TFG / TGONF - Tetragon Financial

[thepupil]

Saw Picasso mention it on the BH thread and realized I have been meaning to start a thread.

 

Tetragon is my largest position.

 

TFG is an Amsterdam-listed investment holding company / asset manager that trades for $9.88. Fully diluted NAV / share is equal to $17.32, putting her at a 58% multiple of fully diluted NAV. The gross NAV multiple is 51%. They have a progressive dividend policy designed to pay out 50% of recurring earnings. It yields 6%.

 

It is a PFIC.

 

Assets are concentrated in CLO equity (mostly of the US CLO 1.0 deleveraging pre-crisis variety) and co-investments in hedge funds and real estate as well. Basically this is a relatively diversified investment vehicle that is becoming more diversified as they add more businesses on the asset management side trading at a large discount because of past misdeeds by management.

 

You get paid to wait for management to take steps to right their previous wrongs (they need to in order to get the stock price up and make a ton of money on their options that expire in 2017).

 

Have more thoughts but I'll leave it at that for now.

 

 

VIC Pitches

http://www.valueinvestorsclub.com/idea/Tetragon_Financial/125503

http://www.valueinvestorsclub.com/idea/Tetragon_Financial/61214

http://www.valueinvestorsclub.com/idea/Tetragon_Financial_Group/48036

http://www.valueinvestorsclub.com/idea/Tetragon_Financial_Group/27837

 

I think this guy's SA articles are decent

http://seekingalpha.com/article/2988256-tetragon-financial-group-the-story-still-not-discovered

http://seekingalpha.com/article/2433025-tetragon-financial-group-a-heavily-undervalued-clo-manager

 

The hair

http://www.bloomberg.com/news/articles/2014-08-08/omega-s-tetragon-lawsuit-over-polygon-deal-thrown-out

http://www.reuters.com/article/2011/07/12/us-tetragon-polygon-lawsuit-idUSTRE76B4L620110712

http://www.insidermonkey.com/blog/leon-coopermans-letter-to-tetragon-financials-board-12363/

[Picasso]

I was close to buying TFG but then I saw Whitney Tilson liked it and it upped my due dilgence requirement at least 2 fold. 

 

Do you have any thoughts as to the price sensitivity on the book value for their CLO's?  This is laziness on my part but I have been meaning to find out downside on the book aside from what is in their filings. 

 

Downside seems very small but I have a hard time pegging the likelihood of getting the upside.

[thepupil]

You can see the aggregate debt outstanding here on slide 13. The way I think about the CLO equity is that it's the first loss tranche on that. So very roughly 10X levered or so. So it's obviously very sensitive to loan beta. Now you are buying that at a 50% discount, default rates have been very low, and the CLO 1.0 equity is rapidly amortizing.

 

Also TFG has been accelerating the de-risking with sales of the equity tranches.

 

So if you are buying $900MM of CLO equity at a 40% discount, effectively paying $540MM, and it's throwing off $200MM+ of amortization, AND they are selectively selling additional tranches in the secondary market, to me it just doesn't seem to be risky.

 

I am by no means knowledgeable when it comes to structured credit, btw. I own TFG because I feel like I don't have to be. When the CLO equity gets converted to cash and re-invested in asset managers and co-investments in more plain vanilla things like real estate PE and event driven hedge funds, I feel good.

 

http://www.tetragoninv.com/~/media/Files/T/Tetragon-Financial-Group-Limited/investor/reports/presentations/2014/TFG%20Investor%20Day%202014%20Presentation%20-%20Public%20Slides.pdf

 

[thepupil]

oh and the guy who wrote the first VIC pitch linked apparently did a lot of work on the CLO's. I trust he did not make this stuff up. For me, the amortization, the apparent 3rd party verification from the VIC author are enough. In the end highly levered credit beta is highly levered credit beta. Buying it at a big discount probably won't save you if shit hits the fan, but TFG has lots of other assets.

