospects, a strategy which was necessitated by the economic downturn and disruption in the capital markets that characterized that period. During 2010, with TFG's investment cash flows improved, we returned our focus to identifying opportunities, assets and asset classes that we believe to be superior based on their long-term track record, and to making investments that we believed could achieve this aim. To that end, TFG expanded its asset management platform with its acquisition of a 10% interest in GreenOak and increased its CLO investment portfolio through the purchase of a majority position in a new issue CLO, LCM VIII, as well as a small secondary equity purchase. The Company was also able to leverage LCM's expertise to make direct investments in loan assets, which totaled approximately
In 2011, we expect to use TFG's strong cash flows to build value for shareholders in a variety of ways. In particular, we are focused on continuing TFG's transition beyond an investment holding company to an owner of interests in multiple operating companies across different asset classes. As such, we will look to continue to grow LCM's assets under management through the issuance of new issue CLOs and the assumption of existing management contracts, as well as to continue to provide the agreed support to GreenOak during the year. In order to strengthen and diversify our asset management businesses, we expect to continue to explore investment opportunities in management companies both within and beyond the leveraged loan market. With regards to our investment portfolio, we intend to evaluate potential investments in new issue CLOs, especially those managed by LCM. Furthermore, we will continue to seek opportunities to enact positive changes to our CLO investments. Finally, as we have done in the past, we will look to return capital to TFG shareholders through dividends, share repurchases or other means.
Please refer to the section entitled "Risk Factors" herein and a more complete description of risks and uncertainties pertaining to an investment in TFG on the Company's website at: http://www.tetragoninv.com.
FINANCIAL REVIEW 2010
OVERVIEW
2010 turned out to be a year of stellar performance for TFG, with a mix of strong portfolio performance and improving outlook for CLOs - the driving force behind the robust financial results recorded during the year. The first half of 2010 saw a continuation of the recovery that began in the latter half of 2009, with many deals curing junior O/C test breaches, switching-on equity cash flows, and benefiting from increased excess interest margins, thereby boosting future cash flow expectations. As we moved into the second half of 2010, CLO performance improved at a rapid pace, against a backdrop of improving expectations for the U.S. leveraged loan market and renewed investor appetite for CLO risk across all tranches. The last two developments were key drivers of the recalibration of assumptions and adjustment of discount rates applied to the deals, which further assisted the Company's performance.
CONSOLIDATED INCOME COMPARISON 2010 VS. 2009 2010 2009 Statement of Operations Consolidated Consolidated ($MM) ($MM) Interest Income 178.9 165.7 CLO Management Fee Income 12.6 - Other Income 2.5 1.2 Investment Income 194.0 166.9 Management and Performance Fees (133.5) (42.2) Other Expenses (10.7) (3.0) Total Operating Expenses (144.2) (45.2) Net Investment Income 49.8 121.7 Net Change in Unrealized Appreciation/(Depreciation) in Investments 336.0 (427.7) Realized Gain/(Loss) on Investments 1.1 - Realized and Unrealized Gains/(Losses) from Hedging and FX 2.1 (9.1) Realized / Unrealized Losses from Investments and FX 339.2 (436.8) Income Taxes (2.4) - Noncontrolling Interest (1.4) - Net Increase/(Decrease) in Net Assets from Operations 385.2 (315.1)
2010 net income of
As expected, expenses grew during the year, with incentive and management fees increasing to
CONSOLIDATED INCOME - 2010 QUARTER ON QUARTER COMPARISON
The quarter-on-quarter comparison of consolidated net income (see table below) reinforces the message of strong performance throughout the period, but with two stand-out quarters recorded at the end of the year.
