TIDMCIFU
RNS Number : 9126F
Carador Income Fund PLC
17 November 2015
RNS Announcement
Carador Income Fund plc
17 November 2015
INTERIM MANAGEMENT STATEMENT
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, DIRECTLY OR
INDIRECTLY, TO U.S. PERSONS OR INTO OR IN THE UNITED STATES,
AUSTRALIA, CANADA OR JAPAN.
The following interim management statement relates to the period
from 1 July 2015 to 17 November 2015 and has been prepared solely
to provide information to meet the requirements of the Transparency
(Directive 2004/109/EC) Regulations 2007, as amended.
HIGHLIGHTS
Carador Income Fund Plc ("Carador" or the "Company"), a listed
investment company investing in the senior secured loans of
companies through collateralized loan obligations ("CLOs"(1) ),
today publishes its interim management statement for the period
from 1 July 2015 to 17 November 2015:
Financial Highlights:
- Total dividends of $0.050 per U.S. Dollar Share declared in
and paid for the period from 1 July 2015 to 17 November 2015 in
line with the target set in January 2015.
- Total 2015 NAV return per U.S. Dollar Share of -1.30% as at 30 September 2015.
- Total 2015 share return per U.S. Dollar Share of -6.57% as at 13 November 2015.
- Historic dividend yield of 13.07% (share price as at 13 November 2015).
- 1.36x dividend cover for the third quarter of 2015.
Portfolio Highlights:
- $8.5 million notional of CLO 1.0 Mezzanine Notes were traded
over the reporting period at prices around their latest marks or
higher, and
- $3.0 million notional of CLO 2.0 Mezzanine Notes were
purchased during October at a discount margin around 775bps.
- As per Carador's valuation policy, all investments in the
portfolio are valued using an average of traded prices, firm bids
or third party broker dealer mark-to-market valuations.
- As of 30 September 2015, the portfolio NAV consists of:
o CLO 2.0 Income Notes: 55.6%
o CLO 2.0 Mezzanine Notes: 24.1%
o CLO 1.0 Mezzanine Notes: 7.5%
o CLO 1.0 Income Notes: 7.1%
o Cash: 5.7%
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 CLOs,
collateralised by senior secured bank loans and equity and
mezzanine tranches of CLOs.
The Company seeks to achieve its investment objective through
investment in cashflow CLO transactions, managed by a portfolio
manager with a proven track record. It seeks to achieve
diversification across asset class, geography, manager and maturity
profile.
U.S. DOLLAR SHARE NAV AND SHARE PRICE PERFORMANCE
As at 17 November 2015, all shares in issue were U.S. Dollar
denominated. The performance of the Company by both Share Price and
NAV is set out below. Total share price return is presented from 1
July to 13 November (the last available closing price prior to
publishing this report) and total NAV return per share is presented
from 1 July to 30 September (the last available NAV prior to
publishing this report).
U.S. Dollar 30-Jun-15 30-Sep-15 13-Nov-15 Dividends Total Return
Shares Paid
Share Price
(2) $0.8700 $0.7763 $0.7650 $0.0500 -6.57%
NAV per Share
(3) $0.8891 $0.8157 n/a $0.0250 -5.62%
The NAV total return summary above does not include the dividend
of $0.0250 per U.S. Dollar Share in respect of the period from 1
July 2015 to 30 September 2015 that was paid on 4 November
2015.
INVESTMENT MANAGER'S REPORT
Loan Market Overview
Credit and equity markets continued to experience significant
volatility over the past few months as a result of global growth
concerns, mixed Federal Reserve messaging and sector-specific
weakness. Loans have proved to be relatively resilient and continue
to outperform high yield bonds. Year-to-date through mid-November,
US loans returned 0.85% compared to high yield bonds at
-1.53%.(4)
The loan market's resilience can be attributed to it having less
exposure to two major sources of market uncertainty: rates and
commodities. The floating rate coupons of senior loans protect the
asset class if the market is wrong about an extremely gradual rate
cycle. In addition, the allocation to energy is much lower in loans
(4%) versus high yield (15%). To further illustrate this point, the
performance of the European loan and high yield sectors are much
closer in line with each other as rates and commodities have much
less influence on valuations in Europe. European loans and high
yield bonds have returned 4.53% and 5.21%, respectively,
year-to-date.(5)
Despite the relative outperformance, an eroding technical
environment weighed on US loan prices, particularly as the fourth
quarter began. The average price of the S&P/LSTA Leveraged Loan
Index fell 276 bps since 2014 year-end to 93.16, the lowest level
since mid-2012.(6) As CLO production slowed, retail outflows
persisted. Consequently, demand for loans is depressed at a time
the new issue pipeline is building with significant merger-related
activity.
