Interim Management Statement

 

TIDMCDO 
 
RNS Number : 7026C 
Carador PLC 
18 November 2009 
 

18 November 2009 
 
 
Carador plc 
("Carador" or the "Company") 
Interim Management Report 
 
 
The following interim management statement relates to the period commencing 1 
July 2009 to 18 November 2009 and has been prepared solely to provide 
information to meet the requirements of the Irish Transparency Regulations. 
 
 
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" 
collateralized by senior secured bank loans and equity and mezzanine tranches of 
CDOs. CDOs are debt securities backed by a diversified pool of underlying 
assets. The CDO uses the cash flows 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 assets. 
 
 
Carador performance summary(i) 
+------------------------------+-----------------+------------------+---------------+ 
|                              |  30 September   |  30 June 2009    |    Change     | 
|                              |      2009       |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
| EUR Share Class:             |                 |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
| Share price                  |      0.250      |      0.150       |    +66.7%     | 
+------------------------------+-----------------+------------------+---------------+ 
| Net asset value per share    |     0.4256      |      0.4205      |    +1.2%      | 
+------------------------------+-----------------+------------------+---------------+ 
| Premium/(discount)           |    (41.3)%      |     (64.3)%      |               | 
+------------------------------+-----------------+------------------+---------------+ 
| Share total return since     |    (19.5)%      |     (27.1)%      |               | 
| inception(ii)                |                 |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
 
 
+------------------------------+-----------------+------------------+---------------+ 
|                              |  30 September   |  30 June 2009    |    Change     | 
|                              |      2009       |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
| USD Share Class:             |                 |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
| Share price                  |      0.325      |      0.225       |    +44.4%     | 
+------------------------------+-----------------+------------------+---------------+ 
| Net asset value per share    |     0.5511      |      0.5419      |    +1.7%      | 
+------------------------------+-----------------+------------------+---------------+ 
| Premium/(discount)           |    (41.0)%      |     (58.5)%      |               | 
+------------------------------+-----------------+------------------+---------------+ 
| Share total return since     |    (39.1)%      |     (59.3)%      |               | 
| inception(ii)                |                 |                  |               | 
+------------------------------+-----------------+------------------+---------------+ 
 
 
The NAV includes an estimated EUR 2,454,001.31 of net cash flow interest 
received in the three month period ended 30 September 2009 (to be allocated 
between capital and income in accordance with the Company's valuation policy), 
which equates to EUR 0.0188 or USD 0.0268 per Share (iii). The level of net cash 
flow interest received continues to reflect several factors including (1) the 
impact of the increased level of cash in the portfolio which, as at 30 September 
2009, represented 28% of the portfolio, (2) the cashflow diversion from 
subordinated notes to repay senior notes in certain transactions following 
breaches in their over-collateralization tests as a result of increases in CCC 
assets and defaults in their underlying portfolios and (3) the low coupon 
payments from the new investments in senior notes where the projected return is 
based on expected principal appreciation. 
 
 
In August, Carador sold its investment in the senior notes of GELCT 06-2, a 2006 
vintage CLO, realising profits of $1.63 million. This investment was the first 
by Carador in a senior CLO security following the change in the investment 
policy approved by shareholders on 9 March 2009. Carador initially invested 
$4.04 million in April 2009 and received aggregate proceeds of $5.67 million 
(including $2.10 million of principal repayments) representing a total cash on 
cash return of 1.4 times the initial investment over the 4 month holding period. 
 
 
In September, Carador sold half of its investment in the tranche E of Inwood 
Park CDO at a price of 38%, realizing profits of $0.720 million. Carador 
acquired a total of $8mm notional at a price of 20% of par ($1.6mm 
consideration) in October 2008. Following the September month end, Carador sold 
the balance at a price of 50%, realizing additional profits of $1.2 million. In 
addition, Carador has received aggregate income of $0.35 million from this 
investment giving total cash on cash return of 2.84 times the initial investment 
over the holding period. 
 
 
The Board declared an interim distribution on 13 July 2009 of EUR0.0149 per 
ordinary share in respect of the quarterly period ended 30 June 2009. US dollar 
class shareholders received US$0.0208 per share, calculated at the prevailing 
exchange rate on 13 July 2009 of EUR1:US$1.3949. 
 
