Last checked at 
9 Feb 2009 10:50
Interim Management Statement
9 February 2009
JZ Capital Partners Limited ("JZCP" or the "Company"), a closed ended investment company incorporated in Guernsey whose corporate objective is to create a portfolio of investments in businesses primarily in the United States, announces its Interim Management Statement ("IMS") for the period from 1 October 2008 to 6 February 2009.
Market Update
While economic conditions in the United States are very difficult, measured in terms of their respective operating performance our micro-cap investments have on the whole held up reasonably well. Of the eight primary micro-cap investments, the last twelve months EBITDA as of 31 December 2008 remained relatively flat, with a slight increase of 0.3%, versus the last twelve months EBITDA as of 30 September 2008.
The other side of the coin is that in these market conditions there are increased opportunities for JZCP to invest in fundamentally strong companies on relatively attractive terms.
Valuation Policy
It is policy to value JZCP's micro-cap investments at least twice yearly as at the interim and year end dates. Such values plus accrued interest and/or dividends are applied in subsequent Net Asset Value ("NAV") calculations and in the IMS until the next half year valuation unless the Directors become aware of any particular new factor that affects the valuation of any particular investment. Given these unprecedented volatile markets, the Directors have concluded it is prudent to update the valuation of the micro-cap investments at 31 December 2008.
JZCP's valuation of its private investments is derived from employing market comparable multiples and we recognize that the realization of any of these investments in current markets would be challenging. Therefore, we have, in respect of most private investments, increased the marketability discount (based on the amount of the relevant enterprise value less senior debt) from 10% to 20% to reflect the current lack of liquidity in the merger and acquisition market.
Net Asset Value and Valuation
For the three months ended 31 December 2008, JZCP's NAV decreased by $51.0 million or 15%.
| 1/7/2008 (1) | 30/9/2008 | 31/12/2008 | |
| Net Asset Value ($000's) (2) | $353,375 | $342,035 | $291,050 |
| Number of Ordinary Shares (000's) | 97,528 | 97,528 | 97,528 |
| Net Asset Value per Ordinary Share ($) | $3.62 | $3.51 | $2.98 |
| Market Price per Share ($) | $2.22 | $1.91 | $0.70 |
| NAV to Market Price Discount | 39% | 46% | 77% |
(1) JZCP essentially began operations on 1 July 2008.
(2) Per JZCP Board.
Balance Sheet
Below is a summary of JZCP's balance sheet as of the relevant dates:
| ($000's) | 1/7/2008 | 30/9/2008 | 31/12/2008 |
| Cash (1) | $110,391 | $112,199 | $108,761 |
| Listed Equities | 75,017 | 70,648 | 64,637 |
| Listed Debt | 44,394 | 42,436 | 26,425 |
| Private Investments | 295,093 | 293,581 | 271,705 |
| Other Assets (2) | 491 | 1,322 | 1,919 |
| Total Assets | $525,386 | $520,186 | $473,447 |
| - Liabilities | (487) | (989) | (815) |
| - Zero Dividend Preferred Shares | (182,214) | (165,643) | (138,259) |
| - Forward Currency Derivative Contract | 10,690 | (11,519) | (43,323) |
| Net Asset Value | $353,375 | $342,035 | $291,050 |
(1) On 31 December 2008, $51,885 of cash was pledged to support a currency hedge.
An additional $22,751 was pledged on 22 January 2009.
(2) Includes accrued dividends on Listed Equities.
All of the Company's asset classes have been negatively affected by the current domestic and worldwide economic slump. For the three months ending 31 December 2008, our listed equities declined 8.5%, while the Standard & Poor's 500 index declined 22.5%. Our listed bank debt, both first and second lien investments, declined by 37.9%, led by a 50.6% decline in second lien loans. Our mezzanine investments declined by 8.8%, while the micro-cap portfolio was down 8.4%. Note that of the 21 mezzanine and micro-cap investments, 19 are current on their interest payments at 31 December 2008.
The Zero Dividend Preferred Shares ("ZDPs") are due for redemption on 24 June 2009. The cover for the ZDP's is 3.0x.