In addition to the deteriorating technical backdrop, we are
seeing an increase in idiosyncratic and sector-specific headlines
resulting in a bifurcated loan market. Investors are distinguishing
between high and low-quality paper to a larger degree. Year-to-date
through mid-November, BB-rated loans are up 2.91% versus the 4.30%
decline for CCC-rated loans.(4) GSO expects this divergence to
continue as default rates slowly climb in 2016 and distressed funds
face outflows following 2015's poor performance.
CLO Market Overview
CLO creation has slowed over the past few months, which we
believe was due to the decrease in loan supply and continued market
volatility. A total of 55 CLOs ($28.1 billion) were issued since
June in the US, versus 112 ($59.3 billion) for the first half of
the year, and 11 CLOs (EUR4.7 billion) were issued in Europe,
versus 19 CLOs (EUR7.6 billion). Despite the recent slowdown,
global CLO issuance year to date has been healthy at $86.5 billion
in the US and at EUR11.8 billion in Europe.(6)
CLO issuance for the full year is projected to be $90-110
billion in the US and EUR13-14 billion in Europe, even though the
pace has decelerated. However, risk retention requirements are
expected to be a minor headwind for 2016 issuance in the US, and
thus Barclays projects US issuance to be reduced to $70-80 billion.
In 2016, European CLO issuance is projected to be stronger than
2015 with a target of EUR15-20 billion given a broadening investor
base and increased manager participation stemming from the
originator structure.(7)
The bifurcation of the loan market has created a ripple effect
within the CLO market as manager tiering due to difference in
management styles and credit selection has become more evident. CLO
managers are being differentiated based on equity NAVs and
performance across deals. In the primary market, "top tier"
managers have been able to achieve tighter pricing on CLO
liabilities while managers who are not perceived as "top tier" have
priced transactions wider.
US CLO 2.0 discount margins have widened throughout the year, as
seen in the post-crisis CLO portion of the JP Morgan Collateralized
Loan Obligation Index ("CLOIE"). BB discount margins increased
104bps while Bs widened 145bps versus year-end. Current discount
margins for BB and B US CLO 2.0s were at 792bps and 976bps as of
mid-November.(8)
Default Rates
Defaults have remained low and are expected to remain below 1.5%
for the full year of 2015. The LTM loan default rate stood at 1.53%
and the LTM high yield bond default rate was 2.21%. Default
activity this year has been dominated by energy and coal defaults
as a result of weak commodity prices. Specifically, twelve energy
companies and four coal companies totalling $9.5 billion and $6.7
billion have defaulted this year, affecting 43% and 30% of year to
date default volume, respectively. JPM forecasts default rates of
3% for high yield and 2% for loans in 2016 based on an estimated
10% default rate in the energy sector.(9)
Carador Portfolio
The Company's NAV has been affected by volatility across the
market due to its mark-to-market approach. The Investment Manager
believes that this approach accurately and transparently represents
Carador's positions on a monthly basis and mark-to-market
volatility will not result in permanent losses in the
portfolio.
The Investment Manager believes that the Company's portfolio
credit quality remains benign. The default rate of Carador's
underlying assets is 0.39% as of 30 September 2015. As Carador
continues the rotation into new, longer-dated CLO investments, GSO
believes that the default rate should improve given the cleaner
pools of assets and longer-dated maturity profiles.
