Interim Management Statement

RNS Number : 0000N

JZ Capital Partners Ltd

09 February 2009

 



Interim Management Statement

9 February 2009

JZ Capital Partners Limited ('JZCP' or the 'Company'), a closed ended investment company incorporated in Guernsey whose corporate objective is to create a portfolio of investments in businesses primarily in the United States, announces its Interim Management Statement ('IMS') for the period from 1 October 2008 to 6 February 2009.

Market Update

While economic conditions in the United States are very difficult, measured in terms of their respective operating performance our micro-cap investments have on the whole held up reasonably well.  Of the eight primary micro-cap investments, the last twelve months EBITDA as of 31 December 2008 remained relatively flat, with a slight increase of 0.3%, versus the last twelve months EBITDA as of 30 September 2008.  

The other side of the coin is that in these market conditions there are increased opportunities for JZCP to invest in fundamentally strong companies on relatively attractive terms.

Valuation Policy

It is policy to value JZCP's micro-cap investments at least twice yearly as at the interim and year end dates. Such values plus accrued interest and/or dividends are applied in subsequent Net Asset Value ('NAV') calculations and in the IMS until the next half year valuation unless the Directors become aware of any particular new factor that affects the valuation of any particular investment. Given these unprecedented volatile markets, the Directors have concluded it is prudent to update the valuation of the micro-cap investments at 31 December 2008. 

JZCP's valuation of its private investments is derived from employing market comparable multiples and we recognize that the realization of any of these investments in current markets would be challenging. Therefore, we have, in respect of most private investments, increased the marketability discount (based on the amount of the relevant enterprise value less senior debt) from 10% to 20% to reflect the current lack of liquidity in the merger and acquisition market.

Net Asset Value and Valuation

For the three months ended 31 December 2008, JZCP's NAV decreased by $51.0 million or 15%.

	1/7/2008 (1)	30/9/2008	31/12/2008
Net Asset Value ($000's) (2)	$353,375	$342,035	$291,050
Number of Ordinary Shares (000's)	97,528	97,528	97,528
Net Asset Value per Ordinary Share ($)	$3.62	$3.51	$2.98
Market Price per Share ($)	$2.22	$1.91	$0.70
NAV to Market Price Discount	39%	46%	77%

(1) JZCP essentially began operations on 1 July 2008.

(2) Per JZCP Board.

Balance Sheet

Below is a summary of JZCP's balance sheet as of the relevant dates:

($000's)	1/7/2008	30/9/2008	31/12/2008
Cash (1)	$110,391	$112,199	$108,761
Listed Equities	75,017	70,648	64,637
Listed Debt	44,394	42,436	26,425
Private Investments	295,093	293,581	271,705
Other Assets (2)	491	1,322	1,919
Total Assets	$525,386	$520,186	$473,447
- Liabilities	(487)	(989)	(815)
-  Zero Dividend Preferred Shares	(182,214)	(165,643)	(138,259)
-  Forward Currency Derivative Contract	10,690	(11,519)	(43,323)
Net Asset Value	$353,375	$342,035	$291,050

(1)  On 31 December 2008, $51,885 of cash was pledged to support a currency hedge.

An additional $22,751 was pledged on 22 January 2009.

(2) Includes accrued dividends on Listed Equities.

All of the Company's asset classes have been negatively affected by the current domestic and worldwide economic slump. For the three months ending 31 December 2008, our listed equities declined 8.5%, while the Standard & Poor's 500 index declined 22.5%.  Our listed bank debt, both first and second lien investments, declined by 37.9%, led by a 50.6% decline in second lien loans.  Our mezzanine investments declined by 8.8%, while the micro-cap portfolio was down 8.4%.  Note that of the 21 mezzanine and micro-cap investments, 19 are current on their interest payments at 31 December 2008.

The Zero Dividend Preferred Shares ('ZDPs') are due for redemption on 24 June 2009.  The cover for the ZDP's is 3.0x.