 
On 15 October 2009, the Board declared an interim distribution of EUR0.0112 per 
ordinary share in respect of the quarterly period ended 30 September 2009. US 
dollar class shareholders received US$0.0167 per share, calculated at the 
prevailing exchange rate on 15 October 2009 of EUR1:US$1.4939. 
 
 
 
 
Investment manager's review 
 
 
Leveraged Loans 
The US and European leveraged loan market continued to outperform many asset 
classes. The Credit Suisse Leveraged Loan Index returned 9.97% for the quarter 
ended 30 September 2009 and 39.77% year-to-date. The average price rose to 84.38 
cents; more than 50% of the loan market now trades at a price of 90 cents or 
greater compared with only 5% in December 2008 (iv). 
 
 
The Credit Suisse Western European Leveraged Loan Index (hedged, in euro) also 
had a positive return of 14.38% for the quarter ended 30 September 2009 and 
returned 39.80% year-to-date. The average price rose to 80.85 cents. 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 48% 
at the end of the third quarter (v). 
 
 
CLOs 
For CLOs the most notable feature of the leveraged loan market has been the 
rally in CCC rated loans which have posted a year-to-date return of 75.8% as 
investor's risk appetite returned. This feeds through to an improvement in many 
Over Collateralisation (OC) tests. The one significant laggard has been middle 
market loans. Loans of issuers with EBITDA of $50 million or less have 
underperformed the broader market year-to-date, with a 27.79% return compared to 
a 46.10% return for the broader market (vi). Carador has only 3 middle market 
investments which make up 2.4% of NAV. 
 
 
The US leveraged loan default rate rose to 9.75% in September 2009 from 9.15% 
and 4.7% in June 2009 and December 2008, respectively (vii). The pace of 
defaults is slowing as the capital markets help provide additional sources of 
financing and business fundamentals begin to improve. There has also been a 
marked slowdown in CCC downgrades, with August and September downgrade numbers 
less than one third of those seen earlier in March and April (viii), which has 
also benefited CLO's. 
 
 
Since early May CLO spreads have tightened dramatically, despite considerable 
volumes of paper for sale. While the primary market remains effectively shut, 
September set a record in secondary trading in CLO paper with close to $2.5 
billion (ix) in public BWICs (Bids Wanted in Competition lists), to bring the 
total amount of public BWICs since late April (when the successful liquidation 
of Whistlejacket SIV started the recovery in the secondary CLO market) to over 
$8 billion (x). The overall volume of trading is probably significantly higher 
given a large number of transactions are executed through private lists, 
bypassing the BWIC market. 
 
 
Several factors contributed to this large volume in September; workout groups in 
some banks were looking to sell senior CLO tranches into the rally, we also saw 
some selling by hedge funds that had bought bonds early in the rally and are now 
looking to lock in profits. 
 
 
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, and this demand will be further 
increased by the improving fundamental credit outlook. In particular as, despite 
the rally, Senior CLO tranches remain cheap relative to the underlying leveraged 
loans and other asset classes (xi). On the supply side of the equation banks 
holding these senior bonds may be 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, market surveys conclude that banks are 
unlikely to sell in the near term (xii), particularly as it now appears the 
rating downgrades discussed below will have a negative, but not drastic impact 
on risk capital charges. 
 
 
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 stabilization of deteriorating hard credit 
fundamentals such as defaults and CCC downgrades. Currently, it is estimated 
that 94% of US CLO deals have CCC assets in excess of 10% of their portfolios, 
however price recovery from an average of $38.7 in March '09 to $77.5 in 
September '09 has dramatically reduced the impact on OC tests (xiii). Europe 
however continues to experience weakness. 
 
 
There are several reasons for this difference in performance; 
 
 
  *  The US loan prepayments from high yield refinancing has been meaningful ($11.5Bn 
  YTD), proceeds of which CLOs can re-invest in loans at prices below par. The 
  European high yield market is far less robust (xiv). 
  *  The US has seen far higher loan amendment fees (> 80bps) than in Europe (<20bps) 
  (xv) paid by corporate borrowers to alter their loan documentation which are 
  additional cashflow into the CLO. 
  *  The US loan market has experienced significant increases in WAS (weighted 
  average spread) (+35bps) as loan terms have been renegotiated through 
  amendments, while Europe has been more muted (+15bps) (xvi) 
 
