LONDON, October 31, 2014 /PRNewswire/ --
TABLE OF CONTENTS
Executive
Summary .......................................................................
1
Key Metrics
Return on Equity
........................................................................
4
Earnings per Share
......................................................................
5
NAV per Share
...........................................................................
7
Distributions
...........................................................................
8
Cash Flows and Uses of Cash
Cash Flows and Uses of Cash
............................................................ 10
TFG's Business Segments
TFG Structure Overview
.................................................................
12
Investment Portfolio
Investment Portfolio Overview
.......................................................... 13
Portfolio Composition and Outlook
...................................................... 13
Corporate Loans
........................................................................
14
U.S. CLO 1.0
...........................................................................
15
U.S. CLO 2.0
...........................................................................
15
European CLOs
..........................................................................
16
Direct Loans
...........................................................................
16
Polygon Equity Funds
...................................................................
17
Polygon Credit, Convertible & Distressed Funds
......................................... 17
Other Equity, Credit, Convertible & Distressed
......................................... 17
Real
Estate.............................................................................
17
Hedging Activity and Other Matters
..................................................... 17
TFG Asset Management
Update on Key Metrics
..................................................................
18
Asset Management
Businesses.............................................................
19
LCM.....................................................................................
19
GreenOak Joint Venture
.................................................................
20
Polygon
................................................................................
21
Q3 2014 Financial Review
Financial Highlights
...................................................................
24
Statement of Operations
................................................................
25
Statement of Operations by Business Segment
............................................ 26
Balance Sheet
..........................................................................
27
Statement of Cash Flows
................................................................
28
Net Economic Income to U.S. GAAP Reconciliation
........................................ 29
Appendices
Appendix I: Certain Regulatory Information
............................................. 31
Appendix II: Fair Value Determination of TFG's CLO Equity
Investments .................. 32
Appendix III: Additional CLO Portfolio Statistics
...................................... 35
Appendix IV: Share Reconciliation and Shareholdings
.................................... 39
Board of Directors
.....................................................................
40
Shareholder
Information.................................................................
40
Endnotes................................................................................
41
Tetragon Financial Group Limited
Unaudited Financial Statements for the Period Ended 30 September 2014
Tetragon Financial Group Master Fund
Limited Unaudited Financial Statements for the Period Ended
30 September 2014
TETRAGON FINANCIAL
GROUP LIMITED (TFG) PERFORMANCE REPORT FOR PERIOD ENDED
30 SEPTEMBER 2014
31 October
2014
Tetragon Financial Group Limited ("TFG" or the "company") is a
Guernsey closed-ended investment
company traded on Euronext Amsterdam N.V. under the ticker symbol
"TFG."(1) In this report we provide an update on
TFG's results of operations for the period ending 30 September 2014.
EXECUTIVE SUMMARY
TFG returned Net Economic Income of $7.9
million (8 cents of Earnings
Per Share ("EPS")(2) in Q3 2014. Performance was
positive in both the company's business segments, namely the
investment portfolio and TFG Asset Management ("TFGAM"). For the
first nine months of 2014, Net Economic Income was $93.9 million, Adjusted EPS was 98 cents,(3) and the company's
annualised Return on Equity ("RoE") was 6.9%.(4)
The Q3 2014 dividend was declared at 15.5
cents per share, giving a rolling 12-month dividend increase
of 10.9%.
On 23 October 2014, TFG announced
the entry into definitive agreements for the acquisition of Equitix
Holdings Limited ("Equitix"), a UK infrastructure asset management
business, for an enterprise value of £159.5 million. The
acquisition is expected to be financed with a combination of cash
from TFG's balance sheet and debt financing supported by the
Equitix business. This acquisition furthers TFG's desire to own
both assets and asset management businesses. We believe that
infrastructure assets fit well alongside the current TFG investment
portfolio and are well suited to TFG's long term investment
horizon. If structured correctly, infrastructure assets may allow
access to government-backed cash flows at an attractive yield.
Furthermore, we believe there are good reasons why there is
likely to be longevity to the asset class, as many western
governments are expected to maintain, and, in some cases, increase
their domestic infrastructure spending over the coming years. In
our view, Equitix has a different approach to infrastructure asset
management in that it also runs a primary business; that is to say,
the business benefits from having its own proprietary origination
platform that seeks to develop infrastructure assets for the funds
it manages. Not only does this provide a profitable additional
business line, but as importantly, we believe it makes Equitix
better as asset managers as they have a broader and deeper
understanding of the assets themselves. We view TFG as a natural
partner for Equitix. TFG plans to own the business for the long
term, invest in their future funds alongside their LPs, give the
management team investment autonomy and support and help to grow
the asset management business. The deal has been structured to seek
to incentivise a broad team to manage and grow the business for the
long term. The acquisition is subject to regulatory approval and
certain other conditions and the purchase price is subject to
adjustment until the closing date.
We are excited about this acquisition and believe it will
provide a strong return on capital invested as well as an
opportunity to broaden TFG's investments into infrastructure assets
over time.
In Q4 2014, TFG also started building a mining finance business.
This business will, among other things, look at ways to fund small
to mid-size exploration and production mining companies (e.g.,
equity, debt or derivatives). We believe there is a dearth of
funding available for many such mining companies; gold miners in
particular. We also believe that TFG could be an ideal
provider of capital given its long term investment horizon, its
detailed technical skills in mining and its depth of in-house
structuring expertise.
GOALS
Looking at the company's goals:
1. To deliver 10-15% RoE per annum to
shareholders.(5)
The third quarter was below target, bringing down the annualised
RoE in the first nine months of 2014 to 6.9%. Please see page 4 for
further details.
2. To manage more of TFG's assets on
the TFG Asset Management platform in order to reduce the proportion
of TFG's capital that pays away fees to third-party managers.
The amount of TFG's capital that paid fees to external managers
at the end of Q3 2014 was 37.0%, down from 53.4% at the end of
2013.(6) We believe that the addition of two new
asset classes and asset management businesses - namely
infrastructure asset management (Equitix) and mining finance - may
allow TFG to further diversify its assets over time while
continuing to reduce fees paid away to external managers.
3. To grow client AUM and fee income
in TFG Asset Management.
Assets under management ("AUM") at 30
September 2014 stood at $10.6
billion, up from $9.2 billion
at 2013 year-end.(7)
TFG Asset Management's fee income (including potential hedge
fund performance fees that don't crystallise until year end) was
$56.0 million, up 28.1% on the same
period last year.(8)
4. To add further asset management
businesses to the TFG Asset Management platform.
TFG added two new businesses in Q3 and early Q4 2014 as
discussed above.
INVESTOR DAY
TFG held its second annual investor day in London in September. Both the webcast
recording and applicable presentation slides are available through
the company website.
KEY METRICS
We continue to focus on three key metrics when assessing how
value is being created for, and delivered to, TFG shareholders:
Earnings, Net Asset Value ("NAV") per share and Dividends.
EARNINGS - RETURN ON EQUITY
("RoE")
- Year to date RoE(9) to Q3 2014 of 5.2% (6.9%
annualised) was below TFG's over-the-cycle target of 10-15%
per annum
.(10)
- TFG generated Net Economic Income(11) of
$93.9 million in the first three
quarters of 2014, compared with $136.5
million in the equivalent period in 2013, a fall of 31.2%
year on year.
- Following encouraging results in the first half of the year,
Q3 2014's result was disappointing and was particularly affected by
the following drivers:
- Unrealised losses primarily on equity-related investments held
on TFG's balance sheet.
- U.S. CLOs performing broadly in line with YTD quarterly
averages, although the CLO portfolio continued to reduce through
amortisation, redemptions and recent sales.
- On a positive note, continuing progress in TFGAM in terms of
AUM, which led to further increases in management fees although
unrealised performance fees dipped slightly in the quarter. TFGAM
contributed approximately $23.4
million of EBITDA equivalent in the first three quarters of
2014, an increase of 27.1% over the same period in 2013. Please see
Figure 11 on page 18 for details.
- Unrealised gains on European CLO investments as the discount
rates used for fair valuing future cash flows were further reduced
in response to observable data.
Figure 1
Annual Return on Equity
RoE
2007 11.4%
2008 -3.7%
2009 -27.6%
2010 47.7%
2011 36.1%
2012 20.8%
2013 15.3%
2014 Annualised 6.9%
Average 13.6%
EARNINGS PER
SHARE ("EPS")
- TFG generated an Adjusted EPS(12) of $0.98 year-to-date through Q3 2014 (YTD Q3 2013:
$1.39).
Figure 2
Adjusted EPS Comparison Q3 2012 - Q3 2014 (USD)
YTD through Q3 2012 $1.77
YTD through Q3 2013 $1.39
YTD through Q3 2014 $0.98
- Despite the lower value of TFG's holdings in U.S. CLOs, the
performance of both U.S. CLO 1.0 and CLO 2.0 has improved compared
with the comparative period in 2013, boosted by, among other
things, gains on sales in recent months.
- The further recalibration of discount rates used in
determining the fair value of the European CLO portfolio, largely
reflecting lower observed risk premia, added approximately
$0.04 of EPS (please see page 34 for
further detail).
- After a strong start to the year, the equity-related returns,
held both indirectly via Polygon(13) funds and directly
on TFG's balance sheet, have experienced a volatile and negative
last few months. As a result, the "Other Equities, Credit,
Convertibles and Distressed" category lost approximately
$16.6 million or $0.18 of EPS in the quarter.
- Despite market volatility, TFG's exposure to convertible bonds
and distressed credit via Polygon funds have held up well, adding
small net gains during Q3 2014.
- It is also worth noting that a lower year-to-date performance
fee accrual has contributed towards the reduction in overall
expenses on a comparative basis.
We discuss the different aspects of the investment portfolio in
more detail later in this report.
