Interim Management Statement
November 18 2009 - 6:57AM
UK Regulatory
TIDMCDO
RNS Number : 7026C
Carador PLC
18 November 2009
18 November 2009
Carador plc
("Carador" or the "Company")
Interim Management Report
The following interim management statement relates to the period commencing 1
July 2009 to 18 November 2009 and has been prepared solely to provide
information to meet the requirements of the Irish Transparency Regulations.
Investment objective
The Company's investment objective is to produce attractive and stable returns,
with low volatility compared to equity markets, by investing in a diversified
portfolio of senior notes of collateralised debt obligations or "CDOs"
collateralized by senior secured bank loans and equity and mezzanine tranches of
CDOs. CDOs are debt securities backed by a diversified pool of underlying
assets. The CDO uses the cash flows from this portfolio of assets to back the
issuance of multiple classes of rated debt securities which, together with the
Equity Notes, are used to fund the purchase of the underlying assets.
Carador performance summary(i)
+------------------------------+-----------------+------------------+---------------+
| | 30 September | 30 June 2009 | Change |
| | 2009 | | |
+------------------------------+-----------------+------------------+---------------+
| EUR Share Class: | | | |
+------------------------------+-----------------+------------------+---------------+
| Share price | 0.250 | 0.150 | +66.7% |
+------------------------------+-----------------+------------------+---------------+
| Net asset value per share | 0.4256 | 0.4205 | +1.2% |
+------------------------------+-----------------+------------------+---------------+
| Premium/(discount) | (41.3)% | (64.3)% | |
+------------------------------+-----------------+------------------+---------------+
| Share total return since | (19.5)% | (27.1)% | |
| inception(ii) | | | |
+------------------------------+-----------------+------------------+---------------+
+------------------------------+-----------------+------------------+---------------+
| | 30 September | 30 June 2009 | Change |
| | 2009 | | |
+------------------------------+-----------------+------------------+---------------+
| USD Share Class: | | | |
+------------------------------+-----------------+------------------+---------------+
| Share price | 0.325 | 0.225 | +44.4% |
+------------------------------+-----------------+------------------+---------------+
| Net asset value per share | 0.5511 | 0.5419 | +1.7% |
+------------------------------+-----------------+------------------+---------------+
| Premium/(discount) | (41.0)% | (58.5)% | |
+------------------------------+-----------------+------------------+---------------+
| Share total return since | (39.1)% | (59.3)% | |
| inception(ii) | | | |
+------------------------------+-----------------+------------------+---------------+
The NAV includes an estimated EUR 2,454,001.31 of net cash flow interest
received in the three month period ended 30 September 2009 (to be allocated
between capital and income in accordance with the Company's valuation policy),
which equates to EUR 0.0188 or USD 0.0268 per Share (iii). The level of net cash
flow interest received continues to reflect several factors including (1) the
impact of the increased level of cash in the portfolio which, as at 30 September
2009, represented 28% of the portfolio, (2) the cashflow diversion from
subordinated notes to repay senior notes in certain transactions following
breaches in their over-collateralization tests as a result of increases in CCC
assets and defaults in their underlying portfolios and (3) the low coupon
payments from the new investments in senior notes where the projected return is
based on expected principal appreciation.
In August, Carador sold its investment in the senior notes of GELCT 06-2, a 2006
vintage CLO, realising profits of $1.63 million. This investment was the first
by Carador in a senior CLO security following the change in the investment
policy approved by shareholders on 9 March 2009. Carador initially invested
$4.04 million in April 2009 and received aggregate proceeds of $5.67 million
(including $2.10 million of principal repayments) representing a total cash on
cash return of 1.4 times the initial investment over the 4 month holding period.
In September, Carador sold half of its investment in the tranche E of Inwood
Park CDO at a price of 38%, realizing profits of $0.720 million. Carador
acquired a total of $8mm notional at a price of 20% of par ($1.6mm
consideration) in October 2008. Following the September month end, Carador sold
the balance at a price of 50%, realizing additional profits of $1.2 million. In
addition, Carador has received aggregate income of $0.35 million from this
investment giving total cash on cash return of 2.84 times the initial investment
over the holding period.
