GSO Capital Partners International LLP. Carador plc (the Fund or the Company ) October

Transcription

1 Fund Performance 2 : GSO Capital Partners International LLP Carador plc (the Fund or the Company ) October Monthly Return 12m Dividend Yield 3 YTD Return 4 LTM Total Return 5 Total Return Inception 5 Price/Net Asset Value Carador Price -7.14% 20.93% -9.53% % -8.06% +9.67% Carador NAV -8.77% General Commentary Fund performance NAV decreased to 59.27c in October. The decrease of EUR includes the dividend of EUR (equivalent to 8.47% of September NAV) in respect of the 6 month interim period paid on 31 October The Fund received cash flows from 13 transactions worth 740,206 in the month of which 217,686 (29.41%) were allocated to principal. The annualised cash on cash returns from distributions ranged from 4.69% (from a transaction originally structured to retain 75% of the income to purchase additional assets) to 48.32% (from a transaction purchased earlier in 2008). The average annualised cash on cash returns on distributions received in October was 23.28%. There were four loan defaults in the leveraged loan market in October 6. Carador had exposure to 3 of these names through 3 portfolios with an average exposure per name of 0.18% 7. On 27 October 2008, the Carador Board declared a dividend of 5.5 cents per ordinary share in respect of the semi-annual period ending 30 September This compares with a dividend of 5.2c paid for the semi-annual period ending 30 March Interest payments in the underlying investments are dependent on defaults rather than mark to market values and as such have benefited from Carador s low cumulative default rate vs the overall market. Market performance Leveraged Loans Technical factors again had a significant impact on the leveraged loan market in October. The collapse of the Icelandic banking system resulted in the publication of bid lists for over 1.6bn worth of leveraged loans. These lists were posted on Thursday, 9 th and Friday 10 th October with extremely tight deadlines (hours) in a very illiquid market. The LCDX index closed at 84 on October 9 th, down from the day before and at the previous Friday s close. Several other bid lists followed from market value CLOs and TRS, with mark to market triggers. 1 Please see important disclaimer at the end of this document 2 Bloomberg analytics unless otherwise stated. Dividends reinvested at Libor 3 Bloomberg 12mYld field (BQ screen) 4 2 January 2008 to date, non annualised 5 Non annualized. Inception: 12 April Source: JP Morgan, Default Monitor, 7 Exposure calculated as percentage of consolidated underlying CLO portfolios.

2 The following table summarizes returns for leveraged loans and the major asset classes for October and YTD 2008: Market October Total Return 2008 YTD Total Return S&P LCD / LSTA Loan Index % % Merrill Lynch High Yield Master Index % % Merrill Lynch Corporate Master Index -7.38% % Merrill Lynch U.S. Treasury Index (7-10 Years) -1.25% 3.82% Rating/Sector/Index performance: There were four loan defaults in October. Aurora Oil & Gas ($50 million facility, no exposure in Carador), Sleep Innovations ($340 million facility, 0.14% exposure in one portfolio), Philadelphia Media ($295 million facility, exposure in 3 portfolios, 0.30%, 0.19% and 0.20% respectively) and Gainey Transportation ($210 million facility, exposure in 2 portfolios, 0.13% and 0.13% respectively). As a result of these defaults, the lagging 12-month issuer-weighted default rate increased to 3.59% from 3.32% in September. The default rate by principal amount continues to be lower, increasing to 1.97% from 1.91% in September. Of the 30 defaulters in 2008, 27% are concentrated in real estate, 17% in automotive, 13% in gaming and 10% in transportation. Carador s cumulative underlying portfolio default rate since inception (April 2006) is 0.967%. The technical pressure on loans means that the traditional measures of distress have to be redefined. As at the end of October, 59% of the loans in the S&P/LSTA Leveraged Loan Index were trading at a spread to maturity of over Libor+1000 bps and, according to JP Morgan, 21% of the market currently trades at a price of 50 or lower. The implied default rate in US leveraged loans, assuming +276 bps long term excess spread 8 and average spread of +893, currently stands at 20.56% or 68% cumulative default rate over 5 years. It is interesting to note that, following the same methodology, the Merrill Lynch High Yield 100 bond index currently implies a 11.49% annual default rate, assuming a 43% recovery rate for high yield bonds 9. CLOs The CLO market amplified the price movements and illiquidity of the underlying leveraged loan market. Senior tranches kept underperforming. The following table summarizes JP Morgan s estimates for US and EUR CLO spread changes. CLO 25-Sep Oct-08 AAA AA A BBB BB Mezzanine tranches have underperformed on the back of bid lists which originated partly from the liquidation of CDOs of ABS or CDO^2 with CLO buckets. AAA liquidation dominated the 8 Defined as (long term average spread long term average defaults * long term recovery rate). Long term average spread based on Credit Suisse Leveraged Loan Index; long term average defaults based on S&P LCD Leveraged Lending Quarterly Review 3Q08 Lagging 12-months Default Rate by Number of Issuers report; long term recovery rate based on Moody s Default Study ; Average Corporate Debt Recovery Rates (measured by ultimate recoveries), measured by issuer-weighted ultimate recoveries. From , the average recovery of Loans was 82.04%. 9 Merrill Lynch High Yield 100 Index. Average end of month spread since 31 December bps. Index spread as of the end of October 2008, bps. Bond recovery rate based on historical average 1995-LTM 09/08, source: Credit Suisse, This Week in High Yield, 9 October 2008