Figure 3
TETRAGON FINANCIAL GROUP
TFG Earnings per Share Analysis Through Q3 2013 - 2014
YTD Q3 2014 YTD Q3 2013
Investment portfolio segment
U.S. CLO 1.0 $1.04 $0.90
U.S. CLO 2.0 $0.19 $0.16
European CLOs $0.24 $0.55
Hedges ($0.09) $0.06
Other income $0.01 $0.02
Polygon Equity Funds $0.03 $0.12
Polygon Credit, Convertibles & Distressed Funds $0.12 $0.02
Other Equities, Credit, Convertibles, Distressed ($0.25) $0.06
Real Estate $0.11 $0.02
FX and Options ($0.03) ($0.01)
Expenses ($0.54) ($0.58)
Net EPS investment portfolio $0.83 $1.32
Asset Management Segment - TFG AM $0.22 $0.11
Corporate Income taxes ($0.07) ($0.04)
Adjusted EPS $0.98 $1.39
Weighted Average Shares (millions)(i) 95.4 97.9
(i) The time-weighted average daily U.S. GAAP Shares outstanding
during the applicable year.
NAV PER SHARE
- Total NAV fell slightly in Q3 2014 to $1,804.4 million which equated to Pro Forma Fully
Diluted NAV per Share(14) of $16.82, down from $17.08 in Q2 2014.
- The majority of the decrease was due to the payment of the Q2
2014 dividend of $0.155 per share
during the quarter. The accounting treatment for the Investment
Manager IPO options also impacted the figure as did investment
performance, among other factors.
[Figure 4]
DISTRIBUTIONS
- Dividends per Share ("DPS"): TFG declared a Q3 2014 DPS of
$0.155, unchanged from Q2 2014. On a
rolling 12-month basis, the dividend of $0.61 per share represents a 10.9% increase over
the preceding four quarters.
- TFG continues to pursue a progressive dividend policy with a
target payout ratio of 30-50% of normalised earnings recognising
the long-term target RoE of 10-15%.(15) The Q3 2014 DPS
of $0.155 brings the cumulative DPS
since TFG's IPO to $3.285.
Figure 5
12-month Rolling DPS Comparison Q3 2012 - Q3 2014 (USD)
Q3 2012 $0.44
Q3 2013 $0.55
Q3 2014 $0.61
CASH FLOWS
& USES OF CASH
CASH FLOWS & USES OF CASH
TFG's cash flows from operations remained strong at $213.0 million year-to-date through Q3 2014,
driven mainly by CLOs, albeit at lower levels than in 2013. Cash
flows generated by the CLO portfolio continued to be the primary
source of operating cash at $86.2
million in the quarter and $279.5
million year to date (same period 2013: $361.5 million). CLO cash flows are
discussed in more detail in the Investment Portfolio section of
this report.
We believe that the CLO market in general continued to be less
attractive in terms of new issue equity returns in the third
quarter and TFG did not purchase any new CLO positions. Instead, it
took advantage of market opportunities to sell or call CLO
positions, and $25.1 million was
received in the quarter relating to a Q2 2014 sale with a further
$18.2 million receivable at the end
of Q3. TFG continued to add to its investments in real estate
vehicles managed by GreenOak.(16)
TFG utilised $43.6 million to pay
dividends in the first three quarters of the year compared with
$40.1 million in the equivalent
period in 2013. A net $47.0
million was utilised to repurchase TFG's shares during the
first three quarters of 2014 although there were no new repurchases
in Q2 or Q3 2014 (see Figure 6).
At the end of Q3 2014, TFG's investible cash balance was
$308.9 million, approximately 17.1%
of net assets, which was at an elevated level compared with past
quarters in anticipation of the planned Equitix acquisition
described earlier in this report.
Figure 6
Cumulative TFG Share Repurchases ($MM)
Inception-2012 $257.5
2013 $273.6
YTD through Q3 2014 $324.5
TFG'S BUSINESS
SEGMENTS
INVESTMENT
PORTFOLIO & TFG ASSET MANAGEMENT
TFG STRUCTURE OVERVIEW
TFG owns 1) an investment portfolio of approximately
$1.8 billion of financial assets and
2) TFG Asset Management, a global alternative asset management
business with approximately $10.6
billion of client AUM, as described below. Investors may
find the below chart useful to better understand the company's
structure.
[Figure 7]
INVESTMENT PORTFOLIO OVERVIEW
TFG's investment portfolio generated positive overall segment
gross earnings during Q3 2014 (details in Figure 9). Corporate loan
investments (accessed primarily via CLO equity) performed well
during the quarter, with equity arbitrage supported by a
deceleration in underlying loan repayments and relatively benign
credit conditions, among other factors. Polygon-managed equity
funds and equities owned directly on TFG's balance sheet showed
losses during this quarter. Polygon-managed convertible and
distressed funds were essentially flat on the quarter. The real
estate portfolio continued to see positive underlying performance
during Q3 2014.
PORTFOLIO COMPOSITION AND OUTLOOK
TFG's net assets totalled $1,804.4
million at the end of Q3 2014. The following chart shows the
composition of TFG's net assets by asset class for Q3 2014 and the
end of the prior year.
[Figure 8]
INVESTMENT PORTFOLIO
The following chart summarizes certain performance metrics for
each asset class in TFG's investment portfolio.
Figure 9
Asset Type Q3 2014 Income(iv) YTD
Net Assets ($MM) Q3 2014 ($MM)
U.S. CLO 1.0(i) $482.3 $99.1
U.S. CLO 2.0(i) $242.9 $18.6
European CLOs $138.0 $22.1
U.S. Direct Loans $24.2 $0.5
Hedges(ii) $3.0 ($9.1)
Polygon Equity Funds $184.1 $3.0
Polygon Credit, Convertibles
& Distressed Funds $120.8 $11.6
Other Equities, Credit,
Convertibles &
Distressed(iii) $89.3 ($23.5)
Real Estate $97.9 $10.6
(i) "U.S. CLO 1.0" refers to U.S. CLOs issued before or during
2008. "U.S. CLO 2.0" refers to U.S. CLOs issued after 2008.
(ii) "Hedges" refers to interest rate swaption hedges put in
place in relation to certain interest rate risks relating to the
CLO portfolio.
(iii) Assets characterised as "Other Equities, Credit,
Convertibles, Distressed" consist of the fair value of, or capital
committed to, investment assets held directly on the balance
sheet.
(iv) "Income" refers to the total income generated by each
category in the quarter including where applicable, realised and
unrealised gains and losses as well interest income, dividends and
certain associated direct expenses such as interest expense on
swaps.
CORPORATE LOANS
TFG's exposure to the corporate loan asset class (whether held
directly or indirectly via CLO equity investments) remained
diversified, and at the end of Q3 2014 saw 77.0% in U.S. broadly -
syndicated senior secured loans, 7.4% in U.S. middle-market senior
secured loans and 15.6% in European senior secured
loans.(17)
TFG's CLO equity investments, which comprise the majority of its
exposure to corporate loan assets, represented indirect exposure to
approximately $11.4 billion par value
of underlying CLO assets.(18)
When reporting on corporate loan exposures, we find it useful to
further segment such investments into the following classes:
- U.S. CLO 1.0;
- U.S. CLO 2.0;
- European CLOs; and
- U.S. Direct Loans.
U.S. CLO 1.0
As of the end of Q3 2014, TFG held 43 U.S. CLO 1.0 equity
investments and one investment in the debt tranche of a U.S. CLO
1.0 transaction.(19) All U.S. CLO 1.0 holdings
were passing their junior- most O/C tests as of the end of the
third quarter.(20)
During Q3 2014, the company sold one equity tranche investment
in a U.S. CLO 1.0 transaction, which we believe was attractive in
light of the sale price achieved versus the future projected
returns on the investment. As in prior quarters, TFG's U.S.
CLO 1.0 portfolio continued to deleverage, with several deals
having substantially completed their wind-downs early-on in the
quarter.
We believe that during the later stages of a CLO's structural
de-leveraging process, the impact of CLO O/C tests on equity
returns may be reduced, as O/C cushions naturally rise due to CLO
liability repayments. During this stage of the investments
life-cycle, however, the exposure to underlying loan market prices
may begin to have a much more significant and direct impact on
equity performance. As a result of this, we believe it is important
to carefully consider the timing of any optional redemption, taking
into consideration each CLO manager's ability and constraints in
realizing the full intrinsic value of the underlying portfolio
(including distressed and equity holdings). In certain cases we may
find it more appropriate to sell an equity investment rather than
continue to hold through an optional redemption exit process.
U.S. CLO 2.0
As of the end of Q3 2014, TFG held 13 equity investments in U.S.
CLO 2.0 deals, unchanged from the prior quarter. During
October 2014, TFG made a
majority-stake equity investment of $22.5
million notional in a new issue CLO managed by LCM Asset
Management LLC ("LCM")(21) , which is not reflected in
the statistics of this quarterly report as the transaction closed
after quarter-end. All of TFG's U.S. CLO 2.0 transactions were in
compliance with their junior-most O/C tests as of the end of Q3
2014.(22)
In our view, the new issue CLO 2.0 market continues to be
challenged by the weak arbitrage between underlying loan spreads
and CLO debt funding costs, which remain stubbornly wide by recent
historical standards. As such, we made no third-party CLO
investments during the quarter. However, we believe that CLO
investments where TFG owns an interest in the manager (like LCM),
remain attractive given the ability to generate recurring fee
income.
Two of our U.S. CLO 2.0 transactions were successfully
refinanced during Q3 2014. The resulting reductions in the CLOs'
financing costs are expected to increase the returns to the
associated equity tranches, all else being equal. We continue to
look for similar opportunities throughout the portfolio; although
we note that many of TFG's U.S. 2.0 deals were priced at tighter
debt spreads than can be achieved in the current market.
EUROPEAN CLOs
As of the end of Q3 2014, TFG held equity investments in nine
European CLOs, unchanged from Q2 2014. Like their U.S. CLO 1.0
counterparts, European CLOs continued to amortise during the
quarter, albeit at a slower pace. Given Europe's continued macroeconomic headwinds and
our continued reservations with respect to the size, liquidity and
certain other structural features of the European leveraged loan
market, we have not made any new investments in European CLOs, and
have no near-term plans at this time to increase TFG's exposure to
this asset class. As in the United
States, we may look to opportunistically sell the company's
European CLO investments or exercise optional redemption rights
when we believe appropriate.
