Carador Income Fund PLC Interim Management Statement (9126F)

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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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

[phone]

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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