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 Shares
|
30-Jun-15
|
30-Sep-15
|
13-Nov-15
|
Dividends Paid
|
Total Return
|
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 (€4.7 billion)
were issued in Europe, versus 19 CLOs (€7.6 billion). Despite
the recent slowdown, global CLO issuance year to date has been
healthy at $86.5 billion in the US and at €11.8 billion in
Europe.(6)
CLO issuance for the full year is
projected to be $90-110 billion in the US and €13-14 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 €15-20 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 of Reinvestment Periods(10)
|
Underlying Loan Maturities(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%
|
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.
Certain information contained in
this document constitutes "forward-looking statements," which can
be identified by the use of forward-looking terminology such as
"may," "will," "should," "expect," "anticipate," "target,"
"intend," "continue" or "believe," or the negatives thereof, other
variations thereon or comparable terminology. Due to various
risks and uncertainties, actual events or results or the actual
performance of the Carador described herein may differ materially
from the events, results or performance reflected or contemplated
in such forward-looking statements. Any projections, forecasts and
estimates contained herein are based upon certain assumptions that
Carador considers reasonable. Projections are necessarily
speculative in nature, and it can be expected that some or all of
the assumptions underlying the projections will not materialize
and/or that actual events and consequences thereof will vary
significantly from the assumptions upon which projections contained
herein have been based. The inclusion of projections herein
should not be regarded as a representation or guarantee regarding
the reliability, accuracy or completeness of the information
contained herein, and the Fund is under no obligation to update or
keep current such information. Unless otherwise indicated,
the information provided herein is based on matters as they exist
as of the date of preparation and not as of any future date.
Recipients of this document are encouraged to contact Carador's
representatives to discuss the procedures and methodologies used to
make the projections and other information provided
herein.
Carador is an investment company
with variable capital incorporated under the laws of Ireland and
authorised by the Central Bank of Ireland as a professional
investor fund. A copy of the Carador prospectus may be
obtained from the website of the Company at
www.carador.co.uk.