David Stevenson: Back on T2

Monday 21 September, 2009

OK so we’re back on T2 again and trying to draw all the threads together.

That $250m of debt in the CLO vehicle is cheap – it costs just 75 basis points above LIBOR overall.

It is lending this money out at well above those levels and overall the T2 income fund is capable of generating income streams of between £10 and £12m a year in interest depending on where Libor is in the future.

Strip out the expenses including the cost of that debt (between £7.3 and £9.3m a year depending on interest rates), and I think even very cautiously it can churn out between £3 and £2.5m a year. Assume that the fund managers keep half of that in reserve – that produces free cashflow for dividends of between £1.25m and £1.5m a year, or 10 per cent per annum.

Turning back to the assets I think it’s sensible to assume that over the next ten years there will be defaults and rather painful haircuts in negotiations with its borrowers and I’d say that a 10 per cent default rate is fairly possible in total implying assets in the CLO of about $270m – leaving about $22m of assets for the T2 income fund.

I also think that the fund will work hard to come up with some cunning plan to buy more of its own debts (those Class B to E notes) at dirt cheap prices and then cancel those loans and rebuild the equity base. Even if we assume they could buy $20m worth for say $8m, that would put an extra $20m on the equity side of the equation – and remember that the managers will be keen to hold on to some of that cash produced by the income stream to do exactly this.

Add this all up and I don’t think you’ve got a monumental potential capital uplift – I could see between $25 and $40m in equity coming out of the CLO – but a decent one nonetheless and that income flow. I also think that if the market tank over the next few weeks (which I think they will) then we should expect the share price to pull back to around 25p.

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

adventurous@ft.com