TFG Quarterly Statement of Operations Statement of Operations Q4 Q3 Q2 Q1 Total 2010 2010 2010 2010 2010 ($MM) ($MM) ($MM) ($MM) ($MM) Interest Income from Investments 46.5 45.8 43.4 43.2 178.9 CLO Management Fee Income 3.4 3.0 2.9 3.3 12.6 Other Income 1.4 0.5 0.3 0.3 2.5 Investment Income 51.3 49.3 46.6 46.8 194.0 Management and Performance Fees (45.6) (42.7) (19.8) (25.4) (133.5) Other Expenses (3.5) (2.7) (2.6) (1.9) (10.7) Total Operating Expenses (49.1) (45.4) (22.4) (27.3) (144.2) Net Investment Income 2.2 3.9 24.2 19.5 49.8 Net Change in Unrealized (Depreciation) / Appreciation in Investments 128.8 121.3 31.4 54.5 336.0 Net Realized Gain / (Loss) on Investments 0.5 0.3 0.3 - 1.1 Realized / Unrealized Gains / (Losses) From Hedging and FX 1.2 0.2 0.7 - 2.1 Realized / Unrealized Gains / (Losses) from Investments and FX 130.5 121.8 32.4 54.5 339.2 Income Taxes (0.4) (0.4) (0.4) (1.2) (2.4) Noncontrolling Interest (0.3) (0.3) (0.6) (0.2) (1.4) Net Increase / (Decrease) in Net Assets from Operations 132.0 125.0 55.6 72.6 385.2
FINANCIAL HIGHLIGHTS TABLE
The table below illustrates a number of key financial and other metrics, certain of which have been the focus of previous parts of the Financial Review section. Cash generated by the CLO investment portfolio staged a strong comeback during 2010 as deals repaired themselves and cash flow payments to the equity tranches resumed. By the end of Q4 2010 cash receipts of
Financial Highlights Q4 2010 Q3 2010 Q2 2010 Q1 2010 Net Income ($MM) $132.0 $125.0 $55.6 $72.6 EPS ($) $1.09 $1.03 $0.45 $0.58 Cash Receipts ($MM)(46) $78.9 $71.8 $60.9 $51.1 Cash Receipts per Share ($) $0.66 $0.59 $0.50 $0.41 Net Cash Balance ($MM) $140.6 $187.9 $156.2 $172.6 Net Assets ($MM) $1,138 $1,019 $909 $867 Number of Shares Outstanding (million) 120.1 120.8 122.2 123.6 NAV per Share ($) $9.47 $8.43 $7.44 $7.02 DPS ($) $0.09 $0.08 $0.08 $0.06 Weighted Average IRR on Completed Transactions (%) 15.1% 13.7% 13.1% 12.3% Number of Investments(47) 70 68 68 68 ALR Fair Value Adjustment ($MM) $(258.0) $(274.7) $(330.7) $(339.5) (table continues) Q4 2009 Q3 2009 Q2 2009 Q1 2009 Net Income ($MM) $94.7 $31.2 $(26.7) $(414.3) EPS ($) $0.76 $0.25 $(0.21) $(3.29) Cash Receipts ($MM)(46) $38.4 $35.3 $31.9 $47.1 Cash Receipts per Share ($) $0.31 $0.28 $0.25 $0.37 Net Cash Balance ($MM) $174.4 $149.7 $123.8 $94.3 Net Assets ($MM) $807 $721 $693 $723 Number of Shares Outstanding (million) 124.8 126.2 125.9 125.7 NAV per Share ($) $6.47 $5.71 $5.50 $5.75 DPS ($) $0.06 $0.03 $0.03 $0.03 Weighted Average IRR on Completed Transactions (%) 11.9% 10.3% 9.2% 10.6% Number of Investments(47) 61 61 61 61 ALR Fair Value Adjustment ($MM) $(349.0) $(333.8) $(254.1) $(315.0)
CASH FLOW FROM OPERATIONS
2010 cash flows from operating activities increased by almost 90% year-over-year, reflecting the recovery in CLO cash flows described previously. In 2009 these cash flows were largely added to the overall cash balance as the Company took a protective stance towards the portfolio. By contrast, during 2010 TFG was able to allocate
Cash Flow From Operations 2010 2009 $MM $MM Operating Activities Operating Cash Flows Before 259.4 139.6 Movements in Working Capital Increase / (Decrease) in 2.3 (0.6) Payables Cash Flows from Operating 261.7 139.0 Activities Investment Activities Proceeds on Sales of 71.0 - Investments Purchase of Investments (205.7) - Cash Flows from Operating 127.0 139.0 and Investing Activities Amounts Due from Brokers 1.6 108.5 Net Purchase of Shares (20.3) (4.9) Dividends Paid to (34.2) (15.1) Shareholders Repayments on Repurchase and - (117.5) Swap Agreements Distribution to (0.1) - Noncontrolling Interest Incentive Fees Paid (107.8) - Cash Flows from Financing (160.8) (29.0) Activities Net (Decrease) / Increase in (33.8) 110.0 Cash and Cash Equivalents Cash and Cash Equivalents at 174.4 63.0 Beginning of Period Effect of Exchange Rate - 1.4 Fluctuations on Cash and Cash Equivalents Cash and Cash Equivalents at 140.6 174.4 End of Period