 

Valuation of CLOs:

 

We believe that part of TFG’s discount is likely due to the opacity and mark-to-model nature of CLO assets (in TFG’s case, those dynamics are likely magnified by the management perception/reputational issues).  TFG does not disclose the identities of its CLOs and reports their value on a mark-to-model DCF basis, making it difficult for investors to gain sufficient comfort around reported NAV and valuation. Therefore, to better understand and independently value the CLOs, we worked with Codean, a firm that specializes in the valuation of CLOs.[1]

 

Working with the Codean, we were able to independently and thoroughly identify, analyze, value and scenario test the vast majority of TFG’s 80+ CLOs. Based on our analysis, the value at which TFG holds its CLOs is more than 10% below the value TFG could realize if it were to liquidate all of the underlying loans in its CLOs at par and redeem its liabilities at par, the book value equivalent used by standard financial institutions.  However, CLOs, especially pre-GFC CLOs, tend to be worth more than their spot liquidation price due to their low cost (LIBOR + 55bps) and long duration funding structure.[2] Furthermore, we were able to stress test TFG’s portfolio under a variety of interest rate, prepayment rate, reinvestment rate, default rate, recovery rate, and discount rate scenarios.

 

Presented below is a summary of the analyses performed on TFG’s CLO portfolio as of the end of 2013:

 

 

 

-          Par Value – Represents the residual equity value that TFG would yield if it were to liquidate all of the underlying loans in its CLOs at par and redeem its liabilities at par; this value is the most comparable metric to book value used by standard financial institutions

 

-          Total Cash-Flows TFG Case – Represents total cash flows (undiscounted) to TFG in a scenario where all CLOs run through maturity and the various input assumptions (default rates, prepayment rates, reinvestment rates) provided in the TFG report are used

 

-          TFG Case Model 10% Discount – Represents the Total Cash Flow TFG Case with all cash flows discounted at a 10% rate

 

-          Elevated Losses Model 10% Discount – Represents Total Cash Flows with all cash flows discounted at a 10% rate but elevated loss assumptions are used (4.5% default rate with 60% recovery through 2015 and 3.0% default rates and 60% recovery thereafter; TFG assumes 2.2% default rate through maturity for US CLOs and 2.6% through 2014 and 2.1% thereafter for European CLOs)

 

Based on the analysis, we are highly comfortable with TFG’s reported NAV for its CLOs. Employing a 10% discount rate (lower than the discount rate used by TFG[3], but in line with the implied IRRs for new issue CLOs and market clearing prices for secondary equity stakes in pre-crisis CLOs)[4], TFG’s CLO NAV is understated by $2+/share. Even assuming a significantly higher loss rates than either TFG or the broader senior loan market assumes, TFG’s CLO NAV is very well protected.

 

Presented below are summary snapshots of certain CLOs in TFG’s portfolio:

 

 

 

For reference, on an aggregate basis TFG’s largest exposures are First Data, Las Vegas Sands, HCA, Berry Plastics, and Aramark, each representing ≈90 to ≈110bps of total assets.

[NoCalledStrikes]

The next question is given the accretive nature of buybacks for the large discounted NAV, are there any plans to continue repurchases and/or for tenders?

 

I think we’ve had this question many times, not surprisingly. And as I think people have sort of listened into these calls in the past that it’s certainly always a consideration. And yes indeed buying shares back at a discount or material discounted, NAV can be very accretive on a NAV per share basis. And in fact if one looks at the history of the Company, we bought back about 41 million shares, spent about $325 million doing so and that’s roughly speaking, about 35% of the initial issuance of shares. So yes, we believe in buybacks.

 

Having said that, the evidence is rather that it doesn’t actually necessarily affect the share price, it can have material reduction on liquidity, it can concentrate or probably does concentrate risk rather than diversified risk, it doesn’t create long term value for the business. And so what we like to do at any point in time is look at the pros and cons of any cash usage we have for investment and match that up against the potential of share buybacks. And so it is we treat it as a use of cash as we do with other investments.

