Replacement Annual Financial Report -3-
April 30 2010 - 11:47AM
UK Regulatory
On the supply side of the equation, too, banks holding these senior bonds may
have been 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 most market
participants conclude that banks are unlikely to sell in the near term,
particularly as it now appears the rating downgrades discussed below have a
negative, but not drastic impact on risk capital charges.
(1)-Source: S&P LCD
(2)-Source: JP Morgan
(3)-Source: S&P LCD
(4)-Source: S&P LCD
(5)-Source: Citibank "Global Structured Credit Strategy" December 2009
(6)-Source: Citibank "Global Structured Credit Strategy" December 2009
(7)-Source: Morgan Stanley "CDO Market Insights"
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2009
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 stabilisation in the deterioration of
hard credit fundamentals such as defaults and CCC downgrades. The European CLO
market, however, shows continued weakness in OC ratios
The difference between Europe and US is even more striking in the Senior OC
tests which have on average, in the US, improved by more than 1.5% points since
June 09, while in Europe they have deteriorated by 1.8% points over the same
period(1).
The rating outlook for CLO securities has stabilized. While S&P continue to
downgrade CLOs based on the methodology released in September 2009, Moody's has
now completed its global rating revision. In total $253bn of CLO paper in the
agency's CLO universe was downgraded. Europe slightly outperformed, with 84% of
the European deal count downgraded, versus close to 87% for US deals. In Europe,
AAA rating stability was better than that of the US (possibly a reflection of
higher initial credit enhancements), with approximately 47% of initially-rated
Aaa remaining so, while the comparable figure in the US was 35%. The average Aaa
downgrade was 2 notches. In light of receding credit deterioration in underlying
pools, negative rating migration trends should now decelerate significantly.
Fund performance(2)
During 2009 the Company's NAV per share declined by 10.2% (EUR class) and 8.7%
(US$ class). This was offset by the dividends distributed during the year which
equated to 10.0% of the opening EUR class NAV and 11.1% of the opening US$ class
NAV, giving a total return for the year in the EUR Class of -0.2% and for the US$
Class of +2.4%.
As highlighted in the strategy update in February 2010, in light of the rally in
CLO paper in the autumn of 2009, we decided to sell certain of the CLO equity
positions which we believed had limited future upside. Consequently, two BWICs
were undertaken at the end of November and early December, relating to, in
aggregate, 20 positions out of a total of 36 equity holdings in the portfolio.
Multiple bids were received on all positions and, in aggregate, 14 positions
were sold and the balance retained. The average bid received for the 20
positions as a percentage of the Company's latest valuation of each position for
the purpose of calculating net asset value was 102.3%, resulting in a small
realised gain on disposal.
We believe that this trading activity has underscored the accuracy of the
Company's net asset value calculation. In addition, in January 2010 the Company
sold just under one third of its largest position, Gale Force 4 CLO, at a price
10% above the 31 December 2009 NAV valuation of that position.
At the end of the year, 27% of the portfolio NAV was composed of cash. Senior
securities tranches, originally rated AA/AAA, of CLOs made up 21% of the
portfolio (16% in Sep 2009) and mezzanine 7% (up from zero at the end of the
third quarter) due to the purchase of 3 positions in December. By geography, 15%
of the portfolio is invested in European CLOs, down from 18% in September while
the balance is invested in US transactions.
GSO Capital Partners International LLP
28 April 2010
(1)-Source: Morgan Stanley
(2)- Past performance is not a guide to future performance
COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December 2009
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 31 December 2008 | | | | 31 December 2009 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| EUR | | | Notes | EUR |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| | | | | |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| | | Assets | | |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 162,243 | | Cash and cash equivalents | 5 | 8,293,739 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 909,377 | | Collateral held at bank | 14 | 909,377 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 1,079,064 | | Interest receivable | | 1,200,933 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| - | | Securities sold receivable | | 35,198 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 680,057 | | Derivative financial instruments | 2, 10 | 399,699 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 53,036,009 | | Financial assets at fair value through profit or loss | 3 | 40,270,580 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 12,311,214 | | Investment in subsidiary designated as fair value through profit or loss | 3, 13 | 7,859,922 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| 68,177,964 | | Total assets | | 58,969,448 |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| | | | | |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
| | | Liabilities | | |
+-------------------------------------+----------------+---------------------------------------------------------------------------------------+----------------+-------------------------------+
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