NET ASSETS
Net assets returned to levels last seen at the end of 2008, as the fair value of TFG's CLO portfolio bounced back strongly and, as mentioned previously, the Company added a portfolio of approximately
Consolidated Balance Sheet Summary 2010 2009 $MM $MM Investments in CLO Equity 932.7 655.2 Investments in Bank Loans 97.6 - Other Investments 5.2 - Cash and Cash Equivalents 140.6 174.4 Other Assets/Liabilities (37.2) (22.8) Net Assets Before Noncontrolling 1,138.9 806.8 Interest Noncontrolling Interest 1.4 - Total Equity Attributable to TFG 1,137.5 806.8
DESCRIPTION OF BUSINESS
TFG (company number 43321) is a
As described above, the Company's investment objective is to generate distributable income and capital appreciation. To achieve this objective, and to aim to provide stable returns to investors across various interest rate and credit cycles,
From inception through
Senior secured bank loans represent the substantial majority of assets underlying the CLO portfolio. The Company currently gains exposure to these assets primarily through investments in the residual tranches or equity tranches of CLO products ("Residual Tranches") and also has had exposure through previous investments in the Residual Tranches of collateralized debt obligation products, which are both securitized interests in underlying assets assembled by asset managers and divided into tranches based on their degree of credit risk ("Securitization Vehicles").
The Company currently invests in a broad range of CLO products, utilizing 29 asset managers, and its underlying assets are diversified on a geographic and industry sector basis. Interest rate and funding risk are sought to be mitigated through the long-term matched funding embedded in the CLO structure (i.e., the assets acquired bear interest by reference to a floating rate similar to the funding source for those assets).
The Company remains committed to its current strategy of expanding its asset management platform and its efforts to continue its transformation into a broad-based financial services firm that functions not only as an investment holding company, but also as a firm that owns interests in multiple operating businesses.
The Company also owns a 75% interest in LCM, an asset manager with approximately
On
CERTAIN CORPORATE BACKGROUND
Shares of TFG (the "Shares") are publicly traded solely on the Euronext Amsterdam by
The current exchange listing, corporate structure and governance and investment management arrangements of TFG were established to help foster the achievement of the Company's investment objective. In particular, at the time of its initial public offering and in consultation with the Company's underwriters and its legal and financial advisors, the Investment Manager concluded, and continues to believe, after analyzing various listing alternatives within
INVESTMENT MANAGEMENT
The investment committee of the Investment Manager (the "Investment Committee") currently consists of
INVESTMENT MANAGEMENT (continued)
In recognition of the work performed by the Investment Manager in successfully arranging the global offering and the associated raising of new capital for the Company, the Company granted to the Investment Manager options (the "Investment Management Options") to purchase 12,545,330 of the Company's Non-Voting Shares at an exercise price per share equal to the IPO offer price (U.S.
For more information on TFG's investment manager, including a summary of key terms of the Investment Management Agreement, please refer to the Company's website at http://www.tetragoninv.com.
HISTORICAL APPROACH TO INVESTMENTS
The Investment Manager has sourced investment opportunities both within and beyond the leveraged loan market through a variety of channels, including the Investment Manager's network of direct relationships with major commercial and investment banks and asset managers.