 

I wasn't particularly fond of Paddy Dear's answer in the last con call concerning buybacks.  I sure hope when he passes up buying his stock at a 40% discount that he is getting these other investments  at >40% discounts, but I doubt it. I think the fundamental problem with Tetragon is that management is not aligned with shareholders.  You'd think hitting their options target would be a driver, but I keep getting the nagging feeling that they are in it for themselves first, foremost, and always.

[thepupil]

Of course they are in it for themselves. I mean how else will Reade pay for the Nantucket & London mansions?  ;D

 

http://www.businessinsider.co.id/reade-griffith-buys-in-nantucket-2014-9/#.VSRPH-Gqkds

 

http://www.dailymail.co.uk/news/article-2399533/Hedge-fund-boss-Reade-Griffithhit-800k-council-fee-build-mega-basement.html

 

 

[misterkrusty]

former shareholder here ... I've looked at this in depth.

 

Management are as slick and polished as you'll find on wall street.  they're also scumbags. 

 

I know the guy who did that VIC writeup.  smart guy ... i'm surprised to learn he likes this idea.  look carefully at the polygon deal - if you think this was done in shareholders' best interests, you haven't thought carefully enough.  further, the odds that they internalize the mgmt company are slim.  the fee structure here is totally egregious - too good to give up, if ethics have no bearing on your decision making process.  think through the incentives and you will agree.

 

I'm not saying this is a short.  for all the hair, I will admit that it's still not expensive.  but why try to jump a 5-foot hurdle when you can wait for a 1-footer?

[thepupil]

former shareholder here ... I've looked at this in depth.

 

Management are as slick and polished as you'll find on wall street.  they're also scumbags. 

 

I know the guy who did that VIC writeup.  smart guy ... i'm surprised to learn he likes this idea.  look carefully at the polygon deal - if you think this was done in shareholders' best interests, you haven't thought carefully enough.  further, the odds that they internalize the mgmt company are slim.  the fee structure here is totally egregious - too good to give up, if ethics have no bearing on your decision making process.  think through the incentives and you will agree.

 

I'm not saying this is a short.  for all the hair, I will admit that it's still not expensive.  but why try to jump a 5-foot hurdle when you can wait for a 1-footer?

 

yes, in case it wasn't clear, I agree with your negative assessment of the management and the  fee structure (1.5 & 25% over LIBOR + 200) and the Polygon acquisition. It's all terrible.

 

I do have contact with management (can't really be more specific) and I respect them as investors, but they are absolutely greedy, aggressive, salesy, slick, whatever.

 

But in my opinion there is very low downside on a fundamental basis (as in there is a low probability the assets are worth less than 50-60% of NAV and in need of significant markdowns) and I like the general direction of the company as well as the growing dividend (which is effectively a slow hopefully growing return of NAV to shareholders so you buy at 50-60% of NAV and "sell" at 100% each time you get a cash divvy).

 

Misterkrusty, when you looked at this in depth, did you find any issues with the actual assets. I am completely comfortable with the equity and converts hedge funds, haven't been able to get a hold of marketing materials on Green Oak's real estate funds (but am working on this), and the CLO's are obviously harder to evaluate.

 

Just curious if your objections were solely based on fees/management rapaciousness or if you had objections to any component of the assets.

[misterkrusty]

no problem with the assets.  I just don't like mgmt.  by the way, note that there is effectively no high water mark in their fee structure ... they've abused this feature once already during the financial crisis.

 

I don't see much downside at these prices.  I just disagree with the author of the VIC writeup and with Whitney Tilson that there is any real hope of mgmt internalizing the management company (thereby getting rid of the fees)

[constala]

As you complained of lack of respond on your posts my dear Pupil, let me reassure you, you are not alone, TFG is also one of my core positions. Looks a no-brainer really, supported by rising div, unwarranted 45% discount to reported Book Value, and also management fairly recent incentive alignment (greed is finally good!). Fair Value is much higher than $17.57: private value of the investment portfolio is, I estimate, close to $15, and the asset management business could be worth say 7$ or more soon (valued at carrying cost mostly-will change). Recent numbers were very robust.

