Pre - close Trading Update

RNS Number : 0069J

Greenwich Loan Income Fund Ltd

24 June 2011

 



Greenwich Loan Income Fund Limited

Pre-close Trading Update

24 June 2011

Given the significant changes within the Company during the first half of 2011, Greenwich Loan Income Fund Limited ("GLIF" or the "Company") is today providing investors with the following pre-close trading update.

CLO Review

As announced in April, Berkshire Capital is conducting a strategic review of GLIF's holding in T2 CLO I Ltd ("the CLO"). It is expected that the review will conclude during Q3 2011, resulting in a decision to dispose of all, part or none of the Company's investment in the CLO.

Depending on the price at which any reduction in the CLO position is executed, it could reduce the management fees from the end of the first quarter of 2012 to close to the minimum level of £155k per quarter specified in the management fee variation agreement, compared to the £911k per quarter to be paid for the remainder of this financial year. It could also provide an opportunity to diversify the asset base of the Company, and alongside the review of the CLO, GLIF's investment manager, T2 Advisers, is reviewing potential reinvestment strategies. However, any diversification will only be considered if it is expected that the risk/return profile of the portfolio as a whole and the current dividend policy are not adversely affected.

Whatever the outcome of the CLO review, the variation to the management fees agreed recently should result in an increase in net income for GLIF during 2012. The Board believes that a sustainable and progressive dividend is more valuable to long term shareholders than achieving the highest possible dividend in any one period. In addition, being an offshore investment company, GLIF is not bound by the strictures of s1158-1159 of the Corporation Taxes Act 2010 (previously s842) in setting the proportion of revenue to be paid out in any one financial year.  The Board will therefore seek to use that flexibility to provide greater confidence in the level of the Company's dividend and to build the potential for a growing level of dividend in the future.

Asset Management Investment Company acquisition

The acquisition of Asset Management Investment Company plc (AMIC) was completed in January for £12.3m. The acquisition has performed slightly ahead of expectations.

A total of £7.5m in cash has been received by GLIF as a result of the transaction.  This includes £4.0m as repayment of the principal of the FX Concepts loan. A further amount of £0.5m in cash is expected in the second half of 2011 and a final £0.1m in cash in 2012. This means that the Investec loan facility taken on to finance the AMIC acquisition will be repaid in the coming weeks.

Lombardia Capital Partners has agreed to swap the convertible loan note held by GLIF for a non-convertible loan note with a face value of $2.5m. This represents an uplift over the acquisition value of approximately $700k, which will be recognised before the end of the first half of 2011. At the same time GLIF is to swap its equity position in Lombardia for a ten year duration penny warrant over the same percentage of the issuer's equity.

The Board will review the valuation of its holding in IFDC and the Lombardia penny warrant for its end of June valuation.

Direct investment disposals

The Company has made three disposals of direct investments in H1 2011. Two positions in the CLO notes were sold, as prices had recovered significantly since the notes were purchased and the IRRs had fallen significantly below GLIF's target returns. In addition GLIF's holding in Koosharem 1st Lien was sold following a significant recovery in the price in this half year. GLIF continues to hold $10.4m of the Koosharem 2nd Lien. The aggregate profit of these three transactions was $2.2m.

Corporate strategy

The Company is managed in order to optimise revenue and capital value in sterling. It is also a core tenet of the Company's approach to managing risk that diversification, rather than hedging, is sought to reduce position risk. It is for this reason that the investment policy allows for investment outside of the US and it is likely over time that the asset base outside of the Company's core US business will grow.

In evaluating prospective future investments after any deconsolidation of the CLO, GLIF will be targeting net returns of 10-15%. This is a target return only, based on a number of assumptions which may or may not materialise. There can be no guarantee that the Company will achieve this level of return.

Equally important in achieving an optimal return to shareholders is the management of the corporate structure. The goal of this process will be to bring the weighted average cost of capital below 10%, ensuring the Company delivers shareholder value over and above simply providing a wrapper for an asset.

Another potential source for value accretion is further acquisitions and prospective targets continue to be evaluated by the Company. As stated before the AMIC transaction, a transaction will only be considered if it will not adversely affect the risk profile of GLIF's business, it is accretive to shareholders and it does not adversely affect GLIF's dividend policy. Finally, any transaction has to be consistent with the investment policy of the Company.

Investment strategy

Whilst the investment policy, following the amendment in January, is established, the investment strategy is likely to evolve as the CLO review process is brought to a satisfactory conclusion.

The CLO market itself represents a significant potential opportunity for reinvestment. It is a $250bn market in the US and $70bn in Europe. There are opportunities in a wide variety of instruments, and the manager has extensive experience in this area through investments held within its other two listed vehicles, TICC and Oxford Lane Capital (NasdaqGS: TICC and OXLC). The CLO market remains opaque and with limited liquidity, but this provides ample scope for an experienced manager to add value.

There is also the bilateral loan market, which was the origin of TICC, and in which the Company's investment manager believes there are significant opportunities in both the US and in Europe.

The Board will continue to review other options to diversify the business within the parameters of the investment policy, as greater diversity will reduce position specific risks. Other managers will be considered if complementary to the existing business and investment manager.

Investment managers' market update

The markets for syndicated corporate loans and CLO securities have continued to show strength since the end of the first quarter 2011. Primary CLO activity has resumed in the US after several quarters of virtually no activity, with all vehicles showing less leverage and higher weighted average spreads than CLO vehicles of several years ago.   The secondary market for CLO securities has seen relatively stable pricing (especially compared with the past several years) and better liquidity, as the asset class has gained standing with a broader range of market participants.

Investor demand for yield-related products has led to a continuation of the generally strong prices seen during the first quarter, with significant numbers of new corporate loans coming to the syndicated market.  The secondary syndicated loan market continues to demonstrate adequate liquidity, with transaction volumes appearing to be similar to last year.  

With respect to both the primary and secondary markets, we continue to favour middle market corporate syndicated loans over larger more broadly syndicated transactions.  We believe that those middle market issues provide us with both more compelling pricing and also frequently superior credit terms compared with those in the broadly syndicated market.  While the research and analysis necessary to select and manage those middle market loans tends to be greater compared with broadly syndicated loans, we believe that middle market-based opportunities remain sufficiently compelling to justify those efforts.

For further information, please contact:

Contacts:

Geoffrey Miller

Greenwich Loan Income Fund Limited

[phone]

Patrick Conroy

Greenwich Loan Income Fund Limited

[phone]

Philip Secrett

Nominated Adviser

Grant Thornton Corporate Finance

[phone]

James Maxwell

Singer Capital Markets Limited

[phone]

Ed Berry

Financial Dynamics

[phone]

 

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