 
 
The rating outlook for CLO securities continues to be negative. Within the CLO 
space there have been 4,081 downgrades and 94 upgrades in 2009 (xvii). Both 
agencies continue to review ratings and methodologies. Moody's Stage II process 
is expected to be completed by the end of 2009. S&P have published revised 
methodologies and assumptions and placed more than 2,300 CLO tranches on 
negative watch as a result of this revision. S&P expects that AAA securities 
will suffer a 1-2 notch downgrade while other tranches will experience a 3 notch 
downgrade on average (xviii). Risk capital charges under Basel II framework 
would currently be 0.56% for a bank holding AAA securities and would increase to 
only 0.96% following a downgrade to A leve, which would appear to be the worst 
case outcome in most transactions. Despite the fact the outlook remains 
negative, the rating action is having no impact on price performance. 
 
 
 
 
Carador overview: 
 
 
As at the end of the month, 28% of the portfolio NAV was composed of cash, 
approximately half of which is set aside for an investment in senior securities 
which has yet to settle. Senior securities tranches of CLOs (originally rated 
AA/AAA) made up 16% of the portfolio. By geography 18% of the portfolio is 
invested in European CLOs while 82% is invested in US transactions. 
 
 
In the past 6 months GSO has met with all but four of our CLO managers, 
representing 98.7% of the NAV, to get an update on strategy and performance 
potential. Most managers have responded well to improving technicals and have 
traded their portfolios, where possible, enabling OC tests to be cured. 
 
 
When compared to the CLO market as a whole, Carador's investments have superior 
default rates: Carador's European CLO investments have an average default rate 
of 4.4% while the European CLO market averages 5.7% (xix) and the European loan 
market almost 13% (xx); in our US CLO investments the default rate averages 5.1% 
while the US CLO market has a default rate of 6.5% and the loan market a rate of 
9.75% (xxi). Looking at Junior OC tests, 41% of Carador's investments fail and 
therefore do not receive distributions while for the market as a whole over 50% 
(xxii) fail. 
 
 
Portfolio analysis as at 30 September 2009 (xxiii) 
 
 
By currency: 
+--------------+---------------+ 
| EUR:         |       17.86%  | 
+--------------+---------------+ 
| USD:         |        82.14% | 
+--------------+---------------+ 
| Other:       |         0.00% | 
+--------------+---------------+ 
 
 
By asset class: 
+----------------------------------------------------------+-------------+ 
| Broadly Syndicated Sub-Investment Grade Secured          |      17.28% | 
| Loans-Europe                                             |             | 
+----------------------------------------------------------+-------------+ 
| Broadly Syndicated Sub-Investment Grade Secured Loans-US |      51.19% | 
|                                                          |             | 
+----------------------------------------------------------+-------------+ 
| Middle Markets Secured Loans-US                          |       2.43% | 
+----------------------------------------------------------+-------------+ 
| Cash                                                     |      29.10% | 
+----------------------------------------------------------+-------------+ 
 