The Board declared an interim distribution on 13 July 2009 of EUR0.0149 per
ordinary share in respect of the quarterly period ended 30 June 2009. US dollar
class shareholders received US$0.0208 per share, calculated at the prevailing
exchange rate on 13 July 2009 of EUR1:US$1.3949.
On 15 October 2009, the Board declared an interim distribution of EUR0.0112 per
ordinary share in respect of the quarterly period ended 30 September 2009. US
dollar class shareholders received US$0.0167 per share, calculated at the
prevailing exchange rate on 15 October 2009 of EUR1:US$1.4939.
Investment manager's review
Leveraged Loans
The US and European leveraged loan market continued to outperform many asset
classes. The Credit Suisse Leveraged Loan Index returned 9.97% for the quarter
ended 30 September 2009 and 39.77% year-to-date. The average price rose to 84.38
cents; more than 50% of the loan market now trades at a price of 90 cents or
greater compared with only 5% in December 2008 (iv).
The Credit Suisse Western European Leveraged Loan Index (hedged, in euro) also
had a positive return of 14.38% for the quarter ended 30 September 2009 and
returned 39.80% year-to-date. The average price rose to 80.85 cents. While the
European loan market has slightly lagged the US rally, the proportion of loans
trading below 80 cents has shrunk from 87% of the market in December 2008 to 48%
at the end of the third quarter (v).
CLOs
For CLOs the most notable feature of the leveraged loan market has been the
rally in CCC rated loans which have posted a year-to-date return of 75.8% as
investor's risk appetite returned. This feeds through to an improvement in many
Over Collateralisation (OC) tests. The one significant laggard has been middle
market loans. Loans of issuers with EBITDA of $50 million or less have
underperformed the broader market year-to-date, with a 27.79% return compared to
a 46.10% return for the broader market (vi). Carador has only 3 middle market
investments which make up 2.4% of NAV.
The US leveraged loan default rate rose to 9.75% in September 2009 from 9.15%
and 4.7% in June 2009 and December 2008, respectively (vii). The pace of
defaults is slowing as the capital markets help provide additional sources of
financing and business fundamentals begin to improve. There has also been a
marked slowdown in CCC downgrades, with August and September downgrade numbers
less than one third of those seen earlier in March and April (viii), which has
also benefited CLO's.
Since early May CLO spreads have tightened dramatically, despite considerable
volumes of paper for sale. While the primary market remains effectively shut,
September set a record in secondary trading in CLO paper with close to $2.5
billion (ix) in public BWICs (Bids Wanted in Competition lists), to bring the
total amount of public BWICs since late April (when the successful liquidation
of Whistlejacket SIV started the recovery in the secondary CLO market) to over
$8 billion (x). The overall volume of trading is probably significantly higher
given a large number of transactions are executed through private lists,
bypassing the BWIC market.
Several factors contributed to this large volume in September; workout groups in
some banks were looking to sell senior CLO tranches into the rally, we also saw
some selling by hedge funds that had bought bonds early in the rally and are now
looking to lock in profits.
One notable change in the secondary market has been increased activity at the
lower mezzanine and equity section of the CLO capital structure, partly driven
by some CLO-squared liquidations and investors' returning risk appetite.
The technicals remain strong with anecdotal evidence suggesting there is money
on the sidelines waiting to be put to work, and this demand will be further
increased by the improving fundamental credit outlook. In particular as, despite
the rally, Senior CLO tranches remain cheap relative to the underlying leveraged
loans and other asset classes (xi). On the supply side of the equation banks
holding these senior bonds may be tempted to sell as the rally has brought
prices closer to the levels at which the assets were moved into
available-for-sale or hold-to-maturity books (although the latter makes sales
particularly difficult). However, market surveys conclude that banks are
unlikely to sell in the near term (xii), particularly as it now appears the
rating downgrades discussed below will have a negative, but not drastic impact
on risk capital charges.
Turning to the fundamentals, the US CLO market has continued to see a steady
improvement in market value tests such as OC tests due to loan price
appreciation and as discussed above a stabilization of deteriorating hard credit
fundamentals such as defaults and CCC downgrades. Currently, it is estimated
that 94% of US CLO deals have CCC assets in excess of 10% of their portfolios,
however price recovery from an average of $38.7 in March '09 to $77.5 in
September '09 has dramatically reduced the impact on OC tests (xiii). Europe
however continues to experience weakness.