Portfolio
At 31 December 2008, the Company's investment assets consisted of 46 investments totaling $473.0 million broken out as follows:
| Number of Investments | % of Portfolio Valuation as of 31/12/08 | |
| Micro-Cap Portfolio | 9 | 33% |
| Cash | 23% | |
| Mezzanine Investments | 12 | 16% |
| Listed Equity | 3 | 14% |
| Legacy Portfolio | 11 | 6% |
| Bank Debt | 11 | 8% |
| Total Investment Assets | 46 | 100% |
43% of the portfolio is invested in "liquid" assets, which consist of cash, listed equity, and listed debt. These asset classes are valued at third party listed prices. Cash is mainly deposited with HSBC and JPMorgan. 57% of the portfolio is invested in private investments in micro-caps or mezzanine investments. These investments are valued at fair value by the JZCP Board of Directors. As a point of reference, the average purchase multiple of the micro-cap investments was 6.9x. The current average enterprise multiple used at 31 December 2008 was 6.2x.
At 31 December 2008, 61% of the JZCP investments were valued below cost, and 39% were valued at or in excess of cost.
The top ten investments as of 31 December 2008 were as follows:
| ($000's) | Asset Category | Original Cost | Valuation as of 30/9/2008 | % of Portfolio Valuation as of 30/9/08 | Valuation as of 31/12/2008 | % of Portfolio Valuation as of 31/12/08 | |
| Safety Insurance Group, Inc. | Listed Equity | $6,816 | $41,668 | 10% | $44,688 | 12% | |
| Accutest Holdings, Inc. | Micro-cap | 31,516 | 30,439 | 7% | 35,322 | 10% | |
| Dental Services inc. | Micro-cap | 19,854 | 28,685 | 7% | 23,700 | 7% | |
| TAL International Group, Inc. | Listed Equity | 13,798 | 27,842 | 7% | 20,248 | 6% | |
| Wound Care Solutions, LLC | Micro-cap | 39,595 | 25,031 | 6% | 19,152 | 5% | |
| BG Holdings, Inc. | Micro-cap | 19,174 | 18,303 | 5% | 18,869 | 5% | |
| Petco Animal Supplies, Inc. | Listed Debt / Mezzanine | 19,468 | 19,372 | 5% | 18,841 | 5% | |
| Dantom Systems, Inc. | Micro-cap | 18,716 | 19,728 | 5% | 18,144 | 5% | |
| Continental Cement Company, LLC | Mezzanine | 15,000 | 16,948 | 4% | 17,592 | 5% | |
| GHW Holdings, Inc. | Micro-cap | 7,467 | 15,752 | 4% | 15,214 | 4% | |
| Top Ten Investments | $191,404 | $243,768 | 60% | $231,770 | 64% | ||
| Remaining Investments | 189,643 | 162,897 | 40% | 132,442 | 36% | ||
| Total Portfolio | $381,047 | $406,665 | 100% | $364,212 | 100% | ||
The portfolio is diversified across the following business sectors:
| Number of Companies | % of Portfolio Valuation as of 31/12/08 | |
| Health Care Equipment & Services | 7 | 26% |
| Support Services | 10 | 21% |
| House, Leisure & Personal Goods | 6 | 12% |
| Financial General | 4 | 13% |
| Industrial Engineering | 8 | 10% |
| Construction Materials | 4 | 10% |
| Other | 6 | 8% |
| Total Portfolio | 45 | 100% |
Material Events and Transactions
In the three months ending 31 December 2008:
The Company invested $4,500,000 of additional preferred stock in ETL Holdings to effect an add-on acquisition.
The Company received an escrow payment of $3,641,235 from the 2007 sale of Mid America Recycling.
The Company received an escrow payment of $452,489 from the sale of Professional Paint.
The Company invested $2,130,000 of additional preferred stock in BG Holdings to support certain capital purchases.
Dividend
On 22 December 2008, the Company paid a dividend of 4.5c per ordinary share.
About JZCP
JZCP is a closed ended investment company incorporated in Guernsey. The Company's corporate objective is to create a portfolio of investments in businesses primarily in the United States providing a superior overall return comprised of a current yield and significant capital appreciation. The Company's strategies include investments in micro-cap buyouts, mezzanine loans (sometimes with equity participations) and high yield securities, senior secured debt and second lien loans and other debt and equity opportunities. The Company's Ordinary Shares and Zero Dividend Preferred Shares are listed on the London Stock Exchange.