In response to, among other things, reductions in observed risk
premia, a reduction was made to the discount rates applied to
future projected cash flows. See Appendix II for further
details.
As of the end of Q3 2014, all of TFG's European CLO investments
were passing their junior-most O/C tests.(23)
The following graph shows the evolution of TFG's CLO equity
investment IRRs over the past three years.
[Figure 10]
DIRECT LOANS
TFG's direct loan portfolio remained stable, ending Q3 2014 at
$24.2 million in fair value. There
were no defaults in the quarter. As stated in the H1 2014 Report,
we do not expect to allocate additional capital to this strategy
due to the existence of what we believe are more attractive
alternative uses of the company's funds.
POLYGON EQUITY FUNDS
As of the end of Q3 2014, TFG had $184.1
million invested in Polygon-managed equity hedge fund
products. The equities products generally had weaker
performance in the quarter compared to earlier in the year due to,
among other things, weakness in European markets (particularly in
mid- cap names), and in gold-related equities as the commodity
price sold off significantly in September.
Over the past six months, a number of market participants have
been de-risking in Europe, and
"off the run stocks" (sub $1.5
billion market cap) in particular have sold off strongly,
many by 20% to 35%. We have seen this kind of rotation many times
in Europe over the past six years,
and these are exactly the kind of opportunities on which TFGAM's
European Event team focuses. We ultimately feel Europe will continue to grind slowly out of
its recession, and that the recent Euro weakness and Mario Draghi's efforts to expand the ECB's
balance sheet will help to achieve this recovery.
POLYGON CREDIT, CONVERTIBLE &
DISTRESSED FUNDS
Both funds delivered positive returns for the quarter. As at the
end of Q3 2014, TFG had $120.8
million invested in Polygon-managed credit, convertible and
distressed fund products.
OTHER EQUITY, CREDIT, CONVERTIBLE AND
DISTRESSED
TFG invests directly in equities, convertible bonds and credit
instruments. Some of these opportunities have arisen in part
from TFG's ownership of Polygon and resulting access to new
opportunities. TFG may invest in opportunities directly from its
balance sheet rather than through, for example, investments in
other funds or collective investment schemes, when it sees an
opportunity that fits its investment criteria, particularly where
our structuring ability and the company's long duration capital may
give it a potential investment advantage. In some cases, TFG may
also have exposure to the investment indirectly through fund
investments. The net assets of this part of the portfolio at the
end of Q3 2014 was $89.3
million. The vast majority of this is invested in
publicly quoted equities. This segment of the portfolio experienced
losses in Q3 2014, primarily from these equity investments.
REAL ESTATE
During Q3 2014, TFG invested net $5.4
million into GreenOak-managed real estate funds and
vehicles; both existing and new vehicles and strategies. In
addition, we saw a significant amount of capital returned from
certain Japanese, U.S. and European investments, reflecting the
profitable sales of certain underlying assets.
We expect to continue to invest in GreenOak-managed real estate
funds and vehicles as we believe such investments may be an
attractive use of TFG's capital.
HEDGING ACTIVITY AND OTHER MATTERS
During the quarter, TFG employed certain foreign exchange rate
and "tail risk" interest rate hedges to seek to mitigate its
exposure to non-USD foreign exchange risk and a potential
significant increase in U.S. inflation and/or nominal interest
rates, respectively. We review our hedging strategy on an
ongoing basis as we seek to address identified risks to the extent
practicable and in a cost-effective manner.
TFG ASSET
MANAGEMENT
OVERVIEW
TFG Asset Management comprises the fee income-generating areas
of TFG's portfolio: management and performance fees from related
and external asset managers.(24) The three related
asset management businesses, LCM, Polygon and the GreenOak joint
venture, continued to perform well through the end of September 2014.
As mentioned earlier in this report, in October TFG announced
its intention to acquire Equitix, a UK infrastructure asset
management business, and launched a global mining finance
business.
UPDATE ON KEY METRICS
- Performance of the underlying strategies: performance
of the various strategies managed by TFGAM remained positive
through the end of Q3 2014, although the Polygon equity strategies
gave back some gains from earlier in the year.
- Gross revenues: composed primarily of management and
performance fees from clients, totalled $51.9 million year to date through Q3
2014. If the unrealised performance fees within the Polygon
hedge funds (which may only crystallise at year end) are included,
then total fee income is $56.0
million versus $45.8 million
for the same period last year.(25)
"EBITDA equivalent"(as described below):
totalled $23.4 million in Q3 2014,
versus $18.4 million in Q3 2013.
Figure 11
TETRAGON FINANCIAL GROUP
TFG Asset Management Statement of
Operations Through Q3 2013 - 2014
YTD Q3 2014 YTD Q3 2013
$MM $MM
Fee income(i) 51.9 43.7
Unrealised Polygon performance fees(ii) 4.1 2.1
Interest income 0.2 0.2
Total income 56.2 46
Operating, employee and administrative
expenses(i) (32.8) (27.6)
Net income - "EBITDA equivalent" 23.4 18.4
Unrealised gain on asset management
stake(iii) 5.7 0.0
Performance fee allocation to TFM (3.1) (2.2)
Amortisation expense on management
contracts (5.1) (5.1)
Net economic income before taxes 20.9 11.1
(i) Nets off cost of recovery on "Other fee income" against this
cost contained in "Operating, employee, and administrative
expenses." Operating costs also removes amortisation from the U.S.
GAAP segmental report. Fee income includes amounts earned through
third- party fee sharing arrangements. It also includes any
fees earned through fees paid on investments made by TFG in Polygon
hedge funds or other investment vehicles. TFG is able to invest at
a preferred level of fees.
(ii) Unrealised Polygon performance fees represent the fees
calculated by the applicable administrator of the relevant Polygon
funds, in accordance with the applicable fund constitutional
documents, when determining NAV at quarter end, less certain
assumed costs. Similar amounts, if any, from LCM and GreenOak are
excluded from this line item. Such fees would typically not be
realised or recognised under U.S. GAAP until calendar year end, and
are therefore subject to change based on fund performance during
the remainder of the year. There are can be no assurance that the
company will realise all or any portion of such amounts. Through
30 September 2014, this amount
equalled $4.1 million before (1) an
assumed imputed tax charge and (2) estimated TFM performance fees
reduced the net contribution to $2.2
million as shown in Figure 11 and further represented
in Figures 18 and 19 of this report. It also includes any
unrealised performance fees to potentially be paid on investments
made by TFG in Polygon hedge funds or other investment vehicles.
TFG is able to invest at a preferred level of fees.
(iii) Unrealised gain generated by a recalibration of the fair
value of the 23% stake held in GreenOak. For accounting purposes TF
G treats this stake as an investment carried at fair value rather
than consolidating the underlying net assets and net income of this
business.
ASSET MANAGEMENT BUSINESSES
AUM for LCM, GreenOak and Polygon are shown below at
30 September 2014.
Figure 12
Summary of TFG Asset Management AUM ($BN)
Business 30 September 2014 30 June 2014
LCM $4.9 $5.1
GreenOak(i) $4.2 $3.9
Polygon(ii) $1.5 $1.5
Total $10.6 $10.5
(i) Includes funds and advisory assets managed by GreenOak
Real Estate, LP, a separately registered investment adviser with
the U.S. Securities and Exchange Commission. TFG owns a 23%
interest in GreenOak.
(ii) AUM for Polygon Recovery Fund LP, Polygon Convertible
Opportunity Master Fund, Polygon European Equity Opportunity Master
Fund and associated managed account, Polygon Mining Opportunity
Master Fund, Polygon Global Equities Master Fund, and Polygon
Distressed Opportunities Master Fund, as calculated by the
applicable fund administrator. Includes, where relevant,
investments by Tetragon Financial Group Master Fund Limited.
LCM
LCM is a specialist in below-investment grade U.S.
broadly-syndicated leveraged loans that was established in 2001.
Farboud Tavangar is the senior portfolio manager.
LCM continued to perform well in Q3 2014, with all of LCM's Cash
Flow CLOs(26) that were still within their reinvestment
periods continuing to pay senior and subordinated management
fees.
At 30 September 2014, LCM's total
CLO loan assets under management stood at approximately
$4.9 billion and the company managed
11 CLOs. LCM XVII priced during Q3 2014 and closed in October 2014.
Figure 13
LCM Assets Under Management History ($BN)
Q4 2011 $3.4
Q1 2012 $3.7
Q2 2012 $4.1
Q3 2012 $3.9
Q4 2012 $4.3
Q1 2013 $4.5
Q2 2013 $4.3
Q3 2013 $4.3
Q4 2013 $4.2
Q1 2014 $4.8
Q2 2014 $5.1
Q3 2014 $4.9
GREENOAK JOINT VENTURE
GreenOak is a real estate-focused principal investing and
advisory firm established in 2010. The Principals and Founders are
John Carrafiell, Sonny Kalsi and
Fred Schmidt.
During Q3 2014, GreenOak continued to execute on its strategy
with respect to its funds and its advisory assignments on behalf of
select strategic clients with mandates in Europe, Japan
and the United States.
At 30 September 2014, assets under
management totalled approximately $4.2
billion.
Figure 14
GreenOak Assets Under Management History ($BN)(i)
Q4 2011 $0.6
Q1 2012 $1.7
Q2 2012 $1.7
Q3 2012 $1.9
Q4 2012 $2.3
Q1 2013 $3.0
Q2 2013 $3.2
Q3 2013 $3.6
Q4 2013 $3.6
Q1 2014 $4.1
Q2 2014 $3.9
Q3 2014 $4.2
(i) Assets under management include all third-party interests
and total projected capital investment costs.
POLYGON
Total AUM for the Polygon funds was approximately $1.5 billion at 30
September 2014. All of the open strategies have positive
returns year-to-date, although market volatility, particularly in
European and mid-cap equities, has led to weaker performance in the
equity strategies during the quarter. The distressed
strategy reached its one year anniversary from inception in
September.
