BOUSSARD & GAVAUDAN HOLDING LIMITED

Transcription

1 BOUSSARD & GAVAUDAN HOLDING LIMITED a closed-ended investment company incorporated with limited liability under the laws of Guernsey with registration number AUGUST 2011 STATEMENT Total value of the investments of BGHL based on the final NAV for the Euro & Sterling ordinary shares * 625 million as of 31 August 2011 NAV per share Euro ordinary share Sterling ordinary share BGHL s portfolio The proceeds of the initial and secondary public offerings have been invested into the Sark Fund (net of a certain amount retained by BGHL for working capital requirements and other requirements). Since 1 November 2010, BGHL is invested into the Boussard & Gavaudan Fund ("BG Fund") in lieu of the Sark Fund. In addition to having substantially 100% of its assets under management invested into the BG Fund, BGHL has three investments in private equity companies. Euro Shares Sterling Shares Shares issued 44,417,687 1,932,543 Shares held in treasury 1,844,525 - Shares outstanding 42,573,162 1,932,543 A. BG FUND PLC Note that trade examples detailed in each strategy below are among the best and worst performances of the month. COMMENTARY AND HIGHLIGHTS European equity markets dropped in August with the Eurostoxx 50 down 13.8%. Volatilities on stock markets soared: the VDAX index ended up to 30.9% from 20% and the VStoxx index to 35.7% from 27.6%. The itraxx Crossover finished the month at 647bps (+209bps of widening). * The total value of the investments of BGHL is based on the final NAV for the euro and sterling shares and the currency exchange rate for the Sterling vs. Euro. 1

2 Volatility strategies Convertible bond arbitrage Whilst both credit and equity markets were extremely challenging this month, European convertibles did not experience the kind of massive sell off or significant de-rating of valuations that were seen in 2008 in the wake of the bankruptcy of Lehman Brothers. Low delta investment grade paper held up pretty well in terms of absolute levels (with names such as KfW/DTE, KfW/DPost, Publicis, or Unibail coming down only a few points). Higher delta / weaker credit issues obviously suffered much more in absolute terms, but it is important to stress that relative valuations were not impaired in any significant way when taking into account the widening in credit. For instance, despite having lost more than 30 points in August (after a 37 points decline in July), the Clariant 3% 2014 convertible bond was trading at an implied volatility of 39%, just about unchanged from the level of 40% a month before. In the meantime the underlying equity was down c. 27% and the 3-year CDS was 200% wider... To our knowledge, secondary market liquidity was relatively limited, reasonable for the month of August, but we did not witness any significant acceleration of flows. We did not get any information either of any significant forthcoming redemption amongst the European CB community. As a consequence, unless one wants to take a directional view (either on the credit or on the underlying equity), we do not currently see a lot of opportunities in the European convertibles market. On our side, most of the negative performance of our convertible bonds book came from our position in Fortis CASHES. Apart from vague market rumours around the liquidity situation of French banks, and a widely expected confirmation of a cash dividend for 2011 at Ageas, there was no news specific to the BNP Paribas / Fortis Bank / Ageas complex which in our view can justify the sharp fall of the Fortis CASHES (more than 20% from above 54 at the end July to a mid of 42.5 as of 31 August). In contrast, the 5-year itraxx Europe Sub Fin Index was 115bps wider in August, from 309bps to 424bps, corresponding to a change in the present value of the CDS contract of less than 4.5%. Under the circumstances, we marginally increased the position. The remainder of our loss in this sub-strategy came mostly from our positions in GFI (whose underlying share price lost 12.5% over the month), which we hold outright, and in Tui Travel The latter suffered from a sharp widening of the issuer's credit on the back of a c. 21% share price fall, and more importantly in our view, from the drop of Tui's plans to list its shipping business, Hapag-Lloyd, and from the contagion impact of the second profit warning in a row from competitor Thomas Cook. The other positions of our convertible bonds book held up well thanks to our CDS hedges and the gamma gains we booked over this volatile month. We continued to reduce our book over the period, taking advantage of the richening of some of our positions. Although we started to identify bonds which could become attractive on an arbitrage basis, we did not initiate any new positions this month. Unsurprisingly the European primary convertibles market remained closed for a second month in a row. Mandatory convertible bond arbitrage Mandatory convertible bonds were almost unchanged in August, with a merely negative contribution to the performance of the fund. The Fresenius 5.625% 2011 mandatory exchangeable bond was redeemed on 14 August and settled in Fresenius Medical Care (FMC) shares at a final conversion price of per FMC share. The number of shares delivered to bondholders upon 2