The current performing CLO investment portfolio is composed solely of substantial positions in the Residual Tranches of a broad range of CLO products. Residual Tranches will in most cases be unrated and represent the "equity" or "first loss" position of a CLO.
The Investment Manager believes by taking majority or substantial positions in the Residual Tranches, the Company may influence various features within a CLO or its applicable collateral management terms that could improve the value of its investment.
CLO ASSET CLASS SELECTION
The Investment Manager has to date focused primarily on utilizing CLO Securitization Vehicles to achieve its investment objective and has sought to employ a multiple asset class investment strategy, including through such Securitization Vehicles.
The Investment Manager has sought to select the Company's target asset classes following an analysis of key factors affecting returns; including (i) credit spread risk premiums, (ii) economic and credit cycles, and (iii) rating agency analyses.
As previously described, the asset class primarily represented in the Company's current CLO portfolio consists of leveraged loans, comprised of (a) broadly syndicated senior secured loans of U.S. borrowers; (b) broadly syndicated senior secured loans of European borrowers; and (c) middle-market senior secured loans of U.S. borrowers. Notwithstanding the Investment Manager's focus to date on the leveraged loan asset class, the Investment Manager has and may continue to seek to achieve its investment objective through investments in other opportunities, assets or asset classes, which may be unrelated to the leveraged loan asset class.
ASSET MANAGER SELECTION
In selecting asset managers, the Investment Manager has sought to take advantage of the significant experience of certain of the Principals. In conducting its assessment of an asset manager, the Investment Manager reviews certain aspects of such asset manager's business, such as the manager's reputation, personnel, research capabilities, financial strength, business infrastructure, asset manager ratings, and, generally, its ability to appropriately manage the underlying asset portfolio as well as its prior dealings with the Company or its Principals.
The Investment Manager has sought to select asset managers (including, LCM and GreenOak) that it believes to be superior and has looked to select asset managers with a demonstrated strength in the applicable market, fundamental analysis and the management of assets on a long-term basis consistent with its buy-and-hold strategy. Notwithstanding the acquisition of LCM, the Company expects to continue to seek and enjoy diversification of CLO asset managers.
ASSET MANAGER SELECTION (continued)
The Company believes that, as a result of (among other things) the reduction in CLO issuance volumes from 2008 through 2010, the CLO asset manager industry may continue to face some consolidation pressures as was evidenced in years past as several managers exited the market or otherwise reorganized, including certain of the Company's CLO managers. The Company realized value on several of its CLO investments in connection with such activity in 2010.
The Company continues to selectively explore strategic business opportunities in asset management, both within and beyond the leveraged loan market as such opportunities may offer, among other benefits, high quality, repeatable, income streams that diversify the Company's current income.
ASSET DIVERSIFICATION
The Investment Manager has sought to diversify its exposures across underlying asset classes, industry sectors, geographies and asset managers. For risk management purposes, the Investment Manager analyzes risks and may where appropriate engage in hedging strategies on both a portfolio-wide basis as well as a single-name basis.
At any given time, certain geographic areas, asset types or industry sectors may provide more attractive investment opportunities than others and, as a result, the Company's investment portfolio may be concentrated in particular geographic areas, asset types or industry sectors. Please refer to the Company's monthly updates on the Company's website (http://www.tetragoninv.com) for a review of the Company's underlying investments' bank loan industry exposure for the relevant period. Due to the overlap of investments of different asset managers, there may be concentrations of individual credits from time to time.
The substantial majority of the Company's currently performing investments are in CLOs. Notwithstanding the efforts of the Investment Manager to diversify across underlying assets, the Company's investments (including, LCM) could face significant downward pressure as Securitization Vehicles, such as CLOs, generally come under increased market pressure. For example, many of the Company's investments in Securitization Vehicles are and will be illiquid and have values that are susceptible to changes in the ratings and market values of such vehicles' underlying assets, which may make it difficult for the Company to sell such holdings. Similarly, the fee revenue earned by LCM, in its capacity as collateral manager to certain CLOs, may be negatively impacted by the performance of such CLOs underlying assets.