Figure 15
Summary of Polygon Funds Assets Under Management ($MM)
30 September YTD 2014 Annualised Net
Fund 2014 Net Performance LTD Performance
European Event-Driven
Equity(i) $577.0 1.9% 13.0%
Convertibles(ii) $405.3 13.3% 20.3%
Mining Equities(iii) $66.2 0.2% 1.8%
Distressed
Opportunities(iv) $78.6 9.0% 12.5%
Other Equity(v) $21.7 17.1% 18.3%
Total AUM - Open Funds $1,148.8
Private Equity Vehicle(vi) $351.6 -1.0% 4.9%
Total AUM $1,500.4
(i) The fund began trading 8 July
2009 with Class B shares which carry no incentive fee. Class
A shares commenced trading on 1 December
2009. Returns from inception through November 2009 for Class A shares have been
pro forma adjusted to match
the fund's Class A share terms as set forth in the Offering
Memorandum (1.5% management fee, 20% incentive fee and other items,
in each case, as set forth in the offering Memorandum). From
December 2009 to February 2011, the table reflects actual Class A
share performance on the terms set forth in the Offering
Memorandum. From March 2011, forward,
the table reflects actual Class A1 share performance on the terms
set forth in the Offering Memorandum. Class A1 share performance is
equivalent to Class A share performance for prior periods. AUM
figure and net performance is for the Polygon European Equity
Opportunity Master Fund and associated managed account as
calculated by the applicable fund administrators.
(ii) The fund began trading with Class B shares, which carry no
incentive fees, on 20 May 2009. Class
A shares of the fund were first issued on 1
April 2010 and returns from inception through March 2010 have been
proforma adjusted to match the
fund's Class A share terms as set forth in the Offering Memorandum
(1.5% management fee, 20% incentive fee over a hurdle and other
items, in each case, as set forth in the Offering
Memorandum). AUM figure and net performance is for the Polygon
Convertible Opportunity Master Fund as calculated by the applicable
fund administrator.
(iii) The fund began trading with Class B1 shares, which carry
no incentive fees, on 1 June 2012.
Returns through October 2013 have
been pro forma adjusted to
account for a 2.0% management fee, a 20% incentive fee, and non
trading expenses capped at 1%, in each case, as set forth in the
Offering Memorandum. Class A1 shares of the Fund were first issued
on 1 November 2013. From November 2013, forward, performance reflects
actual Class A1 share performance on the terms set forth in the
Offering Memorandum. AUM figure and net performance is for the
Polygon Mining Opportunity Master Fund as calculated by the
applicable fund administrator.
(iv) The fund began trading on 2
September 2013. Class A shares of the fund were first issued
in September 2013 and returns from
inception through October 2014 have
been adjusted to match the fund's class A share terms as set forth
in the Offering Memorandum (1.5% management fee, 20% incentive fee
and other items, in each case, as set forth in the Offering
Memorandum). AUM figure and net performance is for the Polygon
Distressed Opportunities Master Fund as calculated by the
applicable fund administrator.
(v) The fund began trading with Class B/B1 shares, which carry
no incentive fees, on 12 September 2011. Returns shown from
inception through August 2013 have
been proforma adjusted to
account for a 2.0% management fee and a 20% incentive fee, in each
case, as to be set forth in further definitive documents. The fund
began trading Class A shares, which are not new issue eligible, on
23 September 2011. Class A1 shares of
the Fund, which are new issue eligible, were first issued on
1 November 2013, and returns from
inception through October 2013 have
been proforma adjusted to match
the Fund's Class A1 performance. AUM figure and net performance is
as calculated by the applicable fund administrator.
(vi) The Private Equity Vehicle noted above is the Polygon
Recovery Fund L.P. ("PRF"). The manager of the PRF is a subsidiary
of TFG having been acquired in the Polygon transaction. The
management fees earned in respect of PRF are included in the TFG
Asset Management business segment described herein. PRF is a
limited-life vehicle seeking to dispose of its portfolio securities
prior to its initial term expiring in the first half of 2015 - with
two additional one-year terms based on performance or investor
approval. Individual investor performance will vary based on their
high water mark. Currently the majority of Class C share class
investors have not reached their high water mark, so their
performance is the same as their gross performance. AUM figure and
net performance is for PRF as calculated by the applicable fund
administrator.
Figure 16(i)
Polygon Hedge Funds Assets Under Management History ($MM)
(European Event-Driven Equity, Convertibles, Mining Equities, Distressed
Opportunities)
Dec-11 $401
Mar-12 $444
Jun-12 $443
Sep-12 $440
Dec-12 $514
Mar-13 $590
Jun-13 $608
Sep-13 $670
Dec-13 $837
Mar-14 $910
Jun-14 $1,073
Sep-14 $1,127
(i) All values are as calculated by the applicable fund
administrators for value date 30 September
2014.
THIRD-PARTY FEE INCOME
In addition to the fee income generated by the three asset
management businesses, TFG also currently receives asset management
fee income derived from a number of one-off and long-term fee
sharing arrangements with third parties.
Q3 2014
FINANCIAL
REVIEW
In this section, we present consolidated financial data
incorporating TFG and its 100% subsidiary, Tetragon Financial Group
Master Fund Limited, which includes both U.S. GAAP and non-U.S.
GAAP metrics.
FINANCIAL HIGHLIGHTS
Figure 17
TETRAGON FINANCIAL GROUP
Financial Highlights Through Q3 2012 - 2014
YTD Q3 2014 YTD Q3 2013 YTD Q3 2012
U.S. GAAP net income ($MM) $74.4 $118.1 $203.4
Net economic income ($MM) $93.9 $136.5 $203.4
U.S. GAAP EPS $0.78 $1.21 $1.77
Adjusted EPS $0.98 $1.39 $1.77
Return on equity 5.2% 8.4% 13.8%
Net assets ($MM) $1,804.4 $1,704.0 $1,623.6
U.S. GAAP number of shares
outstanding (MM) 94.5 97.7 113.6
U.S. GAAP NAV per share $19.10 $17.45 $14.29
Pro Forma number of shares
outstanding (MM) 107.2 110.0 113.6
Pro Forma fully diluted NAV per
share $16.82 $15.49 $14.29
DPS $0.155 $0.140 $0.115
We use, among others, the following metrics to understand the
progress and performance of the business:
- Net Economic Income ($93.9
million): adds back to the U.S. GAAP net income
($74.4 million) the imputed
year-to-date through Q3 2014 share based employee compensation
($17.3 million), which is generated
on an ongoing basis resulting from the Polygon transaction and also
includes unrealised net Polygon performance fees(27)
($2.2 million).
- Return on Equity (5.2%): Net Economic Income
($93.9 million) divided by Net Assets
at the start of the year ($1,803.2
million).
- Pro Forma Fully Diluted Shares (107.2 million): adjusts
the U.S. GAAP shares outstanding (94.5 million) for the impact of
escrow shares used as consideration in the Polygon transaction and
associated stock dividends (11.8 million) and for the potential
impact of options issued to TFG's investment manager at the time of
TFG's IPO (1.0 million).
- Adjusted EPS ($0.98):
calculated as Net Economic Income ($93.9
million) divided by weighted- average U.S. GAAP shares
during the period (95.4 million).
- Pro Forma Fully Diluted NAV per Share ($16.82): calculated as Net Assets
($1,804.4 million) divided by Pro
Forma Fully Diluted shares (107.2 million).(28)
STATEMENT OF OPERATIONS
Figure 18
TETRAGON FINANCIAL GROUP
Statement of Operations Through Q3 2012 - 2014
YTD Q3 2014 YTD Q3 2013 YTD Q3 2012
$MM $MM $MM
Interest income 120.1 158.9 175.1
Fee income 51.9 43.7 18.8
Unrealised Polygon performance fees 4.1 2.1 -
Other income - cost recovery 17.1 15.4 -
Investment income 193.2 220.1 193.9
Management and performance fees (39.7) (51.1) (73.3)
Other operating and administrative
expenses (68.5) (56.5) (14.8)
Total operating expenses (108.2) (107.6) (88.1)
Net investment income 85.0 112.5 105.8
Net change in unrealised appreciation in
investments (60.7) 10.6 106.5
Realised gain on investments 85.3 11.0 0.6
Realised and unrealised gains/(losses)
from hedging and fx (8.8) 6.2 (5.4)
Net realised and unrealised gains from
investments and fx 15.8 27.8 101.7
Net economic income before tax and
noncontrolling interest 100.8 140.3 207.5
Income tax (6.9) (3.8) (2.4)
Noncontrolling interest - - (1.7)
Net economic income 93.9 136.5 203.4
Performance Fee
There were no performance fees accrued in Q3 2014. The total
performance fee accrued year-to- date through the end of Q3 2014
was $18.7 million. The hurdle rate
for the Q4 2014 incentive fee has been reset at 2.880458% (Q3 2014:
2.879658%) as per the process outlined in TFG's 2013 audited
financial statements and in accordance with TFG's investment
management agreement.
Please see TFG's website, http://www.tetragoninv.com, and the
2013 TFG audited financial statements for more details on the
calculation of this fee.