Currently, loans have a favourable maturity schedule as less
than 30% of total outstanding loans have scheduled maturities
before 2019. Nearly all of Carador's current CLO holdings will be
out of their reinvestment period by 2019, as shown in the table
below:
Carador Out Underlying
of Reinvestment Loan Maturities(10)
Periods(10)
2016 15.57% 1.57%
2017 52.97% 5.27%
2018 88.29% 13.98%
2019 94.21% 29.75%
2020 100.00% 56.18%
2021 100.00% 84.80%
2022 100.00% 99.12%
2023 100.00% 100.00%
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(MORE TO FOLLOW) Dow Jones Newswires
November 17, 2015 02:00 ET (07:00 GMT)
The Company has been able to trade $8.5 million notional of CLO
1.0 Mezzanine Notes at prices around their latest marks or higher,
which is a benefit of using a mark-to-market valuation method.
In October, the Company bought a BB-rated bond of a CLO managed
by Blackrock in the primary market at a target discount margin of
775bps. After month-end, the Company also made a purchase of Ares
2013-3 Income Notes in the secondary market at an estimated risk
adjusted return close to 16%.
The Company, together with other investors, has directed an
optional redemption of the Income Notes of Callidus V, a CLO 1.0
deal managed by the Investment Manager. The redemption date will be
20 November 2015 and the expected realised IRR for the investment
will be above 30%.
Outlook
The Investment Manager expects a volatile market over the medium
term and believes investors will continue to display an aversion to
distressed credit risk. This will create some attractive
opportunities where GSO can express high-conviction views at
appealing levels. Given the credit bifurcation in the CLO and the
loan markets, GSO believes that the its credit underwriting skills
and presence as both a CLO investor and a CLO issuer uniquely
places the Investment Manager to take advantage of market
dislocations.
Although the new issue CLO equity arbitrage is currently tight
due to mark-to-market warehouse losses and wider liability levels,
GSO believes that higher quality, new issue CLOs could be
attractive as the structures take advantage of wider-priced assets.
The Investment Manager expects to continue focusing on CLO 2.0
investments with cleaner portfolios and may look to take advantage
of the market volatility by investing in certain BB tranches if
discount margins continue to widen. Manager selection and credit
quality distinction will be critical.
Carador will not be immune from the mark-to-market movement seen
in the CLO equity market. While GSO is unable to control market
volatility, it can control and maintain our rigorous investment
process, which is expected to produce opportunities in this
challenging market.
DIVIDENDS
On 6 August 2015, the Company paid a dividend of $0.025 per U.S.
Dollar Share for the 2Q 2015 period.
On 4 November 2015, the Company paid a dividend of $0.025 per
U.S. Dollar Share for the 3Q 2015 period.
The above payments follow the Company's announcement in January
2015, on the basis of current market conditions, of maintaining a
target annual dividend of $0.100 per U.S. Dollar Share distributed
evenly in four quarterly payments for 2015.
MATERIAL EVENTS
On 21 July 2015, the Company announced a dividend of $0.0250 per
U.S. Dollar Share in respect of the period from 1 April 2015 to 30
June 2015.
On 27 August 2015, the Company released its unaudited interim
report including condensed interim financial statements for the
half year to 30 June 2015.
On 21 October 2015, the Company announced a dividend of $0.0250
per U.S. Dollar Share in respect of the period from 1 July 2015 to
30 September 2015.
For further information, please contact:
Dik Blewitt
GSO / Blackstone
+1 212 503 2035
Notes:
(1) CLOs are debt securities backed by a diverse portfolio of
loan assets. The CLO uses the cashflows 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 loans.
(2) Bloomberg closing price as at relevant date.
(3) Carador NAV total return, dividends reinvested in
security.
(4) S&P/LSTA Leveraged Loan Index, Barclays U.S. High Yield
Index, as of 13 November 2015.
(5) S&P European Leveraged Loan Index total return ex
currency, Barclays (Pan-European High Yield Index, as of 13
November 2015.
(6) S&P/LCD, as of 13 November 2015.
(7) Barclays Credit Research, U.S. Loans & CLOs (6 November
2015) and European Leveraged Loans and CLOs (13 November 2015).
(8) JP Morgan, as of 13 November 2015.
(9) JP Morgan Leveraged Loan Market Monitor, as of 2 November
2015.
(10) Carador Monthly Report, September 2015; Intex; BAML, US
Securitized Products Research, 23 October 2015.
Note: Past performance is not necessarily indicative of future
performance results and there can be no assurance that Carador will
achieve comparable results in the future.