There are several reasons for this difference in performance;
* The US loan prepayments from high yield refinancing has been meaningful ($11.5Bn
YTD), proceeds of which CLOs can re-invest in loans at prices below par. The
European high yield market is far less robust (xiv).
* The US has seen far higher loan amendment fees (> 80bps) than in Europe (<20bps)
(xv) paid by corporate borrowers to alter their loan documentation which are
additional cashflow into the CLO.
* The US loan market has experienced significant increases in WAS (weighted
average spread) (+35bps) as loan terms have been renegotiated through
amendments, while Europe has been more muted (+15bps) (xvi)
The rating outlook for CLO securities continues to be negative. Within the CLO
space there have been 4,081 downgrades and 94 upgrades in 2009 (xvii). Both
agencies continue to review ratings and methodologies. Moody's Stage II process
is expected to be completed by the end of 2009. S&P have published revised
methodologies and assumptions and placed more than 2,300 CLO tranches on
negative watch as a result of this revision. S&P expects that AAA securities
will suffer a 1-2 notch downgrade while other tranches will experience a 3 notch
downgrade on average (xviii). Risk capital charges under Basel II framework
would currently be 0.56% for a bank holding AAA securities and would increase to
only 0.96% following a downgrade to A leve, which would appear to be the worst
case outcome in most transactions. Despite the fact the outlook remains
negative, the rating action is having no impact on price performance.
Carador overview:
As at the end of the month, 28% of the portfolio NAV was composed of cash,
approximately half of which is set aside for an investment in senior securities
which has yet to settle. Senior securities tranches of CLOs (originally rated
AA/AAA) made up 16% of the portfolio. By geography 18% of the portfolio is
invested in European CLOs while 82% is invested in US transactions.
In the past 6 months GSO has met with all but four of our CLO managers,
representing 98.7% of the NAV, to get an update on strategy and performance
potential. Most managers have responded well to improving technicals and have
traded their portfolios, where possible, enabling OC tests to be cured.
When compared to the CLO market as a whole, Carador's investments have superior
default rates: Carador's European CLO investments have an average default rate
of 4.4% while the European CLO market averages 5.7% (xix) and the European loan
market almost 13% (xx); in our US CLO investments the default rate averages 5.1%
while the US CLO market has a default rate of 6.5% and the loan market a rate of
9.75% (xxi). Looking at Junior OC tests, 41% of Carador's investments fail and
therefore do not receive distributions while for the market as a whole over 50%
(xxii) fail.
Portfolio analysis as at 30 September 2009 (xxiii)
By currency:
+--------------+---------------+
| EUR: | 17.86% |
+--------------+---------------+
| USD: | 82.14% |
+--------------+---------------+
| Other: | 0.00% |
+--------------+---------------+
By asset class:
+----------------------------------------------------------+-------------+
| Broadly Syndicated Sub-Investment Grade Secured | 17.28% |
| Loans-Europe | |
+----------------------------------------------------------+-------------+
| Broadly Syndicated Sub-Investment Grade Secured Loans-US | 51.19% |
| | |
+----------------------------------------------------------+-------------+
| Middle Markets Secured Loans-US | 2.43% |
+----------------------------------------------------------+-------------+
| Cash | 29.10% |
+----------------------------------------------------------+-------------+
Portfolio holdings
+----+-----------------------------------------------------------+--------+
| | Investment/Manager: | % NAV |
+----+-----------------------------------------------------------+--------+
| 1 | ACA CLO 2006-2 (Apidos) | 1.26% |
+----+-----------------------------------------------------------+--------+
| 2 | Alpstar I Euro CLO (Alpstar Management) | 0.11% |
+----+-----------------------------------------------------------+--------+
| 3 | Beach Street IV (Citi) | 4.62% |
+----+-----------------------------------------------------------+--------+
| 4 | CIFC Funding 2006-II (CIFC) | 1.10% |
+----+-----------------------------------------------------------+--------+
| 5 | CS Advisors CLO I (Capital Source) | 0.71% |
+----+-----------------------------------------------------------+--------+
| 6 | Denali Capital CLO VI (DC Funding Partners LLC) | 0.75% |
+----+-----------------------------------------------------------+--------+
| 7 | Duchess VII (Babson Capital) | 0.45% |
+----+-----------------------------------------------------------+--------+
| 8 | Eaton Vance CDO VIII (Eaton Vance) | 1.12% |
