Wednesday 16 September, 2009:
We’re back on the subject of T2 again today, this time running through the risks – in no particular order I’d identify the following:
1. This is not a simple structure. The top co fund actually owns very little except for a big CLO vehicle
2. Even the managers of the fund think that the rest of this year is going to be a bad one with credit markets taking another hit
3. When it does manage to sell its loans the managers have to take that cash and reinvest it back into the asset class – they can’t just store up the cash and then pay off those loans that fund the assets. On the plus side that means the managers might be able to mop up new assets at bargain basement prices but on the down side it also means that it could get doubly caught out if the credit markets in corporate debt tank again
4. The companies may not default but they might start proving difficult and even default although its worth noting that in many bankruptcies borrowers end up having to pay to the likes of T2
5. The exchange rate could go horribly wrong - there’s no hedging policy in place
6. Even the managers admit that it’s difficult to come up with a completely simple and easy to understand system for valuing illiquid assets
7. The original investors might start dumping the stock and with poor liquidity the prices could take a real hammering.
8. The T2 fund is only valued at £12m at current levels yet the management fees for the last full year were a whopping £3.3m (including expenses) based on the 2 per cent of total assets!
I’m sure there are lots of other risks that the experts could come up but for now I think you get the picture. Its risky.
Last year clearly got very scary and at one stage the shares traded at 1p on intra day trading (someone made a nice profit – they’re now at 27p) as investors reacted very badly to the suspension of dividends.
These dividends have now restarted at a very low level (0.5p a share for the quarter ending June 2009) – also the fund managers have been buying back their own debt and have so far bought back $4.1m of debt for $900,000. That cuts both ways – on paper they could buy out the $73m of junior debt (Class B to Class E) for a bargain price of say $25m instantly producing a mountain of equity in the CLO. But if these are the prices for the CLO’s own debt, what does it tell us about any market price for the loans advanced to its US mid caps!
David Stevenson is also one of the Four Wise Monkeys at the online TV investment programme www.4wm.co.uk
adventurous@ft.com