STATEMENT OF OPERATIONS BY BUSINESS
SEGMENT
Figure 19
TETRAGON FINANCIAL GROUP
Statement of Operations by Segment Through YTD Q3 2014
Investment Portfolio TFG AM Total
$MM $MM $MM
Interest income 119.9 0.2 120.1
Fee income - 51.9 51.9
Unrealised Polygon
performance fees - 4.1 4.1
Other income - cost recovery - 17.1 17.1
Investment and management fee
income 119.9 73.3 193.2
Management and performance
fees (36.6) (3.1) (39.7)
Other operating and
administrative expenses (13.5) (55.0) (68.5)
Total operating expenses (50.1) (58.1) (108.2)
Net change in unrealised
appreciation in investments (66.4) 5.7 (60.7)
Realised gain on investments 85.3 - 85.3
Realised and unrealised
losses from hedging, fx and
options (8.8) - (8.8)
Net realised and unrealised
gains from investments and fx 10.1 5.7 15.8
Net economic income before
tax 79.9 20.9 100.8
BALANCE SHEET
Figure 20
TETRAGON FINANCIAL GROUP
Balance Sheet as at 30 September 2014 and 31 December 2013
Q3 2014 Q4 2013
$MM $MM
Assets
Investments, at fair value 1,367.7 1,533.0
Management contracts 31.4 36.5
Cash and cash equivalents 350.3 245.9
Amounts due from brokers 54.6 42.0
Derivative financial assets 18.7 15.2
Property, plant and equipment 0.2 0.3
Deferred tax asset and income tax
receivable 7.7 8.3
Other receivables 42.2 26.5
Total assets 1,872.8 1,907.7
Liabilities
Other payables and accrued expenses 41.5 79.8
Amounts payable on share options 14.0 10.7
Deferred tax liability and income
tax payable 9.3 10.7
Derivative financial liabilities 3.6 3.3
Total liabilities 68.4 104.5
Net assets 1,804.4 1,803.2
STATEMENT OF CASH FLOWS
Figure 21
TETRAGON FINANCIAL GROUP
Statement of Cash Flows Through Q3 2012 - 2014
YTD Q3 2014 YTD Q3 2013 YTD Q3 2012
$MM $MM $MM
Operating Activities
Operating cash flows after
incentive fees and before
movements in working capital 205.2 294.5 272.6
Purchase of fixed assets (0.1) (0.4) -
Change in payables /
receivables 7.9 5.6 (0.3)
Cash flows from operating
activities 213.0 299.7 272.3
Investment Activities
Proceeds on sales of
investments
- Proceeds sale of CLOs 153.1 - 0.2
- Net proceeds from derivative
instruments - 7.2 -
- Proceeds sale of bank loans
and maturity and prepayment of
investments 14.6 91.4 65.6
- Proceeds on realisation of
real estate investments 29.4 10.9 0.8
- Proceeds from GreenOak
working capital repayment 2.6 - -
Purchase of investments
- Purchase of CLOs (63.6) (46.4) (87.8)
- Purchase of bank loans (1.4) (20.5) (44.6)
- Purchase of real estate
investments (68.5) (33.4) (9.8)
- Investments in asset managers - (0.5) (2.7)
- Investments in Polygon Equity
Funds - (85.0) -
- Investments in Polygon
Credit, Convertibles and
Distressed Funds (25.0) (60.0) -
- Investments in Other
Equities, Credit, Convertibles
and Distressed (27.3) - -
- Net payment on derivative
instruments (18.3) - -
Cash flows from operating and
investing activities 208.6 163.4 194.0
Amounts due from broker (12.6) (29.5) 2.8
Net purchase of shares (47.0) (12.7) (17.3)
Dividends paid to shareholders (43.6) (40.1) (37.3)
Distributions paid to
noncontrolling interest - - (0.8)
Cash flows from financing
activities (103.2) (82.3) (52.6)
Net increase in cash and cash
equivalents 105.4 81.1 141.4
Cash and cash equivalents at
beginning of period 245.9 175.9 211.5
Effect of exchange rate
fluctuations on cash and cash
equivalents (1.0) (0.1) 0.2
Cash and cash equivalents at
end of period 350.3 256.9 353.1
NET ECONOMIC INCOME TO U.S. GAAP
RECONCILIATION
Figure 22
Net Economic Income to U.S. GAAP Reconciliation
YTD Q3 2014
$MM
Net economic income 93.9
Share based employee compensation (17.3)
Unrealised Polygon performance fees (4.1)
Imputed tax charge on unrealised Polygon
performance fees 1.2
Estimated TFM incentive fee on unrealised
Polygon performance fees 0.7
U.S. GAAP net income 74.4
TFG is primarily reporting earnings through a non-GAAP
measurement called Net Economic Income.
The reconciliation on the table above shows the adjustment
required to get from this measure of earnings to U.S. GAAP net
income. There are currently two categories of adjusting items:
share based employee compensation of $17.3
million; and net performance fee earned but not accrued of
$2.2 million, after taking into
account an imputed tax charge and incentive fee payable to TFM
thereon.
In relation to the share based compensation, under ASC 805 TFG
is recognizing the value of the shares given in consideration for
the Polygon transaction as employee compensation over the period in
which they are vesting.
This mechanic and future vesting schedule are described in more
detail in the Master Fund audited financial statements for the year
ended 31 December 2013, and the
unaudited financial statements for the period ended 30 June 2014.
Unrealised Polygon performance fees represent the fees
calculated by the applicable administrator of the relevant Polygon
funds, in accordance with the applicable fund constitutional
documents, when determining NAV at quarter end, less certain
assumed costs. Similar amounts, if any, from LCM and GreenOak are
excluded from this line item. Such fees would typically not be
realised or recognised under U.S. GAAP until calendar year end, and
are therefore subject to change based on fund performance during
the remainder of the year. There are can be no assurance that the
company will realise all or any portion of such amounts. Through
30 September 2014, this amount
equalled $4.1 million before (1) an
assumed imputed tax charge and (2) estimated TFM performance fees
reduced the net contribution to $2.2
million as shown in Figure 11 and further represented in
Figures 18 and 19 of this report. It also includes any unrealised
performance fees to potentially be paid on investments made by TFG
in Polygon hedge funds or other investment vehicles. TFG is able to
invest at a preferred level of fees.
APPENDICES
APPENDIX I
CERTAIN REGULATORY INFORMATION
This Performance Report constitutes TFG's interim management
statement as required pursuant to Section 5:25e of the Dutch
Financial Markets Supervision Act ("FMSA"). Pursuant to Section
5:25e and 5:25m of the FMSA, this report is made public by means of
a press release and has been filed with the Netherlands Authority
for the Financial Markets (Autoriteit Financiële Markten)
and also made available to the public
by way of publication on the TFG
website (http://www.tetragoninv.com).
An investment in TFG involves substantial risks. Please
refer to the Company's website at
http://www.tetragoninv.com for a description of the risks and
uncertainties pertaining to an investment in TFG.
This release does not contain or constitute an offer to sell or
a solicitation of an offer to purchase securities in the United States or any other jurisdiction.
The securities of TFG have not been and will not be registered
under the U.S. Securities Act of 1933 (the "Securities Act"), as
amended, and may not be offered or sold in the United States or to U.S. 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 U.S. Investment Company
Act of 1940, and investors will not be entitled to the benefits of
such Act. TFG is registered in the public register of the
Netherlands Authority for the Financial Markets under Section 1:107
of the FMSA as a collective investment scheme from a designated
country. This release constitutes regulated information
("gereglementeerde informatie") within the meaning of Section 1:1
of the FMSA.
TFG shares (the "Shares") are subject to legal and other
restrictions on resale and the Euronext Amsterdam N.V. trading
market is less liquid than other major exchanges, which could
affect the price of the Shares.
There are additional restrictions on the resale of Shares by
Shareholders who are located in the
United States or who are U.S. persons and on the resale of
Shares by any Shareholder to any person who is located in
the United States or is a U.S.
person. These restrictions include that each Shareholder who is
located in the United States or
who is a U.S. person must be a "Qualified Purchaser" or a
"Knowledgeable Employee" (each as defined in the Investment Company
Act of 1940), as amended, and, accordingly, that Shares may be
resold to a person located in the United
States or who is a U.S. person only if such person is a
"Qualified Purchaser" or a "Knowledgeable Employee" under the
Investment Company Act of 1940. These restrictions may adversely
affect overall liquidity of the Shares.
APPENDIX II
FAIR VALUE DETERMINATION OF TFG'S CLO
EQUITY INVESTMENTS
In accordance with the valuation policies set forth on TFG's
website, the values of TFG's CLO equity investments are
determined using a third-party cash flow modelling
tool. The model contains certain assumption inputs that are
reviewed and adjusted as appropriate to factor in how historic,
current and potential market developments (examined through, for
example, forward-looking observable data) might potentially impact
the performance of TFG's CLO equity investments. Since this
involves modelling, among other things, forward projections over
multiple years, this is not an exercise in recalibrating future
assumptions to the latest quarter's historical data.
Subject to the foregoing, when determining the U.S.
GAAP-compliant fair value of TFG's portfolio, the company seeks to
derive a value at which market participants could transact in an
orderly market and also seeks to benchmark the model inputs and
resulting outputs to observable market data when available and
appropriate.
Forward-looking CLO equity cash flow
modelling assumptions unchanged at the end of Q3 2014:
The Investment Manager reviews and, when appropriate, adjusts in
consultation with TFG's audit committee the CLO equity investment
portfolio's modelling assumptions as described above. At the end of
Q3 2014, certain key assumptions relating to defaults, recoveries,
prepayments and reinvestment prices were unchanged from the
previous quarter. This was the case across both U.S. and European
deals.
These key average assumption variables include the modelling
assumptions disclosed as a weighted average (by U.S. dollar amount)
of the individual deal assumptions, aggregated by geography (i.e.
U.S. and European). Such weighted averages may change from month to
month due to movements in the amortised costs of the deals, even
without changes to the underlying assumptions. Each individual
deal's assumptions may differ from this geographical average and
vary across the portfolio.
The reinvestment price, assumptions about reinvestment spread
and reinvestment life are also input into the model to generate an
effective spread over LIBOR. Newer vintage CLOs may have a
higher weighted-average reinvestment spread over LIBOR or shorter reinvestment life
assumptions than older deals. Across the entire CLO
portfolio, for those deals still in their reinvestment periods, the
reinvestment price assumption of 100% for U.S. deals and European
deals with their respective assumed weighted-average reinvestment
spreads, generates an effective spread over LIBOR of
approximately 372 bps on broadly syndicated U.S. loans and 279 bps
on European loans. All middle market loan deals are through the end
of their reinvestment periods.
