Portfolio Update

RNS Number : 4789R

NB Distressed Debt Invest. Fd. Ltd

04 November 2011

 



NB Distressed Debt Investment Fund Limited

Portfolio Update

NB Distressed Debt Investment Fund Ltd ("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 credit teams in the industry.

We remain pleased with the portfolio's performance to date. As at 30 September 2011, approximately 86.5% of NBDDIF's NAV was invested in distressed assets and we are in exclusive negotiations to purchase assets which would deploy around 5% of additional capital. Going forward, we expect to maintain between 5% and 10% of the portfolio in cash and cash equivalents as a reserve for investments in existing portfolio companies, as well as for new opportunities.

NBDDIF had investments in 47 companies as at September 30th. Sticking to our price discipline has resulted in lower-than-expected prices, with an average price of approximately 57% of face value against the expected level of 60%. Industry diversification remains strong with the portfolio invested across 13 industries.

The third quarter was challenging across many asset classes, and the leveraged loan market was no exception. The average bid price of CCC loans in the S&P/LSTA Leveraged Loan Index fell 13.1% in the quarter, bringing the year-to-date total decline to 15.2%. NBDDIF's NAV was affected by the market volatility starting in early August, which has resulted in a decrease in year-to-date NAV of 1.5% from $0.9754 to $0.9607 per share. For purposes of comparison, the HFRI Distressed/Restructuring Index1 is the year-to-date return was negative 3.1%. The decrease in NAV primarily reflects mark-downs of the bid prices of various investments by brokers who provide pricing information. However, we remain confident in the ultimate value of the assets securing our debt positions.

We continue to see significant upside potential in the existing portfolio, which we expect to realise as we restructure and exit investments. We anticipate a robust environment for redeployment of capital through to the end of the investment period in June 2013.

Market Environment

The Investment Manager believes that the fundamentals for distressed investing remain favourable. As has been widely reported, the European sovereign debt crisis and related issues have impacted risk appetites globally. We have seen European and other global commercial banks actively offer individual loans and loan portfolios at discounts. The current amount of non-performing and non-core portfolios in the US is estimated to be between $300 - $350 billion2. Issuers with CCC credit ratings are finding it increasingly difficult to access the capital markets as spreads have widened more than 500 bps year-to-date3. We believe that the supply of distressed assets from banks and a relative lack of capital for lower-rated companies will continue to result in opportunities for investing in distressed loans.

Source: BNP Paribas and Bloomberg. Data as at 30 September 2011. Past performance is not indicative of future returns.
1. 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.).
2. Source: KPMG, Global Debt Sales, Portfolio Solutions Group, September 2011.
3. Source: S&P/LSTA Leveraged Loan Index.
4. 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.

Investment Update

Investment Exits:

After we have exited an investment we can provide an overview of our investment thesis and economics, subject to confidentiality agreements and competitive issues. We have had five exits in the portfolio to date, mostly on later stage debt restructuring investments. By industry, three were in Utilities, one in Lodging & Casinos and one related to a Commercial Mortgage investment.

Exit	Industry	Instrument	Entry Price	Exit Price	Hold Period	Catalyst	ROR1	IRR2
1*	Utilities	Secured Loan	84.64	97.25	4 months	Asset Sale	19%	55%
2	Utilities	Secured Loan	87.00	100.00	2 months	Refinancing	16%	107%
3*	Lodging	Secured Loan	80.00	89.12	10 months	Asset Sale	13%	18%
4	Commercial Mtg	Secured Loan	58.60	64.10	7 months	Note Sale	6%	12%
5*	Utilities	Secured Loan	85.58	100.00	8 months	Refinancing	20%	39%

·      = multiple purchases

Investment One

We purchased a $7.0m (face value) strip of 1st lien claims at approximately 84.6% of par secured by a portfolio of natural gas and oil-fired generating facilities in a major Northeastern United States metropolitan area. We believed the loan price undervalued the company's assets and that in the event of a sale of the power plants we would recover in the 90s. The company subsequently announced that it reached an agreement to sell its assets to a Fortune 500 company. In order to consummate the transaction "free and clear of liens", the company filed for Chapter 11 and sold its assets under Section 363 of the US Bankruptcy Code. We sold our interest prior to the Bankruptcy Court's approval of the asset sale at 97.3% of par.

Investment Two

We purchased $2.0m (face value) of the 2nd lien term loan at approximately 87.0% of par secured by a coal-fired generating facility located in the Southern United States. Our investment thesis was that the debt would likely be refinanced or in the event of default we would end up with control of the assets at an attractive valuation ($1,265 per kW versus an estimated replacement cost of over $3,000 per kW). The company successfully refinanced the capital structure, resulting in a principal recovery of 100% of face value plus interest.

Investment Three

We purchased $14.0m (face value) of the 1st lien term loan at a weighted-average price of 80.0% secured by a resort and casino located in Nevada. Due to a challenging economic environment, financial performance declined and interest payments had ceased. Our investment thesis was that it was one of the highest quality properties in its region, that gaming trends had bottomed out and the region would experience growth going forward, and that on the downside our entry valuation was approximately 20% less than construction costs. 1st lien lenders ultimately accepted a bid by a Gaming operator that included an all-cash bid and adequate protection payments throughout a pre-packaged bankruptcy filing, the combination of which resulted in an approximate 90% recovery.

Investment Four

We purchased $20.0m (face value) of the construction loan at approximately 58.7% secured by a retail and residential complex located in the Midwestern United States. It was our belief at the time of the investment that the owners of the property would either a) sell the property to repay the lenders or b) transfer ownership to the lenders through a foreclosure or consensual transfer. We were not able to purchase additional senior debt at attractive levels and ultimately, with the lender group and the borrower, decided to auction the debt/property rather than take control of the assets. The auction resulted in a recovery of 64.1% of face value.

Investment Five

We purchased approximately $8.2m (face value) of the 2nd lien term loan on three different dates for a weighted average price of approximately 85.6% secured by a natural gas-fired combined-cycle facility located in the Southern United States. At the time of the investment, the plant was in the middle of a sales process and it was our belief that value would be in excess of the 2nd lien term loan. Subsequently a Fortune 500 company announced a purchase of the plant resulting in a recovery of 100% of principal plus accrued interest.

Source: Neuberger Berman Fixed Income LLC. Data as at 30 September 2011. Past performance is not indicative of future returns.
1. The Rate of Return (ROR) represents the change in value of the security (capital appreciation, depreciation and income) as a percentage of the purchase amount.
2. The annualized internal rate of return (IRR) was computed based on the actual dates of the cash flows of the security (purchases, sales, interest, principal
paydowns).

-ENDS-

For further information please contact:

Neuberger Berman Europe Limited               [phone]

Nick Hoar

Anji Stewart

Financial Dynamics                                             [phone]

Neil Doyle            

Ed Berry

Laura Pope

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.

Background Information

NB Distressed Debt Investment Fund Limited 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 expects to invest in 40 to 50 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 one of the largest and most experienced credit teams in the industry.

To find out more about the Company and the Neuberger Berman Group, please visit www.nbddif.com .

 

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