Interim Report
August 28 2009 - 11:58AM
UK Regulatory
TIDMCDO
RNS Number : 2454Y
Carador PLC
28 August 2009
Carador PLC
28 August 2009
Half Yearly Report
The Company has today released its Interim Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2009. The Report will
shortly be available from the Company's website www.carador.co.uk and will
shortly be available for inspection at the UK Listing Authority's Document
Viewing Facility, which is located at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the six months ended 30 June 2009. The
financial information for the six months ended 30 June 2009 is derived from the
Interim Report and Unaudited Condensed Financial Statements of the Company for
the six months ended 30 June 2009 an extract of which is set out below.
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'
collateralised by senior secured bank loans and equity and mezzanine tranches of
CDOs.
RESPONSIBILITY STATEMENT
In preparing these condensed financial statements for the six month period to 30
June 2009 the Directors confirm that, to the best of our knowledge:
(a) the condensed set of financial statements has been prepared in accordance
with the international accounting standard applicable to the interim financial
reporting adopted pursuant to the procedure provided for under Article 6 of
Regulation (EC) No. 1606/2002 of the European Parliament and the Council of 19
July 2002;
(b) the interim management report includes a fair review of the information
required by Regulation 8(2) and Regulation 5(4)(c) of the Transparency
(Directive 2004/109/EC) Regulations 2007 (indication of important events during
the first six months and description of principal risks and uncertainties for
the remaining six months of the year);
(c) the interim management report includes a fair review of the information
required by Regulation 8(3) of the Transparency (Directive 2004/109/EC)
Regulations 2007 (disclosure of related parties' transactions and changes
therein); and
(d) the condensed set financial statements give a true and fair view of the
assets, liabilities, financial position and profit/loss of the Company and the
Group.
The half-yearly financial report has not been audited or reviewed by the
independent auditor.
Werner Schwanberg Chairman
Claudio Albanese Director
Edward D'Alelio Director
Nicholas Moss Director
Fergus Sheridan Director
Adrian Waters Director
26 August 2009
CHAIRMAN'S REPORT
I present herewith the interim report and unaudited accounts for Carador plc
('Carador' or the 'Company').
The first half of 2009 has seen an improvement in market sentiment despite the
significant increase in the leveraged loan default rate, highlighting the
influence of technical factors in the loan market sell off in 2008.
The Credit Suisse Leveraged Loan Index was 27.1% higher in the six months to 30
June 2009. The return of the index in 2008 was -28.8%. As a result, leveraged
loans have been one of the best performing asset classes in 2009 with similar
returns to unsecured high yield bonds (27.2%()) and significantly outperforming
equities (S&P500 year-to-date return: 3.2%) and investment grade corporate bonds
(Credit Suisse Liquid US Corporate Bond Index year-to-date return: 9.6%).
Off-setting the recovery in trading levels, the long anticipated increase in
default rates began to materialise. Over the first three months of this year
fifteen issuers defaulted on US$28 billion of institutional loans, by far the
biggest default period on record. As a result, the twelve month lagging default
rate by principal amount jumped to 8.0% in March from 3.8% at year-end. The rate
by number of loans climbed to a 6.25 year high of 4.8% from 4.4%. For the first
quarter of 2009 the annualized default rate soared to an all-time high of 19.2%,
exceeding even the 14.5% annualized rate from the second quarter of 2002, when
Adelphia Communications, the largest loan issuer at the time, filed for Chapter
11().
Another concern for CLOs is the effect of downgrades on their
overcollateralisation test ("OC Tests") which are normally adjusted to reflect
not only defaults but also the proportion of CCC rated assets in the portfolios.
The share of CCC loans among rated issuers jumped to 9.6% at the end of March
2009 (by loan rating), just inside February's all-time high of 10.8%, but up
from 5.7% at the end of 2008. To put this number in context, the CCC
concentration has never before exceeded 5.2%().