 
Portfolio holdings 
+----+-----------------------------------------------------------+--------+ 
|    | Investment/Manager:                                       | % NAV  | 
+----+-----------------------------------------------------------+--------+ 
|  1 | ACA CLO 2006-2 (Apidos)                                   |  1.26% | 
+----+-----------------------------------------------------------+--------+ 
|  2 | Alpstar I Euro CLO (Alpstar Management)                   |  0.11% | 
+----+-----------------------------------------------------------+--------+ 
|  3 | Beach Street IV (Citi)                                    |  4.62% | 
+----+-----------------------------------------------------------+--------+ 
|  4 | CIFC Funding 2006-II (CIFC)                               |  1.10% | 
+----+-----------------------------------------------------------+--------+ 
|  5 | CS Advisors CLO I (Capital Source)                        |  0.71% | 
+----+-----------------------------------------------------------+--------+ 
|  6 | Denali Capital CLO VI (DC Funding Partners LLC)           |  0.75% | 
+----+-----------------------------------------------------------+--------+ 
|  7 | Duchess VII (Babson Capital)                              |  0.45% | 
+----+-----------------------------------------------------------+--------+ 
|  8 | Eaton Vance CDO VIII (Eaton Vance)                        |  1.12% | 
+----+-----------------------------------------------------------+--------+ 
|  9 | Egret Funding CLO I (Egret/SocGen)                        |  0.51% | 
+----+-----------------------------------------------------------+--------+ 
| 10 | Eurocredit CDO II (ICG)                                   |  0.14% | 
+----+-----------------------------------------------------------+--------+ 
| 11 | Eurocredit VI (ICG)                                       |  0.43% | 
+----+-----------------------------------------------------------+--------+ 
| 12 | Euro-Galaxy CLO (AIG)                                     |  0.86% | 
+----+-----------------------------------------------------------+--------+ 
| 13 | Foxe Basin CLO (GSO/Blackstone Debt Funds Management LLC) |  0.09% | 
+----+-----------------------------------------------------------+--------+ 
| 14 | FM Leveraged Capital Fund II (GSO/Blackstone Debt Funds   |  0.57% | 
|    | Management LLC)                                           |        | 
+----+-----------------------------------------------------------+--------+ 
| 15 | Gale Force 1 CLO (GSO/Blackstone Debt Funds Management    |  0.79% | 
|    | LLC)                                                      |        | 
+----+-----------------------------------------------------------+--------+ 
| 16 | Gale Force 2 CLO (GSO/Blackstone Debt Funds Management    | 11.84% | 
|    | LLC)                                                      |        | 
+----+-----------------------------------------------------------+--------+ 
| 17 | Gale Force 3 CLO (GSO/Blackstone Debt Funds Management    |  4.26% | 
|    | LLC)                                                      |        | 
+----+-----------------------------------------------------------+--------+ 
| 18 | Gale Force 4 CLO (GSO/Blackstone Debt Funds Management    | 14.44% | 
|    | LLC)                                                      |        | 
+----+-----------------------------------------------------------+--------+ 
| 19 | GLC CLO I (Global Leveraged Capital, LLC)                 |  0.10% | 
+----+-----------------------------------------------------------+--------+ 
| 20 | Gresham II (Investec)                                     |  0.05% | 
+----+-----------------------------------------------------------+--------+ 
| 21 | Harbourmaster 7 (Harbourmaster)                           |  0.09% | 
+----+-----------------------------------------------------------+--------+ 
| 22 | Harvest III Euro CLO (Mizuho Leveraged Finance)           |  0.28% | 
+----+-----------------------------------------------------------+--------+ 
| 23 | Harvest IV Euro CLO (Mizuho Leveraged Finance)            |  0.06% | 
+----+-----------------------------------------------------------+--------+ 
| 24 | Hudson Straits CLO 2004 Ltd. (GSO/Blackstone Debt Funds   |  3.03% | 
|    | Management LLC)                                           |        | 
+----+-----------------------------------------------------------+--------+ 
| 25 | Inwood Park CDO (Blackstone Debt Advisors LP)             |  0.69% | 
+----+-----------------------------------------------------------+--------+ 
| 26 | Inwood Park CDO (Blackstone Debt Advisors LP)             |  1.86% | 
+----+-----------------------------------------------------------+--------+ 
| 27 | Leopard IV CLO (Prudential M&G)                           |  0.64% | 
+----+-----------------------------------------------------------+--------+ 
| 28 | Leopard V CLO (Prudential M&G)                            |  5.05% | 
+----+-----------------------------------------------------------+--------+ 
| 29 | Leveraged Finance Europe Capital IV (BNP)                 |  0.55% | 
+----+-----------------------------------------------------------+--------+ 
| 30 | Mountain View II (Seix Advisors)                          |  0.47% | 
+----+-----------------------------------------------------------+--------+ 
| 31 | Mountain View III (Seix Advisors)                         |  2.11% | 
+----+-----------------------------------------------------------+--------+ 
| 32 | Navigator CDO 2004 (GE Asset Management)                  |  0.11% | 
+----+-----------------------------------------------------------+--------+ 
| 33 | NYLIM Flatiron CLO 2006-1X (New York Life)                |  1.44% | 
+----+-----------------------------------------------------------+--------+ 
| 34 | Panther CDO III (Prudential M&G)                          |  0.45% | 
+----+-----------------------------------------------------------+--------+ 
| 35 | Prospect Park CLO (Blackstone Debt Advisors LP)           |  1.77% | 
+----+-----------------------------------------------------------+--------+ 
| 36 | RMF Euro CLO III (RMF Investment Management)              |  0.81% | 
+----+-----------------------------------------------------------+--------+ 
| 37 | RMF Euro CLO IV (RMF Investment Management)               |  0.98% | 
+----+-----------------------------------------------------------+--------+ 
| 38 | Skell 2006-1 X 30/11/2022 (AIB)                           |  0.33% | 
+----+-----------------------------------------------------------+--------+ 
| 39 | Venture VII (MJX Asset Management)                        |  1.33% | 
+----+-----------------------------------------------------------+--------+ 
| 40 | Versailles (BNP)                                          |  0.86% | 
+----+-----------------------------------------------------------+--------+ 
| 41 | Westbrook CLO (Shenkman Capital Management)               |  3.80% | 
+----+-----------------------------------------------------------+--------+ 
 