BUY-AND-HOLD STRATEGY
The emphasis of the Investment Manager's existing strategy for the Company has been on the selection and structuring of investment positions that are then intended to be held for returns based on cash flows and other revenues to provide a stable stream of income for the Company. The Investment Manager believes, for example, that its buy-and-hold strategy has allowed the Company to take a long-term view on the expected cash flows from a CLO or other Securitization Vehicle. Market developments, however, have and may continue to, impact the fair value of a Securitization Vehicle and/or its underlying assets. The Investment Manager may dispose of portfolio positions from time to time and may reallocate investments in the portfolio within and among asset classes on a discretionary basis. The Company believes the Investment Manager's asset liability management and its strategy of taking majority (or substantial) positions in its CLO investments has made a buy-and-hold strategy more attractive, as the Investment Manager may in certain cases influence the performance of a CLO investment through, among other things, the support of amendments to the CLO structure or the collateral management agreement.
VALUATION
State Street Fund Services (
CAPITAL DISTRIBUTIONS
The Company has sought to continue to return value to its shareholders, including through dividends and share repurchases.
The Board of Directors will have the authority to declare dividend payments, based upon the recommendation of the Investment Manager, subject to the approval of the voting shares of TFG and adherence to applicable law, including the satisfaction of a solvency test as required pursuant to the Companies (Guernsey) Law, 2008, as amended. The Investment Manager's recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a variety of considerations, including (i) the expected sustainability of the Company's cash generation capacity in the short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of the Company's investments and financial position to other investment opportunities. TFG has and may continue to also pay scrip dividends currently conducted through an optional dividend reinvestment program. If the Board of Directors declares a cash dividend payable by TFG, they will also (in their capacity as directors of the
Please refer to the section entitled "Risk Factors" herein and a more complete description of risks and uncertainties pertaining to an investment in TFG on the Company's website at: http://www.tetragoninv.com .
REPORTING
In accordance with applicable regulations under Dutch law, TFG publishes monthly statements on its website for the benefit of its investors containing the following information: the total value of the investments of the
In addition, in accordance with the requirements of Euronext Amsterdam by
DIRECTORS STATEMENTS
The Directors of TFG confirm that (i) this Annual Report constitutes the TFG management review for the twelve month period ended
RISK FACTORS
An investment in TFG involves substantial risks and uncertainties. Investors may review a more detailed description of these risks and uncertainties and others to which the Company is subject on the Company's website at http://www.tetragoninv.com. These risks and uncertainties include, among others, those listed below.
- Many of the Company's investments are in the form of highly subordinated securities, which are susceptible to losses of up to 100% of the initial investments, including losses resulting from changes in the financial rating ascribed to, or changes in the market value or fair value of, the underlying assets of an investment. CLO vehicles generally invest in fixed income securities rated lower than Baa byMoody's or lower than BBB by S&P (or, if not rated, of comparable quality) and may be regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Moreover, market developments (including, without limitation, deteriorating economic outlook, rising defaults and rating agency downgrades) may impact the fair value of an investment and/or its underlying assets, as we experienced during the period from the third quarter of 2008 through the first half of 2009. - Defaults, their resulting losses and other losses on underlying assets (including bank loans) may have a negative impact on the value of the Company's portfolio and cash flows received. In addition, bank loans may require substantial workout negotiations or restructuring in the event of a default or liquidation which could result in a substantial reduction in the interest rate and/or principal. - The modeled cash flow predictions and assumptions used to calculate the IRR and fair value of each CLO investment may prove to be inaccurate and require adjustment. Factors affecting the accuracy of such modeled cash flow predictions include: (1) uncertainty in predicting future market values of certain distressed asset types, (2) the inability to accurately model collateral manager behavior, and (3) the divergence of assumed variables from realized levels over the period covered by the model. - Bank loans are generally subject to liquidity risks and, consequently, there may be limited liquidity if a Securitization Vehicle is required to sell or otherwise dispose of such bank loans. - Many of the Company's investments in Securitization Vehicles are and will be illiquid and have values that are susceptible to changes in the ratings and market values of such vehicles' underlying assets, which may make it difficult for the Company to sell such holdings. - The Company may be exposed to counterparty risk, which could make it difficult for the Company to collect on the obligations represented by investments and result in significant