Portfolio

At 31 December 2008, the Company's investment assets consisted of 46 investments totaling $473.0 million broken out as follows:

	Number of Investments	% of Portfolio Valuation  as of 31/12/08
Micro-Cap Portfolio	9	33%
Cash		23%
Mezzanine Investments	12	16%
Listed Equity	3	14%
Legacy Portfolio	11	6%
Bank Debt	11	8%
Total Investment Assets	46	100%

43% of the portfolio is invested in 'liquid' assets, which consist of cash, listed equity, and listed debt.  These asset classes are valued at third party listed prices. Cash is mainly deposited with HSBC and JPMorgan.  57% of the portfolio is invested in private investments in micro-caps or mezzanine investments. These investments are valued at fair value by the JZCP Board of Directors.  As a point of reference, the average purchase multiple of the micro-cap investments was 6.9x. The current average enterprise multiple used at 31 December 2008 was 6.2x.

At 31 December 2008, 61% of the JZCP investments were valued below cost, and 39% were valued at or in excess of cost.

The top ten investments as of 31 December 2008 were as follows:

($000's)	Asset Category	Original Cost	Valuation as of 30/9/2008	% of Portfolio Valuation  as of 30/9/08	Valuation as of 31/12/2008	% of Portfolio Valuation  as of 31/12/08
Safety Insurance Group, Inc.	Listed Equity	$6,816	$41,668	10%	$44,688	12%
Accutest Holdings, Inc.	Micro-cap	31,516	30,439	7%	35,322	10%
Dental Services inc.	Micro-cap	19,854	28,685	7%	23,700	7%
TAL International Group, Inc.	Listed Equity	13,798	27,842	7%	20,248	6%
Wound Care Solutions, LLC	Micro-cap	39,595	25,031	6%	19,152	5%
BG Holdings, Inc.	Micro-cap	19,174	18,303	5%	18,869	5%
Petco Animal Supplies, Inc.	Listed Debt / Mezzanine	19,468	19,372	5%	18,841	5%
Dantom Systems, Inc.	Micro-cap	18,716	19,728	5%	18,144	5%
Continental Cement Company, LLC	Mezzanine	15,000	16,948	4%	17,592	5%
GHW Holdings, Inc.	Micro-cap	7,467	15,752	4%	15,214	4%
Top Ten Investments		$191,404	$243,768	60%	$231,770	64%
Remaining Investments		189,643	162,897	40%	132,442	36%
Total Portfolio		$381,047	$406,665	100%	$364,212	100%

The portfolio is diversified across the following business sectors:

	Number of  Companies	% of Portfolio Valuation  as of 31/12/08
Health Care Equipment & Services	7	26%
Support Services	10	21%
House, Leisure & Personal Goods	6	12%
Financial General	4	13%
Industrial Engineering	8	10%
Construction Materials	4	10%
Other	6	8%
Total Portfolio	45	100%

Material Events and Transactions

In the three months ending 31 December 2008:

• The Company invested $4,500,000 of additional preferred stock in ETL Holdings to effect an add-on acquisition.

• The Company received an escrow payment of $3,641,235 from the 2007 sale of Mid America Recycling.

• The Company received an escrow payment of $452,489 from the sale of Professional Paint.

• The Company invested $2,130,000 of additional preferred stock in BG Holdings to support certain capital purchases.

Dividend

On 22 December 2008, the Company paid a dividend of 4.5c per ordinary share.

About JZCP

JZCP is a closed ended investment company incorporated in Guernsey. The Company's corporate objective is to create a portfolio of investments in businesses primarily in the United States providing a superior overall return comprised of a current yield and significant capital appreciation. The Company's strategies include investments in micro-cap buyouts, mezzanine loans (sometimes with equity participations) and high yield securities, senior secured debt and second lien loans and other debt and equity opportunities. The Company's Ordinary Shares and Zero Dividend Preferred Shares are listed on the London Stock Exchange.

 

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