Figure 23
U.S. CLOs
Variable Year Current Assumptions
CADR
Until deal maturity 1.0x WARF-implied default rate (2.2%)
Recovery Rate
Until deal maturity 73%
Prepayment Rate
Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price
Until deal maturity 100%
Figure 24
European CLOs
Variable Year Current Assumptions
CADR
2014 1.25x WARF-implied default rate (2.6%)
Thereafter 1.0x WARF-implied default rate (2.1%)
Recovery Rate
Until deal maturity 68%
Prepayment Rate
Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price
Until deal maturity 100%
Application of Discount Rate to
Projected CLO Equity Cash Flows: U.S. CLO 1.0 Equity - discount
rates unchanged
In determining the applicable rates to use to discount projected
cash flows, an analysis of observable risk premium data is
undertaken. For U.S. CLOs, observable risk premia such as BB and
BBB CLO tranche spreads maintained previous reductions and have
been extremely stable at the current low levels.
For example, according to Citibank research, BB spreads which
were 5.1% at the end of Q2 2014, ended Q3 2014 at 5.0%, whilst BBB
spreads trended down marginally from 3.0% at the end of Q2 2014 to
2.8% at the end of Q3 2014.
Market related information, such as broker research and bid
lists, also tended to support the view that discount rates or
yields had remained stable. Taking into account all of the factors
outlined above, this discount rate has been maintained at
12%. The future movement of mezzanine tranche spreads as well
as the likely range of spreads of equity discount rates over such
spreads, among other factors, will continue to be monitored in
coming quarters.
European CLO Equity - discount rates
reduced from 14% to 13%
During Q3 2014, European CLO BB rated tranches trended lower,
compressing the differential to their U.S.
equivalents. According to Citibank research, they declined
almost 1.0%, falling from 6.9% at the end of Q2 2014 to 5.8% at the
end of Q3 2014. At these levels, they are now only 0.8% higher than
the U.S. CLO 1.0 BB spreads (see above) and reflect a sustained
compression of spreads between Europe and the U.S. over the last few
quarters. In order to reflect the above and other observable market
data, the discount rate applied to European CLO projected cash
flows has been reduced to 13% from 14%. This reduces the
differential on discount rates used on U.S. pre-crisis deals and
European deals to 1.0%. The observable range of European risk
premia over the U.S. equivalent, among other factors, will continue
to be monitored in coming quarters.
U.S. CLO 2.0 Equity - discounted using
deal IRR
The applicable discount rate for newer vintage deals is
determined with reference to each deal's specific IRR, which, in
the absence of other consistently available observable data points,
is deemed to be the most appropriate indication of the current risk
premium on these structures. At the end of Q3 2014, the
weighted-average discount rate (and IRR) on these deals was 11.2%.
Such deals represented approximately 28.2% of the CLO equity
portfolio by fair value (up from 27.1% at the end of Q2
2014). We will continue to monitor observable data on these
newer vintage transactions to determine whether the IRR remains the
appropriate discount rate.
Effect on fair value and net income of
the recalibration of discount rates
Overall, the net impact of the recalibration of discount rates
described above led to an overall increase in fair value of the
total CLO equity portfolio of approximately $3.9 million.
APPENDIX III
ADDITIONAL CLO PORTFOLIO
STATISTICS
Each individual deal's metrics used in the calculation of the
figures below will differ from the overall averages and vary across
the portfolio.
[Figure 25]
Figure 26
ALL CLOs Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+ or Below Obligors: 4.5% 3.7% 4.6% 5.4% 4.9% 5.0%
WARF: 2,554 2,621 2,565 2,542 2,553 2,568
U.S. CLOs Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+ or Below Obligors: 4.4% 3.0% 3.4% 3.8% 3.9% 4.1%
WARF: 2,489 2,556 2,544 2,513 2,534 2,550
EUR CLOs Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+ or Below Obligors: 4.8% 6.9% 9.4% 11.8% 9.1% 8.7%
WARF: 2,819 2,894 2,650 2,658 2,631 2,642
(table cont.)
ALL CLOs Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1 2012 Q4 2011
Caa1/CCC+ or Below Obligors: 5.1% 6.0% 6.4% 5.7% 6.2% 7.0%
WARF: 2,541 2,599 2,605 2,578 2,588 2,624
U.S. CLOs Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1 2012 Q4 2011
Caa1/CCC+ or Below Obligors: 4.0% 4.5% 4.9% 4.2% 4.8% 5.5%
WARF: 2,510 2,524 2,528 2,491 2,504 2,533
EUR CLOs Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1 2012 Q4 2011
Caa1/CCC+ or Below Obligors: 9.7% 11.7% 12.2% 11.6% 11.1% 12.3%
WARF: 2,670 2,896 2,903 2,910 2,900 2,948
CLO EQUITY
PORTFOLIO DETAILS AS OF 30 SEPTEMBER
2014
Figure 27
CLO Equity Portfolio Details
As of 30 September 2014
Original Deal End of Wtd Avg Original
Invest. Closing Year Reinv Spread Cost of
Cost of Funds
Transaction(i) Deal Type ($MM USD)(ii) Date Maturity Period(bps)(iii)(bps)(iv)
Transaction 1 EUR CLO 37.5 2007 2024 2014 386 55
Transaction 2 EUR CLO 29.7 2006 2023 2013 401 52
Transaction 3 EUR CLO 22.2 2006 2022 2012 407 58
Transaction 4 EUR CLO 33.0 2007 2023 2013 418 48
Transaction 5 EUR CLO 36.9 2007 2022 2014 395 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 404 51
Transaction 7 EUR CLO 38.5 2007 2023 2013 376 46
Transaction 8 EUR CLO 26.9 2005 2021 2011 391 53
Transaction 10 EUR CLO 27.0 2006 2022 2012 371 50
Transaction 86 EUR CLO 3.6 2006 2022 2012 371 50
EUR CLO Subtotal: 288.6 394 52
Transaction 11 US CLO 20.5 2006 2018 2012 293 45
Transaction 12 US CLO 22.8 2006 2019 2013 323 46
Transaction 13 US CLO 15.2 2006 2018 2012 312 47
Transaction 14 US CLO 26.0 2007 2021 2014 334 49
Transaction 15 US CLO 28.1 2007 2021 2014 401 52
Transaction 16 US CLO 23.5 2006 2020 2013 371 46
Transaction 17 US CLO 26.0 2007 2021 2014 311 40
Transaction 18 US CLO 16.7 2005 2017 2011 289 45
Transaction 19 US CLO 1.2 2005 2017 2011 289 45
Transaction 20 US CLO 26.6 2006 2020 2012 393 52
Transaction 21 US CLO 20.7 2006 2020 2012 376 53
Transaction 22 US CLO 37.4 2007 2021 2014 390 53
Transaction 23 US CLO 19.9 2007 2021 2013 407 66
Transaction 24 US CLO 16.9 2006 2018 2012 356 46
Transaction 25 US CLO 20.9 2006 2018 2013 381 46
Transaction 26 US CLO 27.9 2007 2019 2013 407 43
Transaction 29 US CLO 19.1 2005 2018 2011 475 66
Transaction 30 US CLO 12.4 2006 2018 2012 383 67
Transaction 31 US CLO 9.5 2005 2017 2012 400 52
Transaction 32 US CLO 24.0 2007 2021 2014 307 59
Transaction 33 US CLO 16.2 2006 2020 2012 353 56
Transaction 34 US CLO 22.2 2006 2020 2012 352 50
Transaction 35 US CLO 23.6 2006 2018 2012 366 52
Transaction 36 US CLO 28.4 2007 2021 2013 361 46
Transaction 38 US CLO 23.7 2007 2021 2013 307 42
Transaction 39 US CLO 7.8 2005 2017 2011 - 70
Transaction 40 US CLO 13.0 2006 2020 2011 349 39
Transaction 44 US CLO 22.3 2006 2018 2012 107 54
Transaction 45 US CLO 23.0 2006 2018 2012 273 46
Transaction 46 US CLO 21.3 2007 2019 2013 287 51
Transaction 47 US CLO 28.3 2006 2021 2013 330 47
Transaction 49 US CLO 12.6 2005 2017 2011 451 40
Transaction 50 US CLO 12.3 2006 2018 2012 308 40
Transaction 56 US CLO 23.0 2007 2019 2014 337 42
Transaction 57 US CLO 0.6 2007 2019 2014 337 42
Transaction 58 US CLO 21.8 2007 2019 2014 337 49
Transaction 59 US CLO 0.4 2007 2019 2014 337 49
Transaction 61 US CLO 29.1 2007 2021 2014 321 45
Transaction 63 US CLO 27.3 2007 2021 2013 357 53
Transaction 64 US CLO 15.4 2007 2021 2013 369 38
Transaction 65 US CLO 26.9 2006 2021 2013 351 47
Transaction 66 US CLO 21.3 2006 2020 2013 290 49
Transaction 68 US CLO 19.3 2006 2020 2013 328 48
Transaction 69 US CLO 28.2 2007 2019 2013 319 44
Transaction 71 US CLO 1.7 2006 2018 2012 308 40
Transaction 72 US CLO 4.8 2007 2019 2014 337 42
Transaction 73 US CLO 1.9 2007 2019 2014 337 42
Transaction 74 US CLO 5.5 2007 2019 2014 337 49
Transaction 75 US CLO 32.7 2011 2022 2014 373 168
Transaction 76 US CLO 1.9 2006 2018 2012 273 46
Transaction 77 US CLO 14.5 2011 2023 2016 392 212