+----+-----------------------------------------------------------+--------+
| 9 | Egret Funding CLO I (Egret/SocGen) | 0.51% |
+----+-----------------------------------------------------------+--------+
| 10 | Eurocredit CDO II (ICG) | 0.14% |
+----+-----------------------------------------------------------+--------+
| 11 | Eurocredit VI (ICG) | 0.43% |
+----+-----------------------------------------------------------+--------+
| 12 | Euro-Galaxy CLO (AIG) | 0.86% |
+----+-----------------------------------------------------------+--------+
| 13 | Foxe Basin CLO (GSO/Blackstone Debt Funds Management LLC) | 0.09% |
+----+-----------------------------------------------------------+--------+
| 14 | FM Leveraged Capital Fund II (GSO/Blackstone Debt Funds | 0.57% |
| | Management LLC) | |
+----+-----------------------------------------------------------+--------+
| 15 | Gale Force 1 CLO (GSO/Blackstone Debt Funds Management | 0.79% |
| | LLC) | |
+----+-----------------------------------------------------------+--------+
| 16 | Gale Force 2 CLO (GSO/Blackstone Debt Funds Management | 11.84% |
| | LLC) | |
+----+-----------------------------------------------------------+--------+
| 17 | Gale Force 3 CLO (GSO/Blackstone Debt Funds Management | 4.26% |
| | LLC) | |
+----+-----------------------------------------------------------+--------+
| 18 | Gale Force 4 CLO (GSO/Blackstone Debt Funds Management | 14.44% |
| | LLC) | |
+----+-----------------------------------------------------------+--------+
| 19 | GLC CLO I (Global Leveraged Capital, LLC) | 0.10% |
+----+-----------------------------------------------------------+--------+
| 20 | Gresham II (Investec) | 0.05% |
+----+-----------------------------------------------------------+--------+
| 21 | Harbourmaster 7 (Harbourmaster) | 0.09% |
+----+-----------------------------------------------------------+--------+
| 22 | Harvest III Euro CLO (Mizuho Leveraged Finance) | 0.28% |
+----+-----------------------------------------------------------+--------+
| 23 | Harvest IV Euro CLO (Mizuho Leveraged Finance) | 0.06% |
+----+-----------------------------------------------------------+--------+
| 24 | Hudson Straits CLO 2004 Ltd. (GSO/Blackstone Debt Funds | 3.03% |
| | Management LLC) | |
+----+-----------------------------------------------------------+--------+
| 25 | Inwood Park CDO (Blackstone Debt Advisors LP) | 0.69% |
+----+-----------------------------------------------------------+--------+
| 26 | Inwood Park CDO (Blackstone Debt Advisors LP) | 1.86% |
+----+-----------------------------------------------------------+--------+
| 27 | Leopard IV CLO (Prudential M&G) | 0.64% |
+----+-----------------------------------------------------------+--------+
| 28 | Leopard V CLO (Prudential M&G) | 5.05% |
+----+-----------------------------------------------------------+--------+
| 29 | Leveraged Finance Europe Capital IV (BNP) | 0.55% |
+----+-----------------------------------------------------------+--------+
| 30 | Mountain View II (Seix Advisors) | 0.47% |
+----+-----------------------------------------------------------+--------+
| 31 | Mountain View III (Seix Advisors) | 2.11% |
+----+-----------------------------------------------------------+--------+
| 32 | Navigator CDO 2004 (GE Asset Management) | 0.11% |
+----+-----------------------------------------------------------+--------+
| 33 | NYLIM Flatiron CLO 2006-1X (New York Life) | 1.44% |
+----+-----------------------------------------------------------+--------+
| 34 | Panther CDO III (Prudential M&G) | 0.45% |
+----+-----------------------------------------------------------+--------+
| 35 | Prospect Park CLO (Blackstone Debt Advisors LP) | 1.77% |
+----+-----------------------------------------------------------+--------+
| 36 | RMF Euro CLO III (RMF Investment Management) | 0.81% |
+----+-----------------------------------------------------------+--------+
| 37 | RMF Euro CLO IV (RMF Investment Management) | 0.98% |
+----+-----------------------------------------------------------+--------+
| 38 | Skell 2006-1 X 30/11/2022 (AIB) | 0.33% |
+----+-----------------------------------------------------------+--------+
| 39 | Venture VII (MJX Asset Management) | 1.33% |
+----+-----------------------------------------------------------+--------+
| 40 | Versailles (BNP) | 0.86% |
+----+-----------------------------------------------------------+--------+
| 41 | Westbrook CLO (Shenkman Capital Management) | 3.80% |
+----+-----------------------------------------------------------+--------+
Outlook
We continue to explore opportunities to acquire assets, particularly senior CLO
notes, and to selectively take profits. Continued defaults and CCC downgrades
will have a negative effect on CLO transactions' OC ratios and could affect
distributions to be received from such investments.
