12 Dec 2008 08:00
Company Update
The Directors (the "Board") of T2 Income Fund Limited (the "Company"; TIDM: T2I) today announce that following the very dramatic declines across the global credit markets, and in view of the recent significant decline in the share price of the Company and a lack of liquidity in its shares, the Board has reviewed a variety of options with a view to maximizing shareholder value. This announcement sets out the Board's conclusions following that review and the Board's plans for the Company going forward.
The Board continues to consider all options available to it and, especially in view of the recent extreme volatility in the markets in which the Company operates, will reassess those alternatives on a regular basis.
The Company's Investment Portfolio and Financing Structure
The Company's portfolio consists of corporate loans (primarily senior secured, first lien loans), almost all of which are held within the Company's collateralized loan obligation ("CLO") subsidiary, T2 Income Fund CLO I Ltd. ("T2 CLO").
In order to finance the Company's portfolio, T2 CLO has issued long-term notes to third party investors ("Senior Notes") in the amount of US$249.5 million (representing approximately 305% leverage as of the date of incurrence, which is below the 500% leverage limitation approved by shareholders in December 2006). This funding arrangement has and continues to provide the Company with extremely attractive long-term financing at a low cost of capital (12 years in duration at LIBOR plus 75 basis points). The Company's return on the underlying portfolio held by T2 CLO is generated through its ownership of income notes ("Income Notes") issued by that entity, which securities receive the residual income after payment to the third party CLO noteholders and represent the first loss portion of the CLO structure and which are junior to the Senior Notes.
The Senior Notes contain a variety of covenants, including collateral coverage tests. Compliance with certain of these covenants may be made more difficult or impossible should credit markets continue to deteriorate and/or the rating agencies continue to downgrade corporate loans on an accelerated basis. Should certain covenants be violated, the Company's income from its ownership of the Income Notes could be diverted to the Senior Notes (for debt paydown), thereby depriving the Company of the vast majority of its revenues.
As of this date, the Company has not experienced any income diversion from its Income Notes. However, at the same time, in light of unprecedented volatility and price declines in the global credit markets, the substantial increase in overall corporate debt defaults and a vastly higher number of credit ratings downgrades, there can be no certainty that relevant covenants will not be violated and that an income diversion will not occur, or that the CLO structure will endure for its stated duration.
The Company's Dividend Policy
The suspension of the Company's dividend as of the third quarter of 2008 was made as the Board believed it prudent, and in the best interest of shareholders, to conserve the Company's cash which could, if necessary, serve to fund the Company's operations for some period of time in the event of a diversion of income from the Income Notes. The Board is aware that many shareholders hold the Company's shares with the objective of receiving regular dividend payments, and intends to reinstate a dividend as soon as warranted by market conditions and the Company's circumstances.
The Value of the Company in Liquidation
In view of the significant decline in the Company's share price and a lack of liquidity in those shares, the Board has considered the possibility of liquidation and a return of capital to shareholders.
The Board has concluded that liquidation at this time would not serve the interests of the shareholders. A liquidation would likely involve the sale of those limited assets held outside T2 CLO, combined with the exit of the Company from the CLO structure, which exit could be facilitated in one of two ways:
1) Voluntary prepayment of the Senior Notes from the proceeds derived from the sale of the underlying portfolio assets with the balance of the residual funds paid to the Company; or
2) The sale by the Company of the Income Notes.
The Board has concluded that the first alternative would not be viable as the CLO structure does not permit voluntary prepayments of the Senior Notes until 2011 unless all third party CLO noteholders agree otherwise. Given the current state of the market for the sale of corporate loans, it is unlikely that an accelerated liquidation of the CLO structure at this time would result in the realization of proceeds that would be sufficiently attractive to all noteholders to induce them to permit such voluntary prepayment, and, in any event, could result in no residual value for the Company's holdings in the CLO structure.
The Board has also concluded that in respect of the second alternative, as there currently exists no significant market to purchase CLO equity (such as the Income Notes), the Company could not sell its Income Notes in T2 CLO at a price that would result in a meaningful return for shareholders in a liquidation.
Given that the Company thus far continues to receive the income benefit of its ownership of the Income Notes and as the possibility exists for a significant longer-term return subject to the continued operation of the CLO structure, the Board believes that the shareholders are currently best served by continuing the Company as a going concern.
The Relationship between the Company's Asset Values and NAV
As presented in the Company's financial disclosure filings, as the market value of the Company's portfolio investments has declined, so too has the market value of the Senior Notes. Those side-by-side declines have had an offsetting effect, such that the Company's net asset value ("NAV") has been significantly more stable than the value of the underlying portfolio assets. As of 30 September 2008, the Company's unaudited NAV was £1.11 per share.
However, as noted above and in light of current market conditions, if the Company and/or T2 CLO were to be liquidated (which T2 CLO is not currently permitted to do voluntarily in any event without the unanimous consent of the holders of the Senior Notes, as described above) those sales would likely result in the realization of the current market prices for those assets. At the same time, while the declining market value of the Senior Notes has a positive effect on NAV, the obligation of T2 CLO to repay the Senior Notes to the third party holders is based upon their full par value. Accordingly, shareholders should view the Company's stated NAV as more representative of its longer-term value assuming its continuation as a going concern rather than its current liquidation value.
The Company's Investment Approach
The Board and the Company's Investment Manager have decided to curtail any new corporate debt investments outside the CLO structure (whereas the continuation of such investments within T2 CLO at some level is necessary to comply with the provisions of its indenture) in order to build the Company's cash position. This strategy is being implemented in order to increase liquidity so that if income is diverted from the Income Notes to third party noteholders, the Company may still have sufficient liquidity to provide for the continuation of its operations for some period, or for the payment of dividends to the Company's shareholders as market conditions and the Company's circumstances permit.
The Company's Refinancing Opportunities
The Company has historically and may again have the opportunity to repurchase certain of the Senior Notes at significant discounts to their par values, which should serve to reduce the Company's overall leverage while simultaneously realizing value. The Company may attempt to raise capital in order to pursue those opportunities, should they become available.
Important notice
This announcement includes statements that are, or may be deemed to be, ''forward-looking statements''. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'', ''will'' or ''should'' or, in each case their negative or other variations or comparable terminology. These forward-looking statements include matters that are not historical facts. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the Company and its subsidiary. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. The business, financial condition, results of operations and prospects of the Company and its subsidiary may change. Except as required by law or applicable regulation, the Company does not undertake any obligation to update any forward-looking statements, even though the situation of the Company or its subsidiary may change in the future. All of the information presented in this announcement, and particularly the forward-looking statements, is qualified by these cautionary statements.
Contact:
Patrick Conroy
T2 Income Fund Limited
+1 203 983-5282
Philip Secrett
Nominated Adviser
Grant Thornton UK LLP
+44 (0) 207 383 5100
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