Transaction 78 US CLO 22.9 2012 2023 2015 453 217
Transaction 79 US CLO 19.4 2012 2022 2015 393 215
Transaction 80 US CLO 22.7 2012 2022 2016 397 185
Transaction 81 US CLO 21.7 2012 2024 2016 416 216
Transaction 82 US CLO 25.4 2012 2022 2016 399 206
Transaction 83 US CLO 20.8 2013 2025 2017 461 193
Transaction 84 US CLO 24.6 2013 2023 2017 391 183
Transaction 85 US CLO 1.0 2013 2025 2017 398 170
Transaction 87 US CLO 23.0 2013 2026 2018 407 199
Transaction 88 US CLO 30.1 2014 2024 2018 414 199
Transaction 89 US CLO 33.6 2014 2026 2018 426 195
US CLO Subtotal: 1,191.1 357 85
Total CLO Portfolio: 1,479.7 364 79
CLO EQUITY
PORTFOLIO DETAILS (CONTINUED)
AS OF 30 SEPTEMBER 2014
Figure 27 (continued)
CLO Equity Portfolio Details (continued)
As of 30 June 2014
Current Current Jr- Jr-Most O/C Annualized ITD Cash
Cost of Most Cushion at (Loss) Received as
Funds O/C Gain of % of
Transaction(i) (bps)(v) Cushion(vi) Close(vii) of Cushion(viii) IRR(ix) Cost(x)
Transaction 1 66 1.24% 3.86% (0.36%) 0.2% 36.4%
Transaction 2 76 3.25% 3.60% (0.04%) 9.9% 120.2%
Transaction 3 133 12.09% 5.14% 0.80% 11.5% 133.2%
Transaction 4 54 8.34% 5.76% 0.34% 15.3% 138.8%
Transaction 5 56 0.24% 5.74% (0.77%) 10.3% 94.5%
Transaction 6 72 9.88% 4.70% 0.62% 5.8% 51.8%
Transaction 7 53 7.51% 3.64% 0.52% 7.1% 41.7%
Transaction 8 106 18.82% 4.98% 1.51% 8.7% 109.9%
Transaction 10 88 2.65% 4.54% (0.23%) 0.9% 49.8%
Transaction 86 88 2.65% 3.11% (0.06%) 9.4% 27.8%
EUR CLO
Subtotal: 74 6.59% 4.61% 0.21% 82.1%
Transaction 11 59 11.28% 4.55% 0.84% 20.4% 192.8%
Transaction 12 61 12.25% 4.45% 0.99% 20.3% 191.8%
Transaction 13 55 7.92% 4.82% 0.38% 21.8% 214.6%
Transaction 14 54 3.25% 5.63% (0.31%) 19.4% 197.3%
Transaction 15 48 3.71% 4.21% (0.07%) 29.7% 252.1%
Transaction 16 53 5.09% 4.44% 0.08% 21.0% 216.1%
Transaction 17 40 4.70% 4.24% 0.06% 24.3% 213.6%
Transaction 18 58 12.24% 4.77% 0.84% 19.9% 204.1%
Transaction 19 58 12.24% 4.77% 0.84% 23.8% 198.4%
Transaction 20 96 10.00% 5.28% 0.59% 22.1% 204.8%
Transaction 21 103 6.52% 4.76% 0.22% 18.2% 183.3%
Transaction 22 56 3.79% 5.00% (0.16%) 21.9% 198.8%
Transaction 23 N/A 18.14% 4.98% 1.79% 21.4% 225.4%
Transaction 24 63 12.04% 4.17% 0.97% 17.9% 186.6%
Transaction 25 65 16.26% 4.13% 1.56% 22.4% 204.5%
Transaction 26 63 13.89% 4.05% 1.31% 19.2% 185.7%
Transaction 29 N/A N/A 4.82% N/A 19.3% 205.8%
Transaction 30 175 10.10% 5.16% 0.60% 17.8% 180.2%
Transaction 31 N/A 18.03% 5.02% 1.40% 16.7% 208.1%
Transaction 32 59 4.37% 5.57% (0.17%) 22.2% 196.4%
Transaction 33 177 12.94% 6.99% 0.70% 13.8% 165.7%
Transaction 34 82 8.82% 6.66% 0.28% 18.9% 194.1%
Transaction 35 N/A - 5.00% (0.60%) 19.7% 196.7%
Transaction 36 68 3.34% 5.18% (0.24%) 19.2% 180.4%
Transaction 38 64 10.03% 5.07% 0.66% 27.7% 237.3%
Transaction 39 N/A N/A 3.15% N/A 8.5% 152.2%
Transaction 40 84 N/A N/A N/A 21.0% 191.4%
Transaction 44 N/A - 4.16% (0.50%) 9.9% 142.0%
Transaction 45 135 9.68% 4.46% 0.67% 8.2% 119.3%
Transaction 46 118 6.78% 4.33% 0.33% 7.1% 111.2%
Transaction 47 46 3.68% 4.34% (0.08%) 22.5% 211.0%
Transaction 49 185 134.42% 3.94% 14.70% 11.0% 131.4%
Transaction 50 185 N/A 4.25% N/A 12.7% 136.6%
Transaction 56 57 7.61% 4.53% 0.41% 22.1% 198.2%
Transaction 57 57 7.61% 4.53% 0.41% 47.2% 1151.0%
Transaction 58 59 5.23% 4.04% 0.16% 24.8% 212.7%
Transaction 59 59 5.23% 4.04% 0.16% 51.9% 1656.8%
Transaction 61 45 2.14% 4.04% (0.26%) 18.1% 170.3%
Transaction 63 66 3.52% 4.78% (0.17%) 19.6% 192.3%
Transaction 64 46 N/A N/A N/A 23.2% 216.4%
Transaction 65 71 7.89% 4.96% 0.37% 14.6% 156.4%
Transaction 66 51 3.53% 4.05% (0.07%) 22.8% 216.7%
Transaction 68 50 6.77% 4.41% 0.30% 28.0% 260.0%
Transaction 69 46 8.05% 5.61% 0.33% 27.0% 242.8%
Transaction 71 185 - 4.25% (0.51%) 27.2% 105.6%
Transaction 72 57 7.61% 4.53% 0.41% 18.0% 99.8%
Transaction 73 57 7.61% 4.53% 0.41% 18.0% 99.8%
Transaction 74 59 5.23% 4.04% 0.16% 21.4% 109.7%
Transaction 75 168 4.36% 4.05% 0.10% 11.6% 67.0%
Transaction 76 135 9.68% 2.43% 0.93% 31.3% 119.4%
Transaction 77 213 5.75% 5.04% 0.25% 13.4% 50.0%
Transaction 78 175 6.00% 4.00% 0.74% 16.5% 67.5%
Transaction 79 179 4.02% 4.00% 0.01% 8.9% 44.9%
Transaction 80 185 4.00% 4.17% (0.08%) 10.8% 46.7%
Transaction 81 194 5.01% 4.00% 0.49% 9.0% 34.3%
Transaction 82 207 4.10% 4.00% 0.05% 7.9% 34.2%
Transaction 83 193 7.09% 6.17% 0.57% 14.3% 30.7%
Transaction 84 184 4.11% 4.02% 0.06% 15.7% 41.1%
Transaction 85 171 5.03% 5.01% 0.02% 9.0% 24.2%
Transaction 87 199 4.18% 4.00% 0.22% 5.1% 12.3%
Transaction 88 200 4.02% 4.02% 0.01% 11.8% 13.8%
Transaction 89 195 3.97% 3.96% 0.05% 11.1% 0.0%
US CLO
Subtotal: 95 7.52% 4.50% 0.42% 155.4%
Total CLO
Portfolio: 91 7.34% 4.52% 0.38% 141.1%
Notes
(i) Transactions are investments made on a particular investment
date. Multiple transactions may be associated with the same tranche
of the same CLO deal. Note that certain transactions may have been
removed from the table above, as the remaining value of the assets
of those CLOs is immaterial. Such transactions may continue to be
held as of the date of this report.
(ii) The USD investment cost reflects a USD-EUR exchange rate
fixed at a single historical rate to avoid the impact of skewed
weightings and FX volatility over time. As such, the investment
costs of European CLOs as shown in this table may not be comparable
to the investments costs as shown in TFG's financial
statements.
(iii) Par weighted-average spread over LIBOR or EURIBOR (as
appropriate) of the underlying loan assets in each CLO's
portfolio.
(iv) Notional weighted-average spread over LIBOR or EURIBOR (as
appropriate) of the debt tranches issued by each CLO, as of the
closing date of each transaction.
(v) Notional weighted-average spread over LIBOR or EURIBOR (as
appropriate) of the debt tranches issued by each CLO, as of the
most recent trustee report date.
(vi) The current junior-most O/C cushion is the excess (or
deficit) of the junior-most O/C test ratio over the test
requirement, as of the latest trustee report available as of the
report date. Calculations are stated as "N/A" In certain cases
where debt has been substantially, but not fully, repaid, resulting
in a junior-most O/C test cushion that is not meaningful.
(vii) The junior-most O/C cushion at close is the excess (or
deficit) of the junior-most O/C test ratio over the test
requirement that was expected on each deal's closing date. Please
note that two of TFG's investments are so called "par structures"
which don't i nclude a junior O/C test. They have been marked by an
"N/A" in the relevant junior-most O/C test columns.
(viii) Calculated by annualizing the change from the expected
closing date junior-most O/C cushion to the current junior-most O/C
cushion.
(ix) Calculated from TFG's investment date. Includes both
historical cash flows received to-date and prospective cash flows
expected to be received, based on TFG's base case modeling
assumptions.
(x) Inception to report date cash flow received on each
transaction as a percentage of its original cost.
CLO EQUITY
PORTFOLIO DETAILS (CONTINUED)
AS OF 30 SEPTEMBER 2014
[Figure 28]
APPENDIX IV
SHARE RECONCILIATION AND SHARE
HOLDINGS
U.S. GAAP TO FULLY DILUTED SHARES
RECONCILIATION
Figure 29
U.S. GAAP to Fully Diluted Shares Reconciliation
30 Sep 2014
Shares (MM)
Legal Shares Issued and Outstanding 135.6
Less: Shares Held In Subsidiary (16.6)
Less: Shares Held In Treasury (12.8)
Less: Escrow Shares(29.i) (11.8)
U.S. GAAP Shares Outstanding 94.5
Add: Manager (IPO) Share Options(29.ii) 1.0
Add: Escrow Shares(29.i) 11.8
Pro Forma Fully Diluted Shares 107.2
As previously disclosed, on 28 October
2014, approximately 1.2 million non-voting shares of TFG
(together with accrued dividends and previously vested shares, the
“Vested Shares”) that were issued pursuant to TFG’s acquisition in
October 2012 of TFG Asset Management
L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates
(the “Polygon Transaction”) will vest with certain persons (other
than Messrs. Griffith and Dear) (such persons, the “Sellers”), all
of whom are employees of TFG, pursuant to the Polygon
Transaction.