 

There is a strong catalyst coming this year. Their smaller competitor Volta (VTA NA., VTA.L) finally managed to be listed in London and not only in Euronext Amsterdam last friday-on its first day in London the fund rallyed about 5%, closing the discount from 12% to 8%.With its discount at 45%, and the plan to follow the same route, TFG is a compelling buy at $10.

 

[randomep]

I just learned about this stock from another thread and researched it. I am surprised no one mentioned this article:

 

https://wexboy.wordpress.com/2013/01/22/tetragon-ready-to-be-a-star/

 

 

wexboy mentioned a lot of corporate governance issues, although he ultimately is a investor, it is enough to turn me off from tetragon.....

[thepupil]

http://www.tetragoninv.com/~/media/Files/T/Tetragon-Financial-Group-Limited/investor/reports/quarterly/2015/TFG%20H1%202015%20Report%2031%20Jul%202015%20with%20Financials.pdf

 

-12% annualized ROE for first half

-potential IPO of tetragon financial management (the asset manager) which would add significantly to NAV

 

all yours for 60% of NAV w/ 17% of NAV in cash

[thepupil]

very cheap stock...not going to bother updating thoughts since nothing has changed other than they got a 3rd  party appraisal of their asset management biz and will list in London soon

TFG_Q3_2015_final.pdf

[MicroValue]

Anyone still involved with this?  I echo the sentiments on the board -- management is smart and kind of slimy, the fee structure is horrible but the yield and discount (almost 50% now) are too large to pass up IMO.

 

On the positive side, the latest tender offer cleared out most of the $10 sellers (85% proration meaning 1.5 million shares left, could be a nice pop once they are cleared out), and it actually demonstrates management working in its shareholders interests.

 

The latest tender offer should add roughly $1.00 to NAV.  Due to Brexit, there will be a writedown on Tetragon's British infrastructure investments, but they do hedge currencies so hopefully not so bad. 

 

Finally, there are 12.5 million options with a strike of 10 that expire April 2017.  Management may try to juice up the stock price before those expire in the meantime we are getting 6.5% yield in a market where almost everything is overvalued.

 

 

 

 

[thepupil]

i agree. it remains my largest position. nothing much to add.

 

you could see on Bloomberg that in the most recent tender the "Polygon Recovery Fund" (a fund controlled by TFG) was a big seller and only has a few shares left. the management here clearly wants to own more of TFG and controlled both sides of that transaction (until i saw that, i wondered who the hell was such a willing seller at $10.00).

 

Even taking all the pending dilution into account (from the shares that remain in escrow that will be released and the options and additional exec comp), it's hard for me to see losing money on this and the dividends just keep rolling in and getting reinvested at 0.5X*

 

*50% of reported NAV, about 70% if you mark the asset manager at 0 (very punitive), exercise all the $10.00 options with no repurchase(unlikely), and immediately count all the waiting to be granted shares.

[MicroValue]

You did bring up one of the issues that I wanted to clarify with investor relations -- their method for accounting for dilution of the $10 options seems to grossly understate the impact of their dilution unless you assume they are coupled with a tender offer to offset the impact.  Hopefully they have something like that in mind or else I don't see how they justify their calculation.

 

By the way, I have been the one pestering them with questions regarding a tender/buyback for the last several conference calls.  The latest tender has placated me for now, but I definitely want to revisit this topic early next year.  It'd be helpful if someone else took up the banner -- I am surprised that other hedge fund investors don't bring it up given how it creates so much no-risk value.

 

 

 

 

 

 

[petec]

I am just starting to look at this and have a couple of early questions for those that know it well.