The second quarter, however, saw a decrease in the number of defaults, with only
five companies defaulting in June across the high yield bond and loan markets,
the lowest number since September 2008(). Despite this relative improvement, the
rolling twelve month leveraged loan notional default rate stands at 11.0%, an
all time high (previously 7.5%, June 2000). Based on the number of issuers
defaulting, the rolling twelve month default rate is 7.2% (all time high is
8.2%, December 2000)(4).
Performance during the six month period ended 30 June 2009
During the six month period ended 30 June 2009 the Company incurred a net loss
of EUR9,088,372 and losses per Euro share of EUR0.05. The Board declared interim
dividends of EUR0.0015 per Euro share (US$0.0019 per USD share) in respect of the
quarterly period ended 31 December 2008 and EUR0.0131 per Euro share (US$0.0173
per USD share) in respect of the quarterly period ended 31 March 2009.
The performance of the Company's equity portfolio has been affected by the
number of defaults and CCC downgrades, and their effect on the OC Tests of
several transactions, which have diverted cash flows to repay senior debt. The
improvement in prices, particularly in CCC rated loans, has provided some relief
but this requirement to repay senior debt in order to cure the OC Tests is
likely to put pressure on the cash flows received from subordinated CLO
investments. The performance of the senior notes in the portfolio has been
positive but has come mainly in the form of principal prepayments, which the
Company cannot use to fund dividend distributions. As a consequence we
anticipate a lower level of distributions in the near future which may be
compensated in part by potential capital gains in the senior investments. As of
the end of June, 20.6% of the Company's portfolio comprised of cash and 14.3% in
senior tranches of CLOs.
On 13 July 2009, the Board declared an interim dividend of EUR0.0149 per Euro
share (US$0.0208 per USD share) in respect of the quarterly period ended 30 June
2009.
CHAIRMAN'S REPORT (continued)
Principal risks and uncertainties for the remainder of the year
The Company's net asset value decreased by EUR0.065 per Euro share in the period
which, when adjusted for the dividends paid in the period ended 30 June 2009,
equates to a decrease of EUR0.0796 or 17%. As at 30 June 2009, the Company's
portfolio had exposure to 41 loan portfolios. 34.9% of the investment portfolio
is invested in cash or senior tranches (AAA/AA original rating) of CLOs. The
portfolio is diversified across 26 managers.
Material events
On 9 March 2009, shareholders approved the amendment to the investment objective
and investment policy, proposed in a circular to shareholders dated 13 February
2009. The amendment permits investment by the Company in the Senior Notes of
CDOs which are collateralised by senior secured bank loans, namely CLOs.
Outlook
The decision by the Company's shareholders to amend the investment policy to
allow investment in senior notes of CLOs has proven to be prudent. As a result
of this change, it is believed that the Company is well positioned to take
advantage of potential opportunities presented by the current market dislocation
and has 20.6% of its assets held in cash in order to take advantage of any
opportunities that arise.
The directors are mindful of the significant discount of the current share price
to the NAV and are considering what appropriate action may be taken to narrow
the discount, insofar as is possible, in the current market conditions.
Werner Schwanberg
Chairman
26 August 2009
INVESTMENT MANAGER'S REVIEW
For the six month period ended 30 June 2009
Market Overview:
The Chairman's report provides a clear overview of the fundamental challenges
faced by the leveraged loan and CLO markets. CLOs have proved to be structurally
sound, reacting to the increase in default rates and CCC downgrades by diverting
cash flows to the senior tranches, aiming to reduce leverage and bring the
structure back in compliance with the overcollateralisation tests ("OC Test") if
breached. Fears of potential unwinds of CLO portfolios based on market value or
fundamental factors have to date proved to be unfounded. CLO spreads decoupled
from the underlying loan market during the first quarter of 2009 but tightened
during the second quarter on the back of investor demand and relative value
considerations versus the underlying loan portfolios.
The following table summarizes cumulative returns for the respective periods
across credit and benchmark assets classes().
+-----------------------------+------------+----------+---------+----------+
| | 2008 | 1Q09 | 2Q09 | 1H09 |
+-----------------------------+------------+----------+---------+----------+
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