losses. - The Company's organizational, ownership and investment structure may create significant conflicts of interest that may be resolved in a manner which is not always in the best interests of the Company or the shareholders of TFG. - The Investment Manager may devote time and commitment to other activities. - Shares of TFG (the "Shares") do not carry any voting rights other than limited voting rights in respect of variation of their class rights. The holder of the voting shares of TFG will be able to control the composition of the Board of Directors and exercise extensive influence over TFG's and the Master Fund's business and affairs. Furthermore, no formal corporate governance code applies to TFG. Additional information on the organizational structure and corporate governance of TFG may be found on the Company's website at http://www.tetragoninv.com. - The performance of many of the Company's investments may depend to a significant extent upon the performance of its asset managers (internal and external). - The Company is subject to concentration risk in its investment portfolio, which may increase the risk of an investment in TFG. - The Company's CLO investments are subject to (i) interest rate risk, which could cause the Company's cash flow, fair value of its assets and operating results to decrease and (ii) currency risk, which could cause the value of the Company's CLO investments in U.S. Dollars to decrease regardless of the inherent value of the underlying investments. - TFG's principal source of cash will be the investments that it makes through theMaster Fund . TFG's ability to pay dividends will depend on it receiving distributions from theMaster Fund . - The ability of Securitization Vehicles in which the Company invests to sell assets and reinvest the proceeds may be restricted, which may reduce the yield from the Company's investment in those Securitization Vehicles. - The shares of TFG may continue to trade below NAV. The NAV per Share will change over time with the performance of the Company's investments and will be determined by the Company's valuation principles. The fees payable to the Investment Manager will be based on NAV and changes in NAV, which will not necessarily correlate to changes in the market value of the shares of TFG. - TFG and theMaster Fund have approved a very broad investment objective and the Investment Manager will have substantial discretion when making investment decisions. In addition, the Investment Manager's strategies may not achieve the Company's investment objective. - Shareholders will not be able to terminate the Company's investment management agreement. None of the Investment Manager or the Service Providers owe fiduciary duties to the shareholders of TFG. - The Company may become involved in litigation that adversely affects the Company's business, investments and results of operations. - If the Company's relationship with the Investment Manager and its principals were to end or such principals or other key professionals were to depart, it could have a material adverse effect on the Company. - The Investment Manager's compensation structure may encourage the Investment Manager to invest in high risk investments. - The liability of the Investment Manager to the Company is limited and the Company's indemnity of the Investment Manager may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would. - The Shares are subject to legal and other restrictions on resale and the Euronext Amsterdam byNYSE Euronext trading market is less liquid than other major exchanges, which could affect the price of the Shares. TFG may decide in the future to list the Shares on a stock exchange other than Euronext Amsterdam byNYSE Euronext . There can be no assurance that an active trading market would develop on such an exchange. - The performance of LCM and, in turn, the Company's operating results, may be negatively influenced by various factors, including the (i) performance of LCM-managed CLOs, which in general are subject to the same risks as the Company's CLO investments and are currently the primary source of LCM's revenues and (ii) ability of LCM to retain key personnel, the loss of whom may negatively affect LCM's ability to provide asset and collateral management services in a fashion, and of a quality, consistent with its prior practice. Furthermore, the Company's ownership of LCM may negatively impact certain aspects of the Company's CLO investment strategy and as a result the Company's performance as well as the Company's ability to diversify its investments across multiple asset managers. - GreenOak is a newly formed entity with no prior operating history and it may be unable to successfully operate its business or achieve its investment objectives. In connection with the transaction with GreenOak, the Company will invest its capital, directly and indirectly, in certain real estate investments. Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond the Company's control - As the Company invests in new asset classes and as its asset mix changes, its revenues and profitability could be reduced. - As the Company becomes more of a financial services firm that functions not only as an investment holding company, but also as a company that owns operating companies, it may face difficulties as it invests in asset classes in which it does not have substantial experience. - Direct investments in asset managers will expose the Company's business to additional risks, including: a decline in the price of securities, regulatory environment, and competition. - The Company may issue additional securities that dilute existing holders of Shares, including as a result of the exercise of the Investment Management Options.
