Tuesday 15 September, 2009

OK in my column on Saturday I talk about the T2 Income fund – over the next two days I’m going to spell out some of the risks and potential for this relatively complicated little fund. Make your own mind up and please drop me an email if you have any comments or thoughts.

Just to remind ourselves of this curious little fund, lets race through the basics

·         It’s a Guernsey domiciled fund that wants to go for a main market listing

·         It’s based on a US fund run by T2 Advisors based in Connecticut

·         It invests in debt securities to mid sized mainly private companies through first rights secured debt with low leverage

·         Defaults so far have been low (one company)

·         But the dividend (19.5p paid out between 2004 and 2008) was stopped last year

At the core of this fund is a CLO vehicle that has $248.9m of debts with one big chunk in senior debt $175m) at a very attractive 29 basis points above LIBOR (that’s cheap and its not due to be repaid until 2019). There are other tranches of debt and overall the CLO has to pay out 75 basis points above LIBOR.

On paper ranged against this debt in the CLO there’s $302m of assets – debts issued to these mid cap companies. The fund’s US managers expect this money to be repaid in full but the market is suggesting that this is unlikely with most secondary prices quoted at  80c or even less.

If the whole portfolio was valued at 70c or less the CLO assets would be valued at less than its liabilities. A more sensible middle basis suggests that NAV is about 84p below water.

David Stevenson is also one of the Four Wise Monkeys at the online TV investment programme www.4wm.co.uk

adventurous@ft.com