Material events
Other than described above, the Board is not aware of any material events during
the period from 1 July 2009 to the date of publication of this statement which
would have had a material impact on the financial position of the Company.
Investor Enquiries:
Paul Noonan
Northern Trust Investor Services (Ireland) Limited Tel: + 353 1 542 2487
Notes to Editors:
About Carador plc:
Carador is a close-ended limited liability investment company which was
incorporated under the laws of Ireland on 20 February 2006 and is authorised by
the Irish Financial Services Regulatory Authority. It was the first London Stock
Exchange traded diversified cash flow CDO fund. The Company's investment
objective is to produce attractive and stable returns, with low volatility
compared to equity markets, by investing in a diversified portfolio of senior
notes of collateralised debt obligations or "CDOs" collateralized by senior
secured bank loans and equity and mezzanine tranches of CDOs.
Further information relating to Carador, including monthly factsheets published
since inception, can be found at the Company's website on www.carador.co.uk.
However, due to applicable securities laws and regulations, this information is
only availably to persons resident in certain jurisdictions.
About GSO Capital Partners LP:
GSO Capital Partners LP (together with its affiliates, including GSO Capital
Partners International LLP, Carador's investment manager ("GSO")) is a leading
credit-oriented alternative asset manager with approximately $24.3 billion of
assets under management as of 31st October 2009. GSO manages senior debt funds,
hedge funds and mezzanine funds focused on the leveraged finance marketplace.
GSO was acquired by The Blackstone Group L.P. in March 2008, following which
Blackstone's debt investment businesses were combined with GSO's operations.
Further information is available at www.blackstone.com/maam/gso.
__________________________
(i) Source: Bloomberg. Past performance is not a guide to future performance
(ii) Source: Bloomberg TRA function (total share price return analysis).
Inception: 12 April 2006 for EUR class return annualised, 11 December 2008 for $
Class return not annualised. Dividends reinvested at Libor.
(iii) Source: Northern Trust
(iv) Source:S&P LCD
(v) Source:S&P LCD
(vi) Source:S&P LCD
(vii) Source:S&P LCD
(viii) Source:S&P LCD
(ix) Source: Citibank "Global Structured Credit Strategy" October 2009
(x) Source: Citibank "Global Structured Credit Strategy" October 2009
(xi) Source Morgan Stanley "CDO Market Insights" September 18th 2009.
(xii) Source: Citibank "Global Structured Credit Strategy" October 2009
(xiii) Source Morgan Stanley
(xiv) Source S&P LCD
(xv) Source: Citibank "Global Structured Credit Strategy"
(xvi) Source: Citibank "Global Structured Credit Strategy"
(xvii) Source Morgan Stanley "CDO Market Insights" September 18th 2009.
(xviii) Source S&P LCD
(xix) Source JPMorgan CLO Outlook October 2009
(xx) Source BofA ML European CLO converge to US October 2009.
(xxi) Source JPMorgan CLO Outlook October 2009
(xxii) Source BofA ML European CLO converge to US October 2009.
(xxiii) Source: GSO Capital Partners International LLP
This information is provided by RNS
The company news service from the London Stock Exchange
END
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