Portfolio Update - Global Shares

RNS Number : 5757X

NB Distressed Debt Invest. Fd. Ltd

10 May 2016

 

10 May 2016

NB Distressed Debt Investment Fund Limited

Portfolio Update - Global Shares

NB Distressed Debt Investment Fund Limited ("NBDDIF") is a Guernsey-incorporated closed-ended investment company 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 New Global Share Class ("NBDG") was created in March 2014 and aims to capture the growing opportunity in distressed debt globally. NBDG is subject to an investment period ending on 31 March 2017, following which the harvest period will commence.

The New Global Share Class is one of three classes of shares in NBDDIF. The others are the Ordinary Share Class and the Extended Life Share Class. The Ordinary Share Class was subject to an investment period which ended on 10 June 2013 and the Extended Life Share Class was subject to an investment period which ended on 31 March 2015. Separate factsheets are produced for those share classes.

Summary

In the first quarter, challenging market conditions continued as a lack of liquidity and potential sellers put pressure on pricing. We believe the fundamental value of our positions will be realised over time.

We continue to focus on debt collateralised by hard assets at attractive valuations and actively managing the current investments in our portfolio in order to generate profitable realisations through significant events (asset sales, legal outcomes, foreclosures, etc.). We remain positive about the investments in the portfolio and believe we can generate significant returns from current mark-to-market valuations.

During the quarter, capital markets experienced significant volatility as commodity prices rebounded in the second half of the quarter to recoup the losses at the beginning of the period. Without a bid, credit and equity markets experienced a steep decline during January and early February. Mid-February was the low point for most markets after which the equity and liquid credit markets began to recover. Commodities followed suit though, remaining depressed versus historical levels.

Our market continues to experience a lack of liquidity as funds remain cautious and investment banks continue to pull back their proprietary investing activities due to regulatory changes. We continue to believe that the opportunity set in distressed debt and post-reorganisation securities of companies with tangible assets is attractive, particularly in the energy, power generation, transportation, and commercial and residential real estate sectors. During the quarter we purchased a new investment in bank debt of an Australian wind farm company, added to an existing investment in a building and development company and purchased additional bank debt in a shipping company, all at what we believe to be attractive prices.

Portfolio

As of 31 March 2016, 85.9% of NBDG's NAV was invested in distressed assets. 14.1% of NAV was held in cash and cash equivalents, net of accruals and is available for new investments and working capital. NBDG is invested in 27 issuers across 11 industries. The largest sectors are lodging & casinos, utilities, shipping, oil and gas, and surface transportation.

NBDG's NAV per share decreased 4.0% in the first quarter to 70.48p from 73.41p (adjusted 31/12/15 NAV). We believe that performance versus other distressed debt managers can be indicated by relevant distressed market indices including the HFRI Distressed/Restructuring Index², which declined 1.3% in the first quarter, and the performance of defaulted loans in the S&P/LSTA Index³, which declined 5.7% in the first quarter. An indicator of the disruption in lower quality credit markets is that the Credit Suisse⁴ and BofA Merrill Lynch⁵ U.S. distressed high yield indices returned (7.1%) and 3.4%, respectively, during the first quarter.

The primary drivers of NBDG's decline in NAV were mark-to-market declines in utilities, shipping, nonferrous metals/minerals, building and development, and industrial investments partially mitigated by unrealised gains in, gaming, commercial real estate investments, and a single power plant investment described below.

Certain notable corporate events involving NBDG's existing investments during the quarter are highlighted below⁶:

•     As previously reported, an east coast power plant announced that it reached an agreement to sell its core asset. The sale closed in the first quarter and we received the first payment from the sales proceeds. We expect a second payment in February 2017 from escrow releases.

•     Negotiations within different equity classes were resolved for an east coast lodging and casino equity investment. The company is close to finalising a corporate recapitalisation to simplify its financial structure to move closer to a sale of the property.

•     An equity investment in a shipping company completed a balance sheet recapitalisation whereby existing shareholders provided a new second lien facility to give the company incremental liquidity.

•     A shipping company announced it is undertaking corporate changes to improve liquidity in its public shares. The equity is currently listed on the Danish stock exchange and the company is contemplating a US equity listing which would be a positive event for the liquidity of the shares.

Market Update

Market conditions continue to present NBDG with a pipeline of stressed and distressed opportunities across a broad spectrum of sectors as described below.

Credit spreads continued to widen in the first quarter as the number of distressed issuers increased to 344 at 31 March 2016 with $317 billion of par value distressed from 177 distressed issuers at 31 March 2015 with $121 billion of par distressed high yield bonds. Sectors with greater than 15% distressed issuers (measured as OAS > 1,000 bps) are Basic Industry, Capital Goods, Energy, Retail, Services, Technology, Telecom and Transportation. We find the majority of hard asset sectors attractive, presenting NBDG with a larger opportunity set of distressed opportunities to pursue⁷.

In Europe, €1.1 billion of non-performing loans currently sit on European Union banks' balance sheets, according to the IMF⁸. Italy announced it is restructuring its banking system, creating a €5 billion fund to offload and ultimately dispose of the bad loans. Other European banks have been announcing plans to offload non-performing loans portfolios. European regulators realise the high level of non-performing loans are a drag on economic activity and are working to create solutions that enable the banks to ultimately dispose of them⁹.

Exits

There were no exits in the quarter.

Share Buy Backs

Under the authorised share buy-back policy, 2,192,000 shares of NBDG were purchased during the quarter in the open market at a cost of £1,404,294. The average discount to NAV on share buy-backs was 10.70% during the quarter¹⁰. Total shares in treasury as of quarter end are 6,257,000.

Factsheet

An accompanying factsheet on the information provided above can be found here http://www.rns-pdf.londonstockexchange.com/rns/5757X_-2016-5-6.pdf or 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.

-ENDS-

For further information please contact:

Neustria Partners                                                         [phone]

Charles Gorman

Rob Bailhache

Nick Henderson

__________________________________________________

Data as at 31 March 2016. Past performance is not indicative of future returns. All comments unless otherwise stated relate to NBDG.

1, Source: Bloomberg, except where otherwise stated.

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 proceedings or financial market perception of near term proceedings (provided by Hedge Fund Research, Inc.).

3. This refers to the D-rated cohort of the S&P /LSTA Leveraged Loan Index indicating defaulted loans. The S&P /LSTA Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated leveraged loan market.

4. Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market. The distressed/default rating index includes issuers who have filed for bankruptcy protection or missed a coupon payment and the grace period has expired; Standard & Poor rating is D,CC or C and/or Moody's rating is Ca or C (provided by Credit Suisse).

5. The BofA Merrill Lynch US Distressed High Yield Index is a subset of the BofA Merrill Lynch US High Yield Index including all securities with an option-adjusted spread greater than or equal to 1,000 basis points. The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market (Data source: Bloomberg).

6. Notable corporate events may or may not result in an increase or a decrease in the value of an NBDG investment or a change in NBDG's NAV per share.  Please note an investment may experience a change in value (positive or negative) during the quarter whether or not it was subject to a notable corporate event.  Not all events involving existing investments are disclosed above.  In addition, certain corporate events may not have been disclosed due to confidentiality obligations.

7. Source: BofA Merrill Lynch U.S. High Yield Master II Constrained Index

8. Source: IMF website

9. Source: IMF Staff Discussion Note, "A Strategy for Resolving Europe's Problem Loans; European Banking Authority, "2015 EU wide transparency exercise report" dated November 24, 2015.

10. Source: Stifel Nicolaus Europe Limited

 

END

 

 

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