Portfolio Update - Extended Life Shares

RNS Number : 5254Q

NB Distressed Debt Invest. Fd. Ltd

01 March 2016

 

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.

On 31 March 2015, the investment period of the Extended Life Share Class ("NBDX") expired. The assets of NBDDIF attributable to the Extended Shares were placed into the harvest period following the expiry of the investment period. Prior to the expiry of the investment period, distributions were made to reflect capital profits only arising from the exit of any assets attributable to Extended Life Shares. Including the distribution described below, the total amount distributed (including share buy-backs) to investors is approximately $113 million or 31% of original capital up to year-end.

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

Summary

In the fourth quarter of 2015, the NBDX NAV was impacted by mark-to-market volatility; however we believe that, on the whole, the true fundamental value of our positions will be realised over time given the quality of the underlying assets. Our portfolio also remains well diversified by sector.   

Volatility across global markets, caused in large part by a decline in commodity prices and heightened risk aversion, led to a lack of buyers and increasingly limited liquidity across credit markets in the quarter. Mark-to-market volatility resulting from a lack of liquidity was compounded by forced selling from hedge funds which were under pressure to raise cash in order to meet redemptions. We believe our investment thesis remains intact and that distressed debt markets will recover. We remain positive about the investments in the portfolio and believe we can generate attractive returns from current mark-to-market valuations.

To date, NBDX has returned 25% ($93 million) of original capital to investors through distributions and share buy-backs with another 6% ($20 million) approved to be distributed in the 1Q16 (see the description below) for a total of $113 million approved return of capital and share buy-backs. NBDX has 46 remaining investments in various stages of restructuring. We continue to see upside potential in these investments which have suffered from mark-to-market write-downs. We believe our portfolio to be undervalued and we continue to focus on returning capital to investors while also ensuring that we maximise the value of all assets in the portfolio. During the fourth quarter, there were positive and negative developments in certain investments, which are described in more detail below.

Portfolio

As of 31 December 2015, 96.4% of NBDX's NAV was invested in distressed assets. Cash available for distributions and working capital at the quarter-end was 3.6% of NAV.

NBDX's NAV per share decreased 8.4% in the fourth quarter, to $1.0091 per share from $1.1020 per share. Volatility in global markets continues to impact valuations of almost all financial instruments.  The increase in volatility has been caused by a number factors including the lack of liquidity in the leveraged loan and high yield bond markets and severe price declines in oil and other commodities.

We believe that performance relative to other distressed debt managers is best indicated by relevant distressed market indices including the HFRI Distressed/Restructuring Index², which declined 3.2% in the fourth quarter, and the performance of defaulted loans in the S&P/LSTA Index³, which declined 18.1% in the fourth quarter. Other indications of the volatility in lower quality credit markets include the Credit Suisse⁴ and Bank of America Merrill Lynch distressed high yield indices⁵, which returned (18.1%) and (15.9%), respectively, during the fourth quarter.

NBDX's NAV was impacted during the quarter by mark-to-market gains/losses in post-reorganisation equities, and energy and utility, financial and infrastructure investments. Significant events were:

·      Exploration & Production (E&P) investments were negatively impacted by further declines in underlying commodity prices. WTI oil prices were down approximately 18% during the fourth quarter while the Henry Hub (US Benchmark) natural gas prices fell approximately 7%. Unlike other sectors in the portfolio that have been marked down and we expect to recover, some portion of this decline could be permanent.

·      A California Supreme Court ruling will potentially delay development of one of the real estate investments in the portfolio. The market price dropped as a result of the ruling in addition to a lack of liquidity in the post-reorganisation equity markets.

·      A building and development equity investment was sold to a national homebuilder for a lower than expected price. We received one payment from the sale proceeds and there are additional distributions expected in 2016 and 2017 from escrows held back on the sale. The total investment (bank debt and equity) was a positive contributor to NBDX's NAV over the life of the investment.

·      As previously reported, one of NBDX's utility investments announced that it reached an agreement to sell its core asset, a combined-cycle natural gas power plant in the eastern USA to a large power generating company. The bid price on the investment increased 12% during the fourth quarter.

We continue to actively manage the investments in our portfolio in order to generate profitable realisations through significant events (asset sales, legal outcomes, foreclosures, etc.), which to a certain extent are not dependent on the liquidity of the credit markets, and to ultimately return capital to investors through consistent distributions.

Exits

We had one exit in the quarter bringing the total number of exits over the life of the fund to 34 exits with total net gain on the investments of $66.7 million generating a weighted average IRR⁶ of 21% since inception to date.

Shipping Investment: NBDX purchased $2.9 million face value of a senior secured loan at 89% of par in June 2013. The loan was performing and lenders benefited from strong asset coverage, stable cash flows and the protections inherent in the Jones Act operating model for shipping vessels. We anticipated a par recovery upon a refinancing in advance of the June 2016 maturity with relatively low volatility. The company completed its refinancing in November 2015 and we generated an 8% IRR on our investment. Total income from the investment was $0.5 million.

Face Value	Entry price	Exit Price	IRR
$2.9 million	89.00%	100.00%	8%

Share Buy Backs

During the quarter, NBDX purchased 1,105,766 shares in the market at a total cost of $1,118,034. The shares have been retired.

Capital Return

The Board of Directors resolved to return approximately $20 million (equivalent to approximately $0.0741 per share) to holders of NBDX shares by way of a compulsory partial redemption of NBDX shares. The current distribution comprises all unrestricted cash available to the NBDX share class, save for amounts deemed to be required to meet follow-on investments that may be required for share buy backs and cash for working capital requirements. Cash available for distribution includes principal repayments and distributions received during the quarter in addition to any cash from exits. See www.nbddif.com for further information.

Factsheet

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.

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Data as at December 31, 2015. Past performance is not indicative of future returns. All comments unless otherwise stated relate to NBDX.

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 proceeding 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.   The term 'weighted average IRR', as used in this fact sheet, is determined by Neuberger Berman by calculating, for each investment exit, (A) the investment exit's original purchase price, divided by (B) the total of all investment exits' original purchase prices, multiplied by (C) the IRR for the applicable investment exit. Neuberger Berman then calculates the sum of the figures calculated in the prior sentence for all of investment exits for the share class.
The weighted average IRR inception to date in the September 30, 2015 fact sheet was 18%. The correct weighted average IRR was 21% as of September 30, 2015.

-ENDS-

For further information please contact:

Neustria Partners                                                         [phone]

Nick Henderson

Rob Bailhache

Charles Gorman

 

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