3 first half of October with more mezzanine tranches coming in during the second half. The price talk in these bid lists showed relative lack of differentiation among portfolios or managers. The new paradigm in loan prices has brought forward a debate about discount obligations. Cash flow CLOs are not required to mark to market positions for the purpose of calculating the over-collateralization test (OC test, assets divided by rated liabilities, which if broken would divert cash flows away from the more junior tranches). There are two standard exceptions: CCC obligations, once the portfolio exceeds a certain maximum percentage of CCC loans, and loans purchased below a certain price, normally 80 to 85 (defined as discount obligations). In the past, a loan trading below 80 could safely be considered problematic, and this constraint prevented managers from taking down the quality of the portfolio while building OC test par. Given current average market prices, the unintended consequence of the constraint is that a CLO manager is not incentivized to sell loans trading below 80 (the OC test would suffer the realized loss), to purchase discount obligations (which will be marked at purchase price, not par, for OC test purposes). Although S&P has issued some constructive comments in this respect, changes are likely to require approval from all CLO tranches and this is likely to highlight the different priorities among noteholders, with AAAs potentially benefiting from a breach of the test which may bring forward principal repayment. Another non-credit related issue we are monitoring closely is the potential negative impact this quarter of the differences in timing between the Libor setting for the assets and the liabilities of a CLO. 3 month USD Libor reached 4.82% on 10 October (up from sub 3% levels in September, pre-lehman). 11 CLOs in Carador reset their liabilities in the month of October. Depending on the rate of reset on the assets, this may affect next quarter s cash flows. Given the relative normalization of Libor after October this is likely to be a one-off situation. On the portfolio side we are also following closely the percentage of loans which reacted to the run up of Libor by switching to Prime based rates. It is interesting to note that several of the agreed covenant waiver amendments seen recently include Libor floors and/or changes to the ability to switch rates in the future. Outlook We continue to adopt a cautious approach to investment and as a consequence remain very selective about price and quality. This resulted in the decision not to acquire any new assets in October. We are cautiously exploring opportunities in BB tranches where cash on cash returns have increased markedly and, in addition, benefit from additional subordination.

4 Fund Performance: Daily Closing Price/NAV ( ) Price + Dividend NAV + Dividend Price /4 12/7 20/10 28/1 8/5 16/8 24/11 3/3 11/6 19/9 For the Price + Dividend and NAV + Dividend calculations, the dividend has been linearly distributed over the relevant period. This adjustment is only applied to previous periods, ie, no future dividend is estimated to adjust the chart. Portfolio Description: As of 31 October 2008 By Asset Class (1) : % NAV Broadly Syndicated Sub-Investment Grade Secured Loans-Europe 48.90% Broadly Syndicated Sub-Investment Grade Secured Loans-US 30.26% Middle Markets Secured Loans-US 10.40% Cash 10.44% Total % By Currency: % NAV EUR 59.35% USD 40.65% Total % Investment/Manager: % NAV Investment/Manager: % NAV 1 ACA CLO (Apidos) 2.91% 17 Harvest IV Euro CLO (Mizuho Leveraged Finance) 1.31% 2 Alpstar I Euro CLO (Alpstar Management) 1.84% 18 Inwood (Blackstone Debt Advisors LP) 1.86% 3 CIFC Funding 2006-II (CIFC) 6.20% 19 Leopard IV CLO (Prudential M&G) 3.12% 4 CS Advisors CLO I (Capital Source) 2.39% 20 Leveraged Finance Europe Capital IV (BNP) 4.66% 5 Denali Capital CLO VI (DC Funding Partners LLC) 3.00% 21 MM Community Funding III (Sandler O'Neill) 0.00% 6 Duchess VII (Babson Capital) 2.40% 22 Mountain View II (Seix Advisors) 1.82% 7 Eaton Vance CDO VIII (Eaton Vance) 3.13% 23 Navigator CDO 2004 (GE Asset Management) 0.83% 8 Egret Funding CLO I (Egret/SocGen) 3.42% 24 NYLIM Flatiron CLO X (New York Life) 4.03% 9 Eurocredit CDO II (ICG) 0.13% 25 OWS CLO I (Bank of New York) 0.93% 10 Eurocredit VI (ICG) 1.72% 26 Panther CDO III (Prudential M&G) 3.83% 11 Euro-Galaxy CLO (AIG) 3.56% 27 Prospect Park CLO (Blackstone Debt Advisors LP) 4.96% 12 Gale Force II CLO (GSO Capital Partners LP) 3.62% 28 RMF Euro CLO III (RMF Investment Management) 4.94% 13 GLC CLO I (Global Leveraged Capital, LLC) 1.10% 29 RMF Euro CLO IV (RMF Investment Management) 5.25% 14 Gresham II (Investec) 1.89% 30 Skell X 30/11/2022 (AIB) 2.66% 15 Harbourmaster 7 (Harbourmaster) 2.11% 31 Venture VII (MJX Asset Management) 3.87% 16 Harvest III Euro CLO (Mizuho Leveraged Finance) 3.27% 32 Versailles (Calyon) 2.77% Cash 10.44% (1) Estimated