Important Information
Any reference herein to future returns or distributions is a
target and not a forecast and there can be no guarantee or
assurance that it will be achieved. The actual principal and income
in any particular case will be determined by the cash flows
received.
This document has been issued by GSO / Blackstone Debt Funds
Management LLC (the "Manager"), a wholly owned subsidiary of GSO
Capital Partners LP, which is registered as an investment adviser
with the U.S. Securities and Exchange Commission. It does not
constitute an invitation and should not be taken as an inducement
to engage in any investment activity and is for the purpose of
providing information about the Manager and certain of the
Manager's affiliates, including without limitation, the Blackstone
Group LP, GSO Capital Partners LP and GSO Capital Partners
International LLP, collectively the "Manager's Affiliates". It may
not be relied upon and should not be used for the purpose of making
any investment decision. This document and the information
contained herein is not for release, publication or distribution
(directly or indirectly) in or into the United States, Canada,
Australia or Japan or to any "U.S. person" as defined in Regulation
S under the United States Securities Act of 1933, as amended (the
"Securities Act") or into any other jurisdiction where applicable
laws prohibit its release, distribution or publication. It does not
constitute or contain an offer of, or the solicitation of an offer
to buy or subscribe for, securities for sale anywhere in the world,
including in or into the United States, Canada, Australia or Japan.
This document is being furnished to you solely for your information
and no recipient may forward, reproduce, distribute, or make
available in whole or in part, this document (directly or
indirectly) to any other person. The distribution of this document
in certain jurisdictions may be restricted by law and recipients of
this document should inform themselves about and observe any such
restrictions and other applicable legal requirements in their
jurisdictions. Accordingly, recipients represent that they are able
to receive this document without contravention of any applicable
legal or regulatory restrictions in the jurisdiction in which they
reside or conduct business. By accepting this document, you agree
to be bound by the foregoing limitations. This document has been
prepared by Carador Income Fund PLC ("Carador") and is the sole
responsibility of Carador. No liability whatsoever (whether in
negligence or otherwise) arising directly or indirectly from the
use of this document is accepted and no representation, warranty or
undertaking, express or implied, is or will be made by Carador, the
Manager or any of their respective directors, officers, employees,
advisers, representatives or other agents ("Agents") for any
information or any of the opinions contained herein or for any
errors, omissions or misstatements. None of the Manager nor any of
its respective Agents makes or has been authorised to make any
representation or warranties (express or implied) in relation to
Carador or as to the truth, accuracy or completeness of this
document, or any other written or oral statement provided. In
particular, no representation or warranty is given as to the
achievement or reasonableness of, and no reliance should be placed
on any projections, targets, estimates or forecasts contained in
this document and nothing in this document is or should be relied
on as a promise or representation as to the future.
Although the portfolio reflected in this document (the
"Portfolio") is consistent with the investment strategy of the
Company, there is no guarantee that the portfolio acquired will be
identical to the make-up of the Portfolio. Moreover, the future
investments to be made by the Company may differ substantially from
the investments included in the Portfolio. Therefore, the Portfolio
parameters, industry concentration, rating concentration, spread
distribution and other factors related to the Portfolio could all
be materially different than those of the future portfolio acquired
by the Company.
Carador has not been and will not be registered under the U.S.
Investment Company Act of 1940, as amended (the "Investment Company
Act") and investors will not be entitled to the benefits of that
Act. The securities described in this document have not been and
will not be registered under the Securities Act, or the laws of any
state of the United States. Consequently, such securities may not
be offered, sold or otherwise transferred within the United States
or to or for the account or benefit of U.S. persons (as such term
is defined in Regulation S under the Securities Act) except
pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act, applicable
state laws and under circumstances which will not require Carador
to register under the Investment Company Act. No public offering of
the securities is being made in the United States. If you are in
the United States and are not either (a) a "qualified institutional
buyer" (as defined in Rule 144a under the Securities Act) who is
also a "qualified purchaser" (as defined in Section 2(a)(51) of the
Investment Company Act) for purposes of Section 3(c)(7) of the
Investment Company Act; or (b) an "accredited investor" (as defined
in Rule 501 of the Securities Act) who is either a qualified
purchaser or an eligible Investment Company Act investor, you
should not open this document and should destroy it.
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