3 mandatory redemption was actually dependent upon the average VWAP of the FMC shares during the averaging period which ran from 14 July to 10 August. As we were hedged and could thoroughly replicate the averaging formula we eventually managed to realize the entirety of the discount to fair value which remained in the bonds. This compensated for the limited losses of the other mandatory positions, in particular the negative gamma P&L which we experienced in the Adecco mandatory, whose underlying stock went through the minimum conversion price (CHF 48.95) during the summer. As the Adecco share price (CHF as of 31 August) declines further away from the mandatory strikes of CHF and CHF 58.74, and we come closer to maturity (November 2012), the bond's profile will look more and more like a pure forward with a reasonable discount to fair value. There was no new mandatory convertible bond issue in Europe this month. Gamma trading Gamma trading contributed negatively to the fund in August. The weakness in the equity markets grew dramatically over the first half of August, starting with the last-minute compromise on the US debt ceiling. Concerns over the European sovereign debt, mitigated corporate results and guidances, as well as fears of a US credit downgrade that materialised and a poor perception of policymakers, caused an abrupt fall in equities, together with a spike in implied volatilities that was reminiscent of the crisis. The massive correction led to some restriking of our gamma exposure, as the spot moved away from our strikes and this reduced our long gamma. We thus bought downside volatility at high levels which still paid off with extreme intraday volatility. Financials reached new lows, with the CDS of most of European countries reaching new highs. As we do not see an imminent end to this stress, we remain cautious about the moves in equity markets and will be keeping or increasing a long gamma exposure. Equity Strategies August was very tough for equity markets with the Eurostoxx 50 down 13.8%. This started with the downgrade of the US debt by S&P from AAA to AA+, and was fuelled by growing uncertainties surrounding the Eurozone future as well as mixed corporates results and revised guidance over the rest of the month. In this environment, financial stocks led the sell off followed by cyclical ones which suffered from renewed risk of a worldwide recession. Having further reduced the risk in July and increased the use of derivatives to protect the book, equity strategies managed to contribute positively to the performance of the fund this month. As an illustration, we had reduced the gross exposure of the equity book (excluding trading) by approximately 2/3 between April and July Our hedges, mostly implemented through options, enabled us, on the one hand, to become short in this bear market (we bought back some of them on the way down) and, on the other hand, to benefit from the volatile environment. We had also initiated a few short positions on some crowded trades and specific sectors; this has turned out to be profitable to the fund as well. Special situations reduced dramatically in this environment, corporates becoming reluctant to take any risk. Whilst most of them have plenty of cash in their balance sheets, they prefer to use it for share buy backs rather than for acquisitions on the brink of a potential global recession. 3

