Portfolio Update - Extended Shares

RNS Number : 3433X

NB Distressed Debt Invest. Fd. Ltd

19 November 2014

 



NB Distressed Debt Investment Fund Limited

Portfolio Update - Extended Life Shares

NB Distressed Debt Investment Fund Limited ("NBDDIF") is a Guernsey-incorporated closed-ended investment company that launched in June 2010. NBDDIF's primary objective is to provide investors with attractive risk-adjusted returns through long-biased, opportunistic stressed, distressed and special situation credit-related investments while seeking to limit downside risk.

NBDDIF owns holdings diversified across distressed, stressed and special situations investments, with a focus on senior debt backed by hard assets. The portfolio is managed by the Distressed Debt team at Neuberger Berman, which sits within what we believe is one of the largest and most experienced non-investment grade credit teams in the industry.

The Extended Life Share Class ("NBDX") was created in April 2013¹ and is subject to an investment period ending on 31 March 2015, following which the assets will be placed into run-off. NBDDIF will seek to return to the holders of Extended Life Shares all net capital profits arising from the exit of any assets attributable to those shares, at least every six months, with the first such distribution having been made in the first quarter of 2014. A second distribution was made in the third quarter of 2014.

The Extended Life Shares are one of three classes of shares in NBDDIF. The other classes are the Ordinary Share Class and the New Global Share Class. The Ordinary Share Class is subject to an investment period which ended on 10 June 2013 and the Global Share Class is subject to an investment period which will end on 31 March 2017. Separate factsheets are produced for those classes.

Summary

We were gratified to see the positive NAV movement achieved year-to-date in 2014. In the third quarter we exited three positions, which were all positive and contributed to NAV.  We continue to see significant upside potential in the existing portfolio, which we expect to realise as we restructure and exit investments.

Portfolio

As at 30 September 2014, 97.3% of the NBDX NAV was invested in distressed assets. Cash available for new investments and working capital ended the quarter at 2.7% of the NBDX NAV. The NBDX NAV per share increased 3.8% in the first nine months of 2014, to $1.2686 per share from $1.2218 per share. We believe that performance comparison versus other distressed debt managers is indicated by the HFRI Distressed/Restructuring Index² which returned 2.5% in the first nine months of 2014. In the third quarter of 2014, NBDX's NAV per share declined 0.9% per share, primarily due to mark-to-market declines on existing positions. 

The market environment for distressed debt was challenging in the quarter, as indicated by the HFRI Distressed/Restructuring Index which declined 2.8% in the quarter. In the third quarter, NBDX experienced the markdown of secured notes of a portfolio company which detracted 1.1% from NAV. This portfolio company reported that it had become the subject of an investigation relating to potential regulatory and criminal violations, resulting in a high degree of uncertainty in the restructuring process and leading to the mark-to-market loss in the quarter. During the quarter we saw our 24th, 25th and 26th exits since inception, which are described in detail below. We added incrementally to existing names and initiated new positions in the infrastructure, real estate and energy sectors.

Market Update³

We continue to experience an improving environment for distressed debt in our sectors of interest. We believe the pipeline of opportunities in real estate, transportation and energy debt is particularly compelling. EU banks in particular increased their disposal of European and U.S. loans and assets to €64 billion in 2013, versus €46 billion in 2012, €36 billion in 2011 and €11 billion in 2010. €44 billion of debt sales have occurred in the first six months of 2014, on a run-rate to exceed €80 billion for the full year. However, over €1 trillion of non-performing loans remain on EU banks' balance sheets. We believe that an ECB-sponsored harmonization of NPL definition across countries may continue to facilitate further recognition and disposal of distressed loans.

Exits

In the third quarter we had three exits, bringing our total to 26 since inception. These exits generated approximately $12.4 million of total income and gains for NBDX.

Investment 24: We purchased $19.0 million face value of senior notes at 71.3% of par, issued by an independent power producer.  At the time of purchase, the company was burdened by an overlevered balance sheet and near-term debt maturities.  Our investment thesis was that the debt would likely be restructured into new securities in order to avoid a default, or that in the event of default we would own equity in the assets at an attractive valuation relative to comparable assets.  The company ultimately filed Chapter 11 bankruptcy and sold substantially all of its assets to a Fortune 500 energy company.  Our recovery on the notes came from the proceeds of the sale, interest payments pre-bankruptcy filing and the sale of remaining claims in the secondary market.  Total income from this investment was $3.2 million.

Investment 25: We purchased $18.7 million of defaulted senior secured debt at 80.0% of par secured by a professional sports team, arena and related real estate.  At the time of purchase we believed that the value of the collateral package was well in excess of the face amount of the company's debt plus accrued and unpaid interest.  We also believed that the team and arena would likely be sold to a new owner who would refinance our debt, or that we and other holders would assume an ownership position at a discounted valuation versus comparable assets.  Ultimately, the assets were sold to a new ownership group who paid past due interest and refinanced the secured debt.  Total income from this investment was $5.5 million.

Investment 26: We purchased $8.5 million face value of senior secured notes at 34.5% of par, secured by a continuing care retirement community located in the southern U.S.  After construction was completed, the facility did not generate sufficient cash flows to service its debt and the issuer defaulted and filed Chapter 11 bankruptcy.  We believed that the value of the property was significantly in excess of our purchase price and that we would either restructure the debt or ultimately own equity in the property.  The bondholders and the company subsequently completed a debt restructuring which allowed the company to emerge from bankruptcy and ultimately refinance its restructured securities.  Total income from this investment was $3.7 million.

Data as at September 30, 2014. Past performance is not indicative of future returns. All comments unless otherwise stated relate to NBDX.

1.         The Extended Life Share Class was created in April 2013 when holders of Ordinary Shares were invited to convert those shares into Extended Life Shares.  The information in this fact sheet therefore relates to the Ordinary Shares up to April 2013 and to the Extended Life Shares thereafter.

2.         The HFRI Distressed/Restructuring Index reflects distressed restructuring strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings (provided by Hedge Fund Research, Inc.).

3.         Source:  Data from PWC Market Update Reports dated March 2014 and July 2014.

-ENDS-

For further information please contact:

Neuberger Berman Europe Limited                               [phone]

Damian Holland

Financial Dynamics                                                            [phone]

Neil Doyle            

Ed Berry

Laura Ewart

An accompanying factsheet on the information provided above can be found on the Company's website www.nbddif.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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