Portfolio Update - Ordinary Shares

RNS Number : 5374W

NB Distressed Debt Invest. Fd. Ltd

10 February 2017

 

10 February 2017

NB Distressed Debt Investment Fund Limited

Portfolio Update - Ordinary Shares

NB Distressed Debt Investment Fund Limited's ("NBDDIF") 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's holdings are 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.

On 10 June 2013, the investment period of the NBDD Share Class ("NBDD" or the "Company") expired. The assets of NBDDIF attributable to the Ordinary Shares were placed into the harvest period following the expiry of the investment period. To date, $111.2 million (equivalent to 89% of original capital) has been approved for distribution (income by way of dividend and capital) to shareholders since the realisation phase for this share class.

The Ordinary Share Class is one of three classes of shares in NBDDIF. The others are the Extended Life Share Class and the New Global Share Class, which both offer exposure to new opportunities in this asset class beyond 10 June 2013. The Extended Life Share Class was subject to an investment period which ended on 31 March 2015 and the New Global Share Class is subject to an investment period ending on 31 March 2017. Separate factsheets are produced for those share classes.

Manager Commentary

Markets continued their recovery during the fourth quarter due to stable economic data, anticipation of a pro-growth change in U.S. economic policy, and the positive reaction to the Federal Reserve's decision to increase interest rates. Liquidity in distressed debt markets remains strained as investment banks continue to pull back their proprietary investing activities due to regulatory changes. NBDD's remaining investments are predominantly in illiquid securities, which had limited price movement during the quarter. We believe value in these assets will be realised upon exit after a liquidity event (i.e. sale, refinancing, IPO) and we are committed to returning capital to investors as we exit investments.

NBDD had two exits during the quarter, which generated a total return (income and capital gains over the life of the investments) of $5.2 million. NBDD generated cash during the quarter of $0.7 million, consisting of $0.4 from exits and $0.3 million from portfolio activity. During the quarter the Board made an income distribution by way of dividend of $2.8 million to NBDD shareholders. Capital distributions and dividends totalled $17.8 million (approximately 48% of year-end NAV) during 2016 and $111.2 million over the life of the Company (equivalent to 89% of original capital). The ratio of total value (capital distributions, dividends and current NAV) to original capital was 119% of original capital at year-end.

Portfolio Update

Including the aforementioned income dividend of $0.0793 paid on 20 December 2016, NBDD's total return was (1.4%) for the quarter. NBDD ended the year with NAV per share of $1.0478 as compared to $1.1432 at the end of September. An unrealised gain in the restructured equity of a utility investment was offset by unrealised losses in two utility investments. The portfolio consists of 22 issuers across 12 sectors. While the majority of NBDD's investments were stable during the quarter; certain notable events are highlighted below¹:

·     A power generation company in the U.S. emerged from bankruptcy and secured debt claims were exchanged for public equity securities. The company paid a dividend of $2.00 per share after emerging from bankruptcy. Equity price at year-end was above the issued level at emergence (adjusted for dividend).

·     A power generation asset filed for Chapter 11 protection during December. We expected this development as part of a needed restructuring and it establishes a process to resolve certain perfected lien issues that could have otherwise had limited recoveries.

·     To avoid dilution and protect NBDD's investment in a utility investment, NBDD participated in an equity supported debt raise in the amount of $0.2 million.

Significant Value Change (approximately 0.5% of NBDD NAV or +/- $200,000)²

Industry	Instrument	Q4 16 Total Return	Comment
Utilities	Private equity	($0.4 million)	Equity diluted with new financing

Exit 33

In 2010, NBDD purchased $9.5 million of private shares in 14 side pocket investments from a large private equity fund that sought to provide liquidity to its investors who needed to exit these investments. The investments included European commercial real estate properties, an Indian real estate company, a European PVC manufacturer, and an aircraft leasing company. Each of the 14 investments was exited at different points in time through sales and refinancing of the underlying properties and companies, with a final wind-down at year-end 2016. The total return on this investment was $5.5 million, with initial cash invested of $9.5 million and total cash received over the life of the investments of $15.0 million (1.6x on initial investment). IRR on the investment was 12% over 72 months and ROR was 58%. 

Exit 34

Beginning in 2010, NBDD invested $4.7 million to purchase defaulted bonds issued by a US financial company. The company was the largest thrift failure in U.S. history and was seized by the Federal Deposit Insurance Corporation (FDIC) in 2008. Shortly after acquiring our position, the FDIC arranged for a sale of the bank's assets to another major financial institution. Proceeds from the sale are being administered by the FDIC and will be used to repay partially creditors of the company. Creditors also received recoveries from a settlement of various legal claims stemming from the company's failure and the subsequent sale. NBDD originally purchased the defaulted bonds because we expected favourable settlement and litigation outcomes relative to the market value of the bonds at the time of purchase. We ultimately sold the defaulted bonds during the fourth quarter because a recent settlement suggested limited upside to the current market price. Total return was ($0.3 million) over 76 months. IRR was (4%) and ROR was (7%).

Exit	Cash Invested	Cash Received	Total Return	Holding Period	IRR	ROR
33	$9.5 million	$15.0 million	$5.5 million	72 months	12%	58%
34	$4.7 million	$4.4 million	($0.3 million)	76 months	-4%	-7%

Distributions

During the fourth quarter, the Board announced an income distribution by way of dividend of $2.8 million to be paid to shareholders. This brings total distributions (capital and income) to $111.2 million, equivalent to 89% of original capital. During 2016, the Board distributed 33% of the beginning NAV (1/1/16) to shareholders through exits and capital activity in the investments.

Factsheet

An accompanying factsheet on the information provided above can be found here http://www.rns-pdf.londonstockexchange.com/rns/5374W_-2017-2-9.pdf or 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.

-ENDS-

For further information please contact:

Neustria Partners                                                         [phone]

Nick Henderson

Charles Gorman

Rob Bailhache

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Data as at 31 December 2016. Past performance is not indicative of future returns. All comments unless otherwise stated relate to NBDD.

Source: Bloomberg, except where otherwise stated.

1. Notable corporate events may or may not result in an increase or decrease in the value of an NBDD investment or a change in NBDD's NAV per share. Please note that an investment may experience a change in value (positive or negative) during the quarter whether or not it was subject to a notable corporate event. Not all events involving existing investments are disclosed above. In addition, certain corporate events may not have been disclosed due to confidentiality obligations.

2. Industry categorisations determined by Neuberger Berman. Total Return determined by the Administrator, and includes realised and unrealised gains and losses, expenses, FX gains and losses, and all income on investments according to US GAAP accounting.

 

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