4 In terms of valuations, we have identified some attractive names. However, we remain vigilant and will not invest unless the macroeconomic environment starts to look brighter. Credit strategies Credit strategies contributed negatively this month. The intervention by the SNB on 6 September proves that we are at the heart of a global trade and economic war, and furthermore that the imbalances that have lead us from 2007 to the present crisis are still very much at play. The current situation stems from the substantial transfer of the manufacturing sector to emerging markets. The ensuing loss of revenue was artificially compensated for by a debt supercycle (in both private and public sectors) which was enhanced by overly accommodative, if not lax, monetary policies. In our newsletter in December 2009, we expressed our fears that no systemic risk premium was left, regardless of the sector, in credit markets and asked ourselves how strong a probability there was of seeing the financial crisis mutate into a full-blown credit crisis encompassing sovereign debt. Unfortunately, less than two years later, the virus has mutated and it is interesting to look into which phase of this second crisis we are in presently We believe the first phase, the denial phase, ended in the summer of Until then the market believed that the European plan for Greece, adopted in the spring, had saved the day. However, when Ireland and Portugal started making the headlines, everyone realised how dire and intricate the European situation had become. Furthermore, it became clear, two weeks after their publication, that the European stress tests were nothing more than a complete joke. We are currently in all likelihood reaching the end of the second phase, the acceptance phase, as even the man on the street now understands that the plan adopted on 21 July will not work. The exchange operation may well hit the targeted 90% success rate, but it will not get Greece out of the rut. To do this the haircut must at least match the secondary trading levels of GGBs (i.e; 55%~ and not 21%). Furthermore, the procrastination of several EMU members in voting through the resolutions of the 21 July summit, underlines the fact that European governance does not have the means to take drastic, immediate and irrevocable decisions. We therefore have not yet gone through the third and last phase of the crisis: the capitulation phase. Fortunately it is generally the shortest! We now think that corporate credit spreads correctly anticipate the risks of a European economic recession, resulting from the weakness of internal demand and the slowdown in the US and emerging markets. The value proposition in credit is getting harder and harder to argue against. Investment grade corporate spreads (for the iboxx corporate index) have rarely been so attractive since 1999! In fact, if one excludes the fourth quarter of 2008 and the first quarter of 2009, when bond prices were arguably trading more on the lack of liquidity in the system than on default risk, then the market is only 2% from its cheapest levels. Furthermore, since the introduction of the Euro, corporate leverage in this rating category has never been as low as today (average Net Debt / EBITDA = 2.2x). Spreads now anticipate a cumulative default rate of 11% for the next five years, whereas the worst we have seen since 1980 has been 3.8%. In high yield, valuations are not that extreme. Nevertheless, at 720bps (on 7 September) a hold-tomaturity investor in the itraxx Crossover could tolerate 15 defaults (i.e. 38%) before breaking 4

5 even, assuming a 20% recovery rate. Since 1980, the highest five year cumulative default rate stands at 34%. One can reasonably argue that this market is anticipating a situation as drastic as when the tech bubble burst in the early 2000s. There again, leverage numbers look more reasonable than they did ten years ago (average 3.6x vs. 4.7x in January 2001). We think, therefore, that current market levels do incorporate a reasonable systemic risk premium. Credit, as an asset class, is once again attractive in the present risk-free yield environment, assuming, as we do, that no member will be allowed to leave EMU. Over August we have hence monetised most of our hedges to go long the market. That said, we will wait for signs of the capitulation phase before significantly deploying further capital to the strategy. Thus far, policy makers have sought to deal with the crisis in two ways. Firstly, they have put in place a rescue mechanism that is limited in scope, temporary in nature and intergovernmental in structure. Secondly, they have sought to reinforce the governance framework that has been in place since EMU s launch in 1999: intergovernmental cooperation on fiscal, macroprudential and structural policies and a no bailout feature as the ultimate sanction on errant sovereigns. Developments this month may determine whether this strategy is fundamentally flawed or not. Many commentators and market participants have already concluded that it is. From the ultimate capitulation phase, we hope a Federal European Union will rise, founded on a governance structure that is more substantial, permanent and supranational. Trading Trading contributed positively this month. B. PRIVATE EQUITY INVESTMENTS On top of its investment in BG Fund, BGHL has entered into three private equity investments. These investments, which represent approximately 4% of the net asset value of BGHL, were marked at cost. Rasaland BGHL entered into Rasaland in June 2008 for $10 million. Rasaland is a Maltese company structured as a private equity fund in terms of fees and organisation, which is dedicated to investing in land, land development and high-end resort developments in Mexico. The EUR/USD exposure is hedged by an FX forward which is rolled on a 3 month basis. DSO Interactive On 9 December 2009 and 19 February 2010, BGHL acquired a minority stake in DSO Interactive for a total consideration of 1.7 million (6.2% of the share capital and 5.3% on a fully diluted basis). DSO Interactive is a private company incorporated in France and headquartered in Paris, where it employs over 120 people. DSO Interactive provides bad debt collection services to consumer creditors such as telecom operators, banks and specialised credit institutions. Compagnie des Minquiers On 3 March 2011, Compagnie des Minquiers SAS, a 83.3%-owned subsidiary of BGHL (held jointly with the executive committee members of the Cofigeo group) acquired 100% of the shares of MPF (renamed Financière des Minquiers), a holding company, holding 26,523 shares in Cofigeo 5

6 negotiated on the regulated market NYSE Euronext in Paris representing approximately 36% of capital and 41% of voting rights. On 29 March 2011, in compliance with French securities law, Compagnie des Minquers filed a mandatory tender offer for all the remaining shares of Cofigeo at a price of 530. On 20 June 2011, following the completion of the offre publique de retrait on Cofigeo, Compagnie des Minquiers SAS announced that it held 100% of the capital of Cofigeo. With sales of 138 million and approximately 650 employees, Cofigeo is a leading player in France in the canned food industry. The group sells prepared meals and sauces under the brands Zapetti (formerly Buitoni) and Raynal & Roquelaure as well as under private labels. It ranks #2 in France with a market share of approximately 25%. BGHL s total investment in the transaction amounts to approximately 18 million, which represents less than 3% of its NAV. C. BOUSSARD & GAVAUDAN ASSET MANAGEMENT UPDATE Transaction in the Company's securities Please note that transactions in the Company's securities that have been performed by officers, directors and persons referred to in the section 5:60 of the Financial Supervision Act ("Wft") are reported: directly on the AFM website: (public database > notification > insidertransactions 5:60 wft); on the Company s website through a link to the AFM notification: (Investment Manager > Regulatory information). Transactions in the Company s own securities are also reported on: the AFM website: (public database > notification > price-sensitive press releases); the Company s website: (Investor Relations > Financial announcements). BG Fund AUM As of 1 September 2011, assets under management are at 1.30bn. Sincerely, E. Boussard & E. Gavaudan 6

7 Disclaimer The Company is established as a closed-ended investment company domiciled in Guernsey. The Company has received the necessary approval of the Guernsey Financial Services Commission and the States of Guernsey Policy Council. The Company is registered with the Dutch Authority for the Financial Markets as a collective investment scheme pursuant to article 2:73 in conjunction with 2:66 of the Dutch Financial Supervision Act (Wet op het financieel toezicht). The shares of the Company (the "Shares") are listed on Euronext Amsterdam. The Shares are also listed on the Official List of the UK Listing Authority and admitted to trading on the London Stock Exchange plc's main market for listed securities. This is not an offer to sell or a solicitation of any offer to buy any securities in the United States or in any other jurisdiction. This announcement is not intended to and does not constitute, or form part of, any offer or invitation to purchase any securities or the solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of the securities referred to in this announcement in any jurisdiction in contravention of applicable law. Neither the Company nor Boussard & Gavaudan Fund Plc has been, and neither will be, registered under the US Investment Company Act of 1940, as amended (the "Investment Company Act"). In addition the securities referenced in this announcement have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"). Consequently any such securities may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, US persons except in accordance with the Securities Act or an exemption therefrom and under circumstances which will not require the issuer of such securities to register under the Investment Company Act. No public offering of any securities will be made in the United States. You should always bear in mind that: all investment is subject to risk; results in the past are no guarantee of future results; the investment performance of BGHL may go down as well as up. You may not get back all of your original investment; and if you are in any doubt about the contents of this communication or if you consider making an investment decision, you are advised to seek expert financial advice. This communication is for information purposes only and the information contained in this communication should not be relied upon as a substitute for financial or other professional advice. VC