 
 
 
 
 
Outlook 
 
 
We continue to explore opportunities to acquire assets, particularly senior CLO 
notes, and to selectively take profits. Continued defaults and CCC downgrades 
will have a negative effect on CLO transactions' OC ratios and could affect 
distributions to be received from such investments. 
 
 
 
 
Material events 
 
 
Other than described above, the Board is not aware of any material events during 
the period from 1 July 2009 to the date of publication of this statement which 
would have had a material impact on the financial position of the Company. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investor Enquiries: 
Paul Noonan 
Northern Trust Investor Services (Ireland) Limited    Tel: + 353 1 542 2487 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Editors: 
 
 
About Carador plc: 
 
 
Carador is a close-ended limited liability investment company which was 
incorporated under the laws of Ireland on 20 February 2006 and is authorised by 
the Irish Financial Services Regulatory Authority. It was the first London Stock 
Exchange traded diversified cash flow CDO fund. 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" collateralized by senior 
secured bank loans and equity and mezzanine tranches of CDOs. 
 
 
Further information relating to Carador, including monthly factsheets published 
since inception, can be found at the Company's website on www.carador.co.uk. 
However, due to applicable securities laws and regulations, this information is 
only availably to persons resident in certain jurisdictions. 
 
 
About GSO Capital Partners LP: 
 
 
GSO Capital Partners LP (together with its affiliates, including GSO Capital 
Partners International LLP, Carador's investment manager ("GSO")) is a leading 
credit-oriented alternative asset manager with approximately $24.3 billion of 
assets under management as of 31st October 2009.  GSO manages senior debt funds, 
hedge funds and mezzanine funds focused on the leveraged finance marketplace. 
GSO was acquired by The Blackstone Group L.P. in March 2008, following which 
Blackstone's debt investment businesses were combined with GSO's operations. 
Further information is available at www.blackstone.com/maam/gso. 
 
 
 
 
 
__________________________ 
 
 
 
 
(i) Source: Bloomberg. Past performance is not a guide to future performance 
(ii) Source: Bloomberg TRA function (total share price return analysis). 
Inception: 12 April 2006 for EUR class return annualised, 11 December 2008 for $ 
Class return not annualised. Dividends reinvested at Libor. 
(iii) Source: Northern Trust 
(iv) Source:S&P LCD 
(v) Source:S&P LCD 
(vi) Source:S&P LCD 
(vii) Source:S&P LCD 
(viii) Source:S&P LCD 
(ix) Source: Citibank "Global Structured Credit Strategy" October 2009 
(x) Source: Citibank "Global Structured Credit Strategy" October 2009 
(xi) Source Morgan Stanley "CDO Market Insights" September 18th 2009. 
(xii) Source: Citibank "Global Structured Credit Strategy" October 2009 
(xiii) Source Morgan Stanley 
(xiv) Source  S&P LCD 
(xv) Source: Citibank "Global Structured Credit Strategy" 
(xvi) Source: Citibank "Global Structured Credit Strategy" 
(xvii) Source Morgan Stanley "CDO Market Insights" September 18th 2009. 
(xviii) Source  S&P LCD 
(xix) Source JPMorgan CLO Outlook October 2009 
(xx) Source BofA ML European CLO converge to US October 2009. 
(xxi) Source JPMorgan CLO Outlook October 2009 
(xxii) Source BofA ML European CLO converge to US October 2009. 
(xxiii) Source: GSO Capital Partners International LLP 
 
This information is provided by RNS 
            The company news service from the London Stock Exchange 
   END 
 
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