Certain of these employees may enter into sales trading plans
(each a, “Fixed Trading Plan”) providing for the sale of up to an
aggregate of approximately 550,000 Vested Shares in the market or
may otherwise sell some or all of their Vested Shares subject to
applicable compliance policies. Beginning on 14 November 2014, applicable brokerage firms may
be authorized to sell such TFG shares under the relevant Fixed
Trading Plan pursuant to certain irrevocable
instructions. Each Fixed Trading Plan is intended to comply
with Rule 10b5-1 under the United States Securities Exchange Act of
1934, as amended. Each Fixed Trading Plan has been approved by
TFG in accordance with its applicable compliance
policies. Employees of TFG may enter into additional trading
plans in the future from time to time.
Certain Sellers expect to sell to Messrs. Griffith and Dear as
well an employee of TFG an aggregate of approximately 160,000
Vested Shares on 5 November 2014 at a
price equal to the volume-weighted average trading price of the TFG
shares over the period from 17 October through 30 October
2014. If purchased, Messrs. Griffith and Dear have advised
TFG that they have no plans to dispose of these shares.
For additional information regarding the Polygon Transaction and
the future vesting schedule for shares issued thereunder, see Note
19 to the 2013 Tetragon Financial Group Master Fund Limited audited
financial statements, included in the TFG 2013 Annual Report.
Rule 10b5-1 provides a “safe harbor” that is designed to permit
individuals to establish a pre-arranged plan to buy or sell company
stock if, at the time such plan is adopted, the individuals are not
in possession of material, nonpublic information.
BOARD OF DIRECTORS
Paddy Dear Reade Griffith Rupert Dorey*
Frederic Hervouet* Byron Knief* David Jeffreys*
*Independent Director
SHAREHOLDER INFORMATION
Registered Office of TFG and the
MasterFund
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
Investment Manager
Tetragon Financial Management LP
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
General Partner of Investment
Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Investor Relations
David Wishnow / Greg Wadsworth
ir@tetragoninv.com
Press Inquiries
Sard Verbinnen & Co
tetragon-svc@sardverb.com
Auditors
KPMG Channel Islands Ltd.
20 New Street
St. Peter Port, Guernsey
Channel Islands GY1 4AN
Sub-Registrar and Transfer Agent
Computershare
One Wall Street
New York, NY 10286
United 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
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
United States of America
Legal Advisor (as to Guernsey 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 N.V.
Administrator and Registrar
State Street (Guernsey)
Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
END NOTES
Executive Summary and Outlook
(1) TFG invests substantially all its capital through a
master fund, Tetragon Financial Group Master Fund Limited
("TFGMF"), in which it holds 100% of the issued shares. In this
report, unless otherwise stated, we report on the consolidated
business incorporating TFG and TFGMF. References to "we" or
"our" are to Tetragon Financial Management LP, TFG's investment
manager.
(2) Please refer to Financial Highlights on page 24 for the
definitions of Net Economic Income and Adjusted EPS.
(3) Please see Endnote 2.
(4) TFG's returns will most likely fluctuate with LIBOR. LIBOR
directly flows through some of TFG's investments and, as it can be
seen as the risk-free short-term rate, it should affect all of
TFG's investments. In high-LIBOR environments, TFG should achieve
higher sustainable returns; in low-LIBOR environments, TFG should
achieve lower sustainable returns.
(5) Please see Endnote 4.
(6) The percentage of TFG's capital that is externally
managed is calculated by dividing the sum of the U.S. GAAP fair
value of all investment assets managed by parties other than TFG or
its affiliates, by the total Net Asset Value of the company.
(7) Includes GreenOak Real Estate, LP ("GreenOak"), funds
and advisory assets, AUM for Polygon Recovery Fund LP, Polygon
Convertible Opportunity Master Fund, Polygon European Equity
Opportunity Master Fund and associated managed account, Polygon
Mining Opportunity Master Fund, Polygon Global Equities Master Fund
and Polygon Distressed Opportunities Master Fund, as calculated by
the applicable administrator for value date 30 September 2014. Includes, where relevant,
investments by Tetragon Financial Group Master Fund
Limited. TFG Asset Management AUM as used in this report
includes the assets under management of several investment
advisers, including Tetragon Asset Management L.P., and GreenOak
Real Estate, LP, each of which is an investment manager registered
under the U.S. Investment Advisers Act of 1940.
(8) Fee income nets off cost of recovery on "Other fee
income" against this cost contained in "Operating, employee, and
administrative expenses," and includes amounts earned through
third-party fee sharing arrangements. It also includes any fees
earned through fees paid on investments made by TFG in Polygon
hedge funds or other investment vehicles. TFG is able to invest at
a preferred level of fees.
Key Metrics
(9) Please refer to Financial Highlights on page 24 for the
definition of Return on Equity ("RoE").
(10) Please see Endnote 4.
(11) Please refer to Financial Highlights on page 24 for the
definition of Net Economic Income.
(12) Please refer to Financial Highlights on page 24 for
the definition of Adjusted EPS.
(13) Polygon Global Partners LP and Polygon Global Partners LLP
and certain of their affiliates, hereinafter referred to in this
report as "Polygon."
(14) Please refer to Financial Highlights on page 24 for
the definitions of Pro Forma Fully Diluted Shares and Pro Forma
Fully Diluted NAV per Share.
(15) Please see Endnote 4.
Cash Flow & Uses of Cash
(16) GreenOak Real Estate, LP, a separately registered
investment adviser with the U.S. Securities and Exchange
Commission) hereinafter referred to in this report as "GreenOak".
TFG owns a 23% stake in GreenOak.
Investment Portfolio
(17) The CLO asset characterizations referenced 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.
(18) For each CLO, TFG's indirect exposure to the underlying
assets is calculated by multiplying the total par amount of the
CLO's assets by the percentage of the equity tranche owned by TFG.
Each CLO's data is as of the date of the latest available trustee
report.
(19) Please note that TFG may hold more than one investment
in any CLO transaction within its portfolio.
(20) Based on the most recent trustee reports available as
of 30 September 2014.
(21) LCM Asset Management LLC, hereinafter referred to in
this report as "LCM."
(22) Based on the most recent trustee reports available as
of 30 September 2014.
(23) Based on the most recent trustee reports available as of
30 September 2014.
TFG Asset Management
(24) TFG owns a 23% stake in GreenOak and for accounting
purposes treats this stake as an investment rather than
consolidating the underlying net assets and net income of this
business. Any change in the calculated fair value of the 23% stake
in GreenOak will be reflected through the TFG Asset Management
segment below the EBITDA equivalent line.
(25) Unrealised Polygon performance fees represent the fees
calculated by the applicable administrator of the relevant Polygon
funds, in accordance with the applicable fund constitutional
documents, when determining net asset value at quarter end, less
certain assumed costs. Similar amounts, if any, from LCM and
GreenOak are excluded from this line item. Such fees would
typically not be realised or recognised under U.S. GAAP until
calendar year end, and are therefore subject to change based on
fund performance during the remainder of the year. There are can be
no assurance that the company will realise all or any portion of
such amounts. Through 30 September
2014, this amount equalled $4.1
million before (1) an assumed imputed tax charge and (2)
estimated TFM performance fees reduced the net contribution to
$2.2 million as shown in Figure 11
and further represented in Figures 18 and 19 of this report. It
also includes any unrealised performance fees to potentially be
paid on investments made by TFG in Polygon hedge funds or other
investment vehicles. TFG is able to invest at a preferred level of
fees.
(26) The LCM V, LCM VI, LCM IX, LCM X, LCM XI, LCM XII, LCM
XIII, LCM XIV, LCM XV and LCM XVI CLOs are referred to as the "LCM
Cash Flow CLOs." 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.
Financial Review
(27) Please see Endnote 25.
(28) Pro Forma Fully Diluted NAV per Share seeks to reflect
certain potential changes to the total non- voting shares over the
next few years, which may be utilised in the calculation of NAV per
Share. Specifically, the number of shares used to calculate U.S.
GAAP NAV per Share has been adjusted to incorporate:
(i) The Escrow Shares, which have been used as consideration for
the acquisition of Polygon and applicable stock dividends relating
thereto, and which are held in escrow and are expected to be
released and incorporated into the U.S. GAAP NAV per Share over the
next three years.
(ii) The number of shares corresponding to the applicable
intrinsic value of the options issued to the Investment Manager at
the time of the company's IPO with a strike price of $10.00, to the extent such options are in the
money at period end. The intrinsic value of the manager (IPO) share
options is calculated as the excess of (x) the closing price of the
shares as of the final trading day in the relevant period over (y)
$10.00 (being the exercise price per
share) times (z) 12,545,330 (being a number of shares subject to
the options before the application of potential anti-dilution). The
terms of exercise under the options allow for exercise using cash,
as well as, with the consent of the board of the company, certain
forms of cashless exercise. Each of these prescribed methods of
exercise may give rise to the issuance of a different number of
shares than the approach described herein. If the options were to
be surrendered for their intrinsic value with the board's consent,
rather than exercised, the number of shares issued would equal the
intrinsic value divided by the closing price of the shares as of
the final trading day in the relevant period. This approach has
been selected because we currently believe it is more reasonably
illustrative of a likely outcome if the options are exercised. The
options are exercisable until 26 April
2017.
Appendix IV
(29) Please see endnote 28.
An investment in TFG involves substantial risks. Please refer
to the company's website
at http://www.tetragoninv.com for a
description of the risks and uncertainties pertaining to an
investment in TFG.
This release does not contain or
constitute an offer to sell or a solicitation of an offer to
purchase securities in the United
States or any other jurisdiction. The securities of TFG have
not been and will not be registered under the U.S. Securities Act
of 1933 (the "Securities Act"), as amended, and may not be offered
or sold in the United States or to
U.S. 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 U.S.
Investment Company Act of 1940, and investors will not be entitled
to the benefits of such Act. TFG is registered in the public
register of the Netherlands Authority for the Financial Markets
under Section 1:107 of the FMSA as a collective investment scheme
from a designated country. This release constitutes regulated
information ("gereglementeerde informative") within the meaning of
Section 1:1 of the FMSA.
SOURCE Tetragon Financial Group Limited