The foregoing is not a comprehensive list of the risks and uncertainties to which the Company is subject.
END NOTES
LETTER TO SHAREHOLDERS
(1) TFG's corporate loan default rate for 2010 of 1.7% was approximately 24% below the 2.2% annual WARF-implied default rate used as a historical average rate within TFG's assumption framework. WARF is a par-weighted average of the Rating Factors of each of the assets in the collateral pool. A Rating Factor is a numerical value assigned to each rating category by
(2) Please refer to a press release as of
(3) For additional information please refer to the Company's website at http://www.tetragoninv.com.
(4) Such return is based on the following assumptions: TFG shares were purchased at a price of
2010 PERFORMANCE AT A GLANCE
(5) S&P/LCD U.S. Leveraged Lending Review 4Q 2010. Please note that TFG's investment portfolio includes approximately 9.6% CLOs with primary exposure to European broadly syndicated senior secured loans and such loans are included in the calculation of TFG's corporate loan default rate.
(6) Based on the most recent trustee reports available for our investments as of
(7) Morgan Stanley CDO Market Tracker,
(8) Please note that as of
(9) Excess Caa/CCC+ or below rated assets above the transaction specific permitted maximum holding levels are generally haircut in our transactions at market value for purposes of the over-collateralization and/or interest reinvestment test ratios.
(10) Morgan Stanley CDO Market Tracker,
(11) The net cash position is calculated as total cash less net liabilities.
(12) The LCM I, LCM II, LCM III, LCM IV, LCM V, LCM VI, and LCM VIII CLOs are referred to as the "LCM Cash Flow CLOs." The LCM VII CLO was a market value CLO previously managed by LCM, which was liquidated commencing in 2008, and is not included in the mentioned statistics. In addition, these statistics do not include the performance of certain transactions that were developed and previously managed by a third-party prior to being assigned to LCM, some of which continue to be managed by LCM.
(13) Based on a weighted average share count, excluding treasury shares, of 120.1 million for 2010 and 125.8 million for 2009.
(14) The hurdle rate is reset each quarter using
INVESTMENT MANAGER'S REPORT
PORTFOLIO OVERVIEW
(15) The CLO asset characterizations referenced above reflect the primary asset focus of the vehicles. These transactions, however, may allow for limited exposure to other asset classes including unsecured loans, high yield bonds, or structured finance securities.
(16) As of
(17) Based on the most recent trustee reports available for both our U.S. and European CLO investments as of
(18) Please note that the number of unique CLO transactions held by TFG has increased from 60 as of
(19) As of
as of the end of Q4 2010.
END NOTES (continued)
INVESTMENT MANAGER'S REPORT
(20) 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.
(21) Morgan Stanley CDO Market Tracker,5 January 2011 ; based on a sample of 477 U.S. CLO transactions. (22) S&P/LCD Quarterly Review, Q4 2010. (23) S&P/LCD Quarterly Review, Q4 2010. (24) S&P/LCD Quarterly Review, Q4 2010. (25) S&P/LCD Quarterly Review, Q4 2010. (26) S&P/LCD Quarterly Review, Q4 2010. (27) S&P Leveraged Commentary and Data, "Full Index analysis: Loans return 10.13% in no-drama 2010."4 January 2011 . (28) S&P/LCD Quarterly Review, Q4 2010. (29) S&P/LCD Quarterly Review, Q4 2010.
