16 Sep 2009 07:30
T2 Income Fund Limited ("T2" or the "Company")
Monthly CLO Test Results
The Company announces the test results as of 2 September 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/1252Z_-2009-9-15.pdf
With respect to the various tests required under the CLO indenture, on 14 September 2009, the CLO passed all collateral coverage tests and all of the loans held within the CLO continue to pay the interest due.
It should be noted that the implications of failing the collateral coverage tests are very complicated, and the consequences could include interest diversion, principal repayment, or limitations on reinvestment of available cash balances.
Distinct from the collateral coverage tests are the percentage limitation tests. 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 CLO failed four portfolio percentage limitation tests, two of which relate to limitations on loans rated CCC+/Caa1 and lower by S&P and Moody's, respectively, one related to the highest single obligor for non-senior secured loans and one related to the minimum percentage of senior secured loans required to be outstanding.
The failure of the senior secured loan minimum percentage was due to the amount of cash held within the CLO ($32.1 million); cash is excluded when calculating the percentage of senior secured loans. The Company believes that the substantial cash balance provides an opportunity to acquire better-rated securities at discounts to their par value, which should help to improve the quality of the portfolio as well as improve the CLO's collateral test coverage ratios under a variety of scenarios. 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.
The failure of the highest single obligor for non-senior secured ("second lien") loans percentage was due to the sale of certain loans at the CLO's option in August , due to credit concerns, at a realized loss, which reduced the aggregate collateral balance from approximately $303 million in July 2009 to $297 million in August 2009. Since there is a single non-senior secured loan of $9.0 million currently outstanding, the 3.0% maximum limit percentage was violated. However, this specific test is a "maintain and improve" covenant and thus does result in interest diversion or principal paydown.
These covenant violations described above do not have a material impact on the CLO's ability to invest in new loans, and all of the loans held within the CLO continue to pay the interest due.
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.
While the current month's test results are not controlling as to the 2 October 2009 payment test, it may be worth noting that, had this been a payment test, there would not have been an interest diversion.
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 MillerT2 Income Fund Limited+353 1 4433 466
Patrick ConroyT2 Income Fund Limited+1 203 983 5282
Philip SecrettNominated AdviserGrant Thornton UK LLP+44 (0) 20 7383 5100
Jos TrustedSinger Capital Markets Limited +44 (0) 20 3205 7622
Ed Gascoigne PeesFinancial Dynamics+44 (0) 20 7269 7132