CDO Carador Eur

inappropriate to presume that the Company and Group will continue in business; 
·    present information, including accounting policies, in a manner that 
provides relevant, reliable, comparable and understandable information; 
·    provide additional disclosures when compliance with the specific 
requirements in IFRS is insufficient to enable users to understand the impact of 
particular transactions, other events and conditions on the entity's financial 
position and financial performance; and 
·    state that the Company and Group has complied with IFRS as adopted by the 
European Union, subject to any material departures disclosed and explained in 
the financial statements. 
 
The Directors confirm that they have complied with the above requirements in 
preparing the consolidated financial statements.  The Directors confirm that the 
consolidated financial statements contain a fair review of the events during the 
period and a description of the principle risks and uncertainties for the next 
twelve months. 
 
The Directors are responsible for keeping proper books of account which disclose 
with reasonable accuracy at any time the financial position of the group and 
Company and to enable them to ensure that the consolidated financial statements 
are prepared in accordance with Companies Acts 1963 to 2009, the Listing Rules 
of the UK Listing Authority and the Non-UCITS Series of Notices (the "Notices"). 
They are also responsible for safeguarding the assets of the group and Company 
and hence for taking reasonable steps for the prevention and detection of fraud 
and other irregularities. 
In preparing these consolidated financial statements for the year to 31 December 
2009 the Directors confirm that, to the best of their knowledge: 
 
(a)   the consolidated financial statements, prepared in accordance with 
International Financial Reporting Standards, give a true and fair view of the 
assets, liabilities, financial position and profit or loss of the group and 
Company and the undertakings included in the consolidated financial statements 
taken as a whole; 
 
(b)   the directors' report, chairman's report and investment manager's review 
include a fair review of the development and performance of the business and the 
position of the group and Company and the undertakings included in the 
consolidated financial statements taken as a whole, together with a description 
of the principal risks and uncertainties that they face. 
 
 
 
 
INVESTMENT MANAGER'S REVIEW 
For the year ended 31 December 2009 
 
Overview 
 
The fourth quarter saw a continuation of the improving trends witnessed in the 
third quarter - loan prices continued to rally, defaults and CCC downgrades 
moderated and as a result CLO collateral coverage tests (at least in the US) 
improved. In concert with this improvement and the continued interest of 
investors in higher risk assets, CLO security prices appreciated in value, 
despite a minor sell off in late November, particularly in more junior tranches. 
The sell off was met with high demand and bonds rallied to end the year through 
the highs. 
 
Carador entered the rally with a portfolio which during the second and third 
quarter had expanded to include senior CLO tranches. We continued to invest in 
senior tranches and also selectively invested in mezzanine tranches as the rally 
improved their prospects. We took profits on some of the investments made in the 
past year, where we viewed the potential future upside to be limited. 
 
While we expect that the market will continue to see volatility, it is clear 
from the current improved market technicals that it is unlikely we will re-test 
the lows of the first quarter. CLOs have benefited from the improvement in 
fundamentals during 2009. We expect this to continue as default rates fall, 
asset prices rally and the economy improves through 2010. While the improvement 
in European CLOs has lagged that in the US, we expect this to gradually change. 
 
Market overview 
 
Leveraged loans 
The US and European leveraged loan market continued to outperform many asset 
classes. The Credit Suisse Leveraged Loan Index posted a 44.9% return in 2009, a 
complete turn around from 2008's -28.8% return. More than 60% of the loan market 
now trades at a price of 90 cents or greater compared with only 5% in December 
2008(1). 
 
The key drivers to performance were an improvement in both fundamentals and 
technical conditions. Technicals improved vastly over the course of 2009 as a 
result of the ongoing inventory squeeze. New-issue volume fell to all-time lows 
even as repayments continued at a rate of 1.25% per month, exceeding supply by 
$46.5 billion over the year. Over the year, the institutional universe 
contracted 10.9% from $596 billion at year-end 2008(2) and technical conditions 
remain robust. In the fourth quarter alone, accounts built up large cash 
positions on the strength of bond-for-loan take-out activity, which totalled $8 
billion during the final three months of 2009. For the full year bond issuance 
was a multiple of loan issuance for the first time since 2004(3). 
 