 

1. Why would I look at this, and not one of the listed US asset management companies (KKR, Oaktree etc.)?  Some of these, at least, trade at good discounts to SOTP and offer strong dividends.  I understand at least some of the differences but I'm just interested to know what jumps out as your answer.

 

2. Excluding buybacks, is there any reason to expect the discount to NAV to close?  I understand there is some possibility that liquidity will rise and management are more aligned but is there anything else?

 

3. For those who think downside is limited: why?  I get that it trades at a discount but my (limited) understanding of the CLOs is that they are equity tranche and in a downturn could suffer nasty losses.  In that scenario, the discount to NAV might well remain.

 

4. In a business like this, aren't buybacks (funded by investments maturing/amortising) effectively putting the business into liquidation? 

 

Thanks all.  I hope to have enough knowledge to actually contribute to this thread in future.  Very interesting idea.

 

Pete

 

[MicroValue]

SOTP valuation is ok, but its not NAV.  KKR appears to trade at a premium to book value so what great asset does it have that is not properly reflected on its balance sheet?  If you aren't a value-based NAV investor, which you don't seem to be, then maybe Tetragon is not for you.

 

Tetragon could well to continue to trade at a discount to NAV, but there are several possible catalysts

1.  Latest tender offers cleared out 85% of the sellers at 10.00, leaving room for stock to appreciate once the 15% of sellers have unloaded their position.

2.  A huge chunk of management stock options priced at 10 expires in April 2017.  Management may juice the stock in front of option expiration and either way it will be nice to get those off of the balance sheet so we start to get cleaner NAVs.

3.  Possible spin-off of asset management business.

4.  The accretive nature of buying back stock at a 50% discount is tremendous -- an immediate 100% risk-free NAV return on each dollar spent.  Even if the discount is 30%, there is tremendous value in buying back shares.  And for once the company did the right thing by buying back without enriching themselves too

5.  Management keeps increasing insider ownership of stock.  At some point they may own enough where they get tired of the low stock price and restructure the company to boost the stock price. 

6.  Everything else is overvalued so this looks like the best value in the market right now, and in the past when I have encountered situations like that, I am either missing something big or the stock catches up to the market.

 

CLO exposure is only a portion of the NAV and has been trending lower over time. 

 

Buybacks are not equivalent to liquidation -- look at all the big banks buying back stock.  Tetragon has plenty of cash and large enough assets that the buybacks would juice the stock price before the company gets anywhere close to liquidation mode.

 

Anyway what alternative uses of cash are so great right now?  Almost all asset classes pretty expensive to me.

 

 

 

[petec]

Thanks for the response!

 

I'm certainly a value investor, but not based only on NAV, and personally I wouldn't distinguish too much between NAV and SOTP when both are heavily reliant on assumptions, but that's just me.

 

I may have missed something in my reading but how do we know the last tender offer cleared out 85% of those who are willing to sell at $10?

 

Also, can you point me to a good summary of management's past misdemeanours?  I do find it reassuring that their ownership is rising.

 

 

[bskptkl]

Thanks for the response!

 

I'm certainly a value investor, but not based only on NAV, and personally I wouldn't distinguish too much between NAV and SOTP when both are heavily reliant on assumptions, but that's just me.

 

I may have missed something in my reading but how do we know the last tender offer cleared out 85% of those who are willing to sell at $10?

 

Also, can you point me to a good summary of management's past misdemeanours?  I do find it reassuring that their ownership is rising.

 

You can read a lot of the background on VIC.

I assume he meant latest tender took up 85% of stock that was tendered.

[MicroValue]

Yes VIC has good write ups.  You can access company press releases on tetragoninv.com or look at the yahoo symbol tfg.as

 

 

[MicroValue]

Tetragon reports results with diluted NAV at 19.96 up just under a $1.00, in line with expectations.

 

Dividend a very slight increase, but I like the signaling that the dividend appears here to stay.

 

Getting paid 6.7% to wait at almost a 50% discount to NAV leaves enