Quarterly NAV and Monthly CLO

RNS Number : 7926X

T2 Income Fund Limited

21 August 2009

 



T2 Income Fund Limited ('T2I' or the 'Company')

Quarterly NAV and Monthly CLO Test Results

The Company announces that as at 30 June 2009 its preliminary unaudited net asset value per share was £1.44. The Company anticipates releasing its financial statements for the six-month period in early September. The increase in NAV, when compared to the NAV at 31 December 2008 of £1.25 per share, was due primarily to mark-ups of the portfolio investments in excess of mark-ups on the CLO notes, offset to some extent by the weakening of the US dollar against the British pound sterling for the six-month period. 

In the year-end accounts, the Chairman's Statement discussed at some length the anomaly created by the requirement to carry investments and liabilities at fair value, which for financial reporting purposes under International Financial Reporting Standards (IFRS) resulted in a substantial unrealized gain and an increase in NAV at year-end due to the comparatively greater decline in value of the CLO loan notes than the portfolio investments.  At 30 June 2009, the portfolio investments and the CLO notes were both marked-up in value compared to year-end. The net effect of these fair value determinations was a further increase in NAV. 

Shareholders should be aware that the Company's realization of the full incremental value suggested by the markdowns on the CLO loan notes is almost certain to prove to be unattainable and should consider evaluating the NAV reported under IFRS accordingly.

The Company also announces the test results as of 2 August 2009 pursuant to the indenture of the Company's subsidiary, T2 Income Fund CLO I Ltd (the 'CLO'). The report summarising the results of those tests can be found at the link below:

http://www.rns-pdf.londonstockexchange.com/rns/7926X_-2009-8-20.pdf

With respect to the various tests required under the CLO indenture, on 14 August 2009, the CLO passed all collateral coverage tests. It should be noted that the implications of failing the collateral coverage tests could include interest diversion, principal repayment, and/or limitations on reinvestment of available cash balances.

The CLO failed five portfolio percentage limitation tests, four of which relate to limitations on loans rated CCC+/Caa1 and lower by S&P and Moody's, respectively, and one related to the minimum percentage of senior secured loans required to be outstanding. It should be emphasized that the consequence of failing these percentage limitation tests is simply that each new investment made by the CLO must 'maintain or improve' the test result.

The failure of the senior secured loan minimum percentage was due to the amount of cash held within the CLO ($22.5 million); cash is excluded when calculating the percentage of senior secured loans. As cash is invested in new senior secured loans, this failure should be cured automatically. Although no new investments rated CCC+/Caa1 or lower have been made by the manager for some time, the failure of CCC+/Caa1 percentage limitations tests occurred due to historic and ongoing downgrades of companies by S&P and Moody's. The manager continues to evaluate opportunities to reduce the amount of these loans in situations where a sale could be achieved without incurring substantial principal losses. Nonetheless, these covenant violations described above do not have a material impact on the CLO's ability to invest in new loans. 

The next payment test date is 2 October 2009. While we continue to monitor the situation closely, we currently have only limited visibility with respect to which of the CLO tests may or may not be met on that date or other future dates, and whether any further principal paydowns or interest diversions may occur and, if so, the magnitude of those paydowns or diversions.  As described in previous press releases, the CLO indenture contains a variety of covenants, compliance with which could be made more difficult or impossible should credit markets deteriorate or the loans held by the CLO fail to make expected payments or otherwise not perform.  

Contacts:

Geoffrey Miller

T2 Income Fund Limited

[phone] or [phone]

Patrick Conroy
T2 Income Fund Limited
[phone]

Philip Secrett

Nominated Adviser

Grant Thornton UK LLP

[phone]

Michael Wentworth-Stanley

JP Morgan Cazenove

[phone]

Ed Gascoigne Pees

Financial Dynamics

[phone]

 

END

 

 

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