(30) S&P Leveraged Commentary and Data, "(EUR) Leveraged loan volume recovers in 2010 after miserable 2009,"
(31) S&P Leveraged Commentary and Data, "(EUR) S&P ELLI finishes 2010 with December rally,"
(32) Morgan Stanley CDO Market Tracker,
(33) Morgan Stanley CDO Market Tracker,
(34) Morgan Stanley CDO Market Tracker,
(35) Morgan Stanley CDO Market Tracker,
(36) Morgan Stanley CDO Market Tracker,
(37) Morgan Stanley CDO Market Tracker,
FAIR VALUE DETERMINATION OF TFG's CLO INVESTMENTS
(38) The Accelerated Loss Reserve is transaction specific. The Accelerated Loss Reserve is a direct adjustment to the fair value of an investment to account for the potential impact of certain potential losses and the cumulative value of such adjustments is evidenced in TFG's financial statements.
FORWARD-LOOKING CASH FLOW MODELING ASSUMPTIONS
(39) Please note that TFG undertakes no obligation to update public disclosure with respect to these or other modeling assumptions, except as required by law.
(40) The base-case weighted-average recovery rate represents the weighted average of expected recoveries for each transaction based on our assumed recoveries on each asset class and each transactions' targeted asset mix, assuming 75% recovery on first-lien U.S. loans, 70% on first-lien European loans, 50% recovery on U.S. second-lien loans and mezzanine loans, and 30% recovery on high yield bonds.
CAPITAL DISTRIBUTIONS 2010: DIVIDENDS AND SHARE REPURCHASES
(41) For additional information please refer to the Company's website at http://www.tetragoninv.com.
LCM
(42) As of
GREEN OAK
(43) Please refer to a press release as of
(44) In connection with the transaction, an affiliate of the Investment Manager,
SUMMARY, OUTLOOK AND STRATEGY
(45) Cash flow CLOs are not fully insulated from price declines in the underlying assets as a number of "stressed" asset categories, including excess Caa1/CCC+ and defaulted assets are typically carried at the lower of market value and rating-agency assigned recovery rate for O/C test purposes.
FINANCIAL HIGHLIGHTS TABLE
(46) Gross cash receipts from CLO portfolio.
(47) Excludes CDO-squared and ABS CDO transactions written off in
DESCRIPTION OF BUSINESS
(48) By the Proceedings, Mr. Jackson seeks to impugn TFG's decision of
BOARD OF DIRECTORS Paddy Dear Reade Griffith Byron Knief* Rupert Dorey* David Jeffreys* Greville Ward* *Independent Director SHAREHOLDER INFORMATIONRegistered Office of TFG and theMaster Fund Tetragon Financial Group Limited Tetragon Financial Group Master Fund Limited Tudor House Le Bordage St. Peter Port,Guernsey Channel Islands GYI 3PF Investment ManagerTetragon Financial Management LP 399 Park Avenue , 22nd FloorNew York, NY 10022United States of America General Partner of Investment ManagerTetragon Financial Management GP LLC 399 Park Avenue , 22nd FloorNew York, NY 10022United States of America Investor RelationsDavid Wishnow /Yuko Thomas [email protected] Press InquiriesBrunswick Group Andrew Garfield /Gill Ackers / Pip Green [email protected] +44(0)2074045959 AuditorsKPMG Channel Islands Limited 20 New Street St. Peter Port,Guernsey Channel Islands GY1 4AN Sub-Registrar and Transfer AgentThe Bank of New York One Wall Street New York, NY 10286United States of America Issuing Agent, Dutch Paying and Transfer Agent Kas Bank N.V. Spuistraat 172 1012 VT Amsterdam The Netherlands Legal Advisor (as to U.S. law)Cravath, Swaine & Moore LLP One Ropemaker Street London EC2Y 9HR United Kingdom Legal Advisor (as toGuernsey law) Ogier Ogier House St. Julian's Avenue St. Peter Port,Guernsey Channel Islands GY1 1WA Legal Advisor (as to Dutch law)De Brauw Blackstone Westbroek N.V. Claude Debussylaan 80 1082 MD Amsterdam The Netherlands Stock Listing Euronext Amsterdam byNYSE Euronext Administrator and Registrar State Street Fund Services (Guernsey ) Limited Tudor House Le Bordage St. Peter Port,Guernsey Channel Islands GYI 3PF
SOURCE
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