5 DISCLAIMER This documents is for informational purposes only and does not constitute an offer of, or the solicitation of an offer to buy or subscribe for, securities of Carador PLC in the United States or to any person in any other jurisdiction to whom or in which such offer or solicitation is unlawful and, in particular, is not for release, publication, or distribution in or into the United States. Further, it does not constitute an offer to sell, or a solicitation of an offer to buy, any investment in, or to participate in any trading strategy with GSO Capital Partners International LLP (the Manager ) or its affiliates, including without limitation, The Blackstone Group L.P., GSO Capital Partners LP and GSO Debt Funds Management LLC (collectively, the Manager s Affiliates ) or any investment fund managed or sponsored by the Manager or the Manager s Affiliates (a Blackstone Fund ). Such an offer only will be made by means of the Private Placement Memorandum (or other offering document) for the Blackstone Fund as it may be amended or supplemented from time to time (the "PPM ). Each PPM contains material information (including a discussion of risk factors and potential conflicts of interest) not contained in this document, and supersedes and qualifies in its entirety the information set forth herein. Any decision to invest in, or withdraw from, a Blackstone Fund should be made after reviewing the appropriate PPM, conducting such investigations as the investor deems necessary and consulting the investor's own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of the investment. A copy of the PPM for each Blackstone Fund is available upon request. Risks associated with investment in a Blackstone Fund include, without limitation, illiquidity of an investment, risk of default of the underlying debt instrument and risk of loss of principal. Carador PLC has not, and will not be, registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"). In addition, no offer, issue or sale of securities of Carador PLC has been, or will, registered under the Securities Act of 1933, as amended (the "Securities Act") or with any securities regulatory authority of any State or other jurisdiction of the United States. Accordingly, securities of Carador PLC may not be offered, sold, pledged or otherwise transferred or delivered, directly or indirectly, in or into the United States, or to or for the account or benefit of any US person (within the meaning of Regulation S under the Securities Act), except in transactions that are exempt from registration under the Securities Act and under circumstances which will not require Carador PLC to register under the Investment Company Act. This document is issued and has been approved for the purposes of Section 21 Financial Services and Market Act 2000 ("FSMA") by the Manager, which is authorised and regulated by the Financial Services Authority in the United Kingdom. It does not constitute an invitation and should not be taken as an inducement to engage in any investment activity and is for the purpose of providing information about Carador PLC ( Carador") only. It may not be relied upon and should not be used for the purpose of making any investment decision. This document is based on information which is otherwise publicly available and, whilst the Manager uses all reasonable efforts to ensure the information is accurate and up to date, no representations or warranties are given as to the reliability, accuracy or completeness of the information. Neither the Manager nor the Manager s Affiliates accepts any liability for any loss or damage which may arise directly or indirectly from any use of or reliance on such information. In particular, you should note that, since many or all of the Manager investments are unquoted, net asset value figures in relation to Carador are based wholly or partly on estimates of the values of Carador's investments provided by the originating banks of those underlying investments or other market counterparties, which estimates may themselves have been subject to no verification or auditing process or may relate to a valuation at a date before the relevant net asset valuation for Carador, or which have otherwise been estimated by Carador's Investment Advisor. Information contained herein which relates to the net asset value performance of Carador may not be indicative of how Carador's investments may perform in the future. Moreover the values of such investments may fluctuate considerably and the historic net asset values shown for Carador take no account of the costs or practical difficulties of realising some or all of such investments. The value of investments offered through or mentioned in the site may go down as well as up and investors may not get back the amount invested. No assurance can be given that the investment objective will be achieved. Information on past performance, where given, is not necessarily a guide to future performance. Changes in rates of exchange between currencies may cause the value of investments to decrease or increase. The information on the site is provided solely for information and does not constitute investment advice or personal investment recommendations. Investments offered through or mentioned in the site may not be suitable for all recipients and in each case potential investors are advised not to take any investment decision unless they have taken independent advice from an advisor authorised under FSMA. For other risk factors which may be applicable to Carador and certain of the information contained herein, you are referred to the Company's listing particulars dated 12 April 2006 and the Prospectus dated 30 September Any comparisons herein of Carador performance to a benchmark or an index are qualified as follows: (i) the volatility of such benchmark or index may be materially different from that of the performance of Carador; (ii) such benchmark or index will employ different investment guidelines and criteria than Carador and, therefore, the holdings in Carador may differ significantly from the securities that comprise the index; and (iii) the performance of such benchmark or index has not necessarily been selected to represent an appropriate benchmark to compare to the performance of Carador, but rather is disclosed to allow for comparison of Carador s performance to that of a well-known benchmark or index. A summary of the investment guidelines for any such benchmark or index is available upon request.