Portfolio Update - Extended Life Shares

RNS Number : 5648P

NB Distressed Debt Invest. Fd. Ltd

20 August 2014

 



NB Distressed Debt Investment Fund Limited

Portfolio Update - Extended Life Shares

NB Distressed Debt Investment Fund Limited ("NBDDIF") is a Guernsey-incorporated closed-ended investment company that launched in June 2010. NBDDIF's primary objective is to provide investors with attractive risk-adjusted returns through long-biased, opportunistic stressed, distressed and special situation credit-related investments while seeking to limit downside risk.

NBDDIF owns holdings diversified across distressed, stressed and special situations investments, with a focus on senior debt backed by hard assets. The portfolio is managed by the Distressed Debt team at Neuberger Berman, which sits within what we believe is one of the largest and most experienced non-investment grade credit teams in the industry.

The Extended Life Share Class ("NBDX") was created in April 2013¹ and is subject to an investment period ending on 31 March 2015, following which the assets will be placed into run-off. NBDDIF will seek to return to the holders of Extended Life Shares all net capital profits arising from the exit of any assets attributable to those shares, at least every six months, with the first such distribution having been made in the first quarter of 2014.  A second distribution is expected to be made in the third quarter of 2014.

The Extended Life Shares are one of three classes of shares in NBDDIF. The other classes are the Ordinary Share Class and the New Global Share Class. The Ordinary Share Class is subject to an investment period which ended on 10 June 2013 and the Global Share Class is subject to an investment period which will end on 31 March 2017. Separate factsheets are produced for those classes.

Summary

We were gratified to see the positive NAV movement achieved in the first half of 2014. In the second quarter we exited three positions, which contributed to the increase in our NAV for the quarter.  NBDDIF expects to make a second capital profits return to shareholders in the third quarter of 2014 in respect of NBDX.  We continue to see significant upside potential in the existing portfolio, which we expect to realise as we restructure and exit investments. We believe the pipeline of distressed debt opportunities remains robust in our sectors of interest.

Portfolio

As at 30 June 2014, 98.5% of NBDDIF Extended Life Share NAV ("NBDX's NAV") was either invested in distressed assets (97.5% of NBDX's NAV) or allocated to fund the scheduled capital profits return to shareholders (1.0% of  NBDX's NAV). Cash available for new investments and working capital ended the quarter at 1.5% of NBDX's NAV. NBDX's NAV per share increased 4.8% in the first half of 2014, to $1.2801 from $1.2218 per share. We believe that performance comparison versus other distressed debt managers is indicated by the HFRI Distressed/Restructuring Index² which returned 5.5% in the first half of 2014. 

In the second quarter of 2014, NBDX's NAV per share increased 1.6% primarily due to mark-to-market gains on positions which reached key restructuring milestones and the reversal of an accrual for performance fees.  We added incrementally to existing names and initiated new positions in the shipping sector.  During the quarter we saw our 21st, 22nd and 23rd exits since inception, which are described in detail below.

Capital Profits Return

On 1 August 2014, the Board of the Company resolved to return $4.19 million (equivalent to approximately $0.0125 per share) to holders of NBDX shares by way of a compulsory partial redemption of NBDX shares. The current return comprises the total capital profit from investment exits from the NBDX portfolio in the period from 1 January 2014 through 30 June 2014. This distribution is expected to be made in the third quarter of 2014.

Market Update³

We continue to experience an improving environment for distressed debt in our sectors of interest. We believe the pipeline of opportunities in real estate, transportation and energy debt is particularly compelling, both in the U.S. and Europe. EU banks in particular increased their disposal of European and U.S. loans and assets to €64 billion in 2013, versus €46 billion in 2012, €36 billion in 2011 and €11 billion in 2010. €44 billion of debt sales have occurred in the first six months of 2014, on a run-rate to exceed €80 billion for the full year. However, over €1 trillion of non-performing loans remain on EU banks' balance sheets. The ECB is scheduled to assume supervisory authority for all euro-area lenders later in 2014. We believe that an ECB-sponsored harmonization of NPL definition across countries may facilitate further recognition and disposal of distressed loans. In the U.S., we continue to see a healthy pipeline of distressed assets in real estate, energy and other asset-intensive sectors. 

Exits

In the second quarter we had three exits, bringing our total to 23 since inception.  These exits generated approximately $5.9 million of total income and gains for NBDX.

Investment 21: We purchased $15.2 million face value of secured term loans at 86.9% of par, issued by a media company with businesses including broadcast radio and outdoor advertising.  The term loans were secured by substantially all of the assets of the company, including broadcasting licenses and equipment.  We believed that the debt would be refinanced, or that in the event of default, we would ultimately own the assets at an attractive valuation.  The company subsequently engaged in a series of transactions which termed out debt maturities and enhanced the economics of its bank debt.  As a result of these actions and positive operating performance, the prices of the company's debt moved up and we exited the position in the secondary market.  Total income from this investment was $3.6 million.

Investment 22: We purchased $3.8 million of defaulted senior secured debt at 85% of par, secured by an office building in Belgium.  Our intention was to purchase additional pieces of debt and engage in the restructuring process.  We believed that even in a downside valuation scenario, the sale of the collateral would cover our purchase cost of the debt.  However, we were unable to purchase additional debt and the original lenders sold the collateral at the lower end of our valuation.  As a result, we received our original capital back from sale proceeds and other interim payments and generated no material income from the investment.

Investment 23: We purchased $9.0 million of post-reorganization equity of a power generation company which owned three power plants located in the northeast U.S. Our purchase price valued the plants at approximately $520/kW, which we believed represented a discount versus the likely proceeds of a sale of the plants. Subsequently the company's assets were sold to a strategic buyer for a value of approximately $620/kW.  We exited the investment through a combination of cash distributions and secondary sales of shares. Total income from the investment was $2.4 million.

Data as at June 31, 2014. Past performance is not indicative of future returns. All comments unless otherwise stated relate to NBDX.

1.         The Extended Life Share Class was created in April 2013 when holders of Ordinary Shares were invited to convert those shares into Extended Life Shares.  The information in this fact sheet therefore relates to the Ordinary Shares up to April 2013 and to the Extended Life Shares thereafter.

2.         The HFRI Distressed/Restructuring Index reflects distressed restructuring strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings (provided by Hedge Fund Research, Inc.).

3.         Source:  Data from PWC Market Update Reports dated March 2014 and July 2014.

-ENDS-

For further information please contact:

Neuberger Berman Europe Limited                               [phone]

Damian Holland

Anji Stewart

Financial Dynamics                                                            [phone]

Neil Doyle            

Ed Berry

Laura Ewart

An accompanying factsheet on the information provided above can be found on the Company's website www.nbddif.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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