The Credit Suisse Western European Leveraged Loan Index (hedged, in euro) was up 
with a return of 47.2% in 2009. 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 less than 30% at the end of 2009(4). 
 
For CLOs the most notable feature of the leveraged loan market has been the 
rally in CCC-rated loans - which have posted a full year return of 79% as 
investor's risk appetite returned following a negative 51% performance in 
2008(5). This feeds through to an improvement in many overcollateralisation 
("OC") tests. 
 
The continued laggard was middle market loans - to which Carador has minimal 
exposure - as investors still seek perceived liquidity. The other 
underperforming market has been Europe where, with a less robust high yield 
market, restructurings relied on the loan providers for liquidity; however, 
although bond issuance increased in the fourth quarter. 
 
The US leveraged loan lagging 12-month default rate by principal amount eased to 
9.61%, from an all-time high of 10.81% in November, although still almost double 
the rate of 4.7% in December 2008(6). 
 
(1)- Source: S&P LCD 
(2)- Source: S&P LCD 
(3)- Source: JP Morgan 4 January 2010 
(4)-Source: S&P LCD 
(5)- Source: Credit Suisse Returns analysis 14 January 2010 
(6)-Source: S&P LCD 
 
INVESTMENT MANAGER'S REVIEW (continued) 
For the year ended 31 December 2009 
 
If November 2009 does prove to be the peak in defaults, that is a significant 
improvement on first quarter predictions of 12-15% default rates. The reasons 
for this improvement are threefold. Firstly, it appears that the economy has 
rebounded faster than expected. Secondly, aggressive efforts to amend loan terms 
put off the day of reckoning for 15% of loan market issuers, with 4% executing 
"amend-to-extends" and 11% covenant-relief. Finally, and most powerful, was the 
bond market's embrace of distressed exchanges including top-10 Index names such 
as TXU, Ford and Harrah's. The loans in question - which were unaffected even as 
bondholders suffered principal haircuts - total a significant $41 billion. Had 
they been included in the loan default rate, the rate would have peaked in 
November at 17.89% by principal amount(1). 
 
One concern relating to CLOs has been that recovery rates still significantly 
lag historical average levels, however this is consistent with the stage of 
economic recovery - recovery rates are always in inverse proportion to default 
rates. Also of benefit to CLO's there has been a marked slowdown in CCC 
downgrades, with fourth quarter downgrade numbers less than one third of those 
seen in March and April(2). 
 
Looking forward, the bond take-out trend shows no sign of ebbing and the loan 
primary market appears to be at the highest level in 12 months. This and the 
increasing approval of loan extensions (leading to higher spreads and fees), 
bodes well for the growing loan maturity schedule which peaks at $279 billion in 
US and EUR66 billion in Europe in 2014 - over three quarters of the US loan market 
matures by that date, Europe peaks the following year. 
 
Looking to the next few months, the default rate appears set to decline, with 
$28 billion of first-quarter 2009 loan defaults coming out of the 12 month 
default rolling average(3). Assuming that defaults continue at the second-half 
pace of $2.6 billion a month, the default rate will fall to 6.53% by the end of 
March 2010, putting the market on track to end 2010 in the mid-single digits, as 
most participants now expect(4). 
 
CLO Market 
Since early May, with a hiccup in November, CLO spreads tightened dramatically 
in 2009, despite considerable volumes of paper for sale. 
 
While the primary market remains effectively shut, 2009 set a record in 
secondary trading in CLO paper with close to $4 billion(5) in public BWICs (Bids 
Wanted in Competition lists) trading in December, to bring the total amount of 
public BWICs since May to over $12 billion(6), more than three quarters of which 
was in the second half of the year. The overall volume of trading is probably 
significantly higher given a large number of transactions are executed through 
private lists, bypassing the BWIC market. 
 
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, demonstrated by the recovery from 
November's dip. The improving fundamental credit outlook and diminishing returns 
in other asset classes is increasing that demand, particularly as, despite the 
rally, Senior CLO tranches remain cheap relative to the underlying leveraged 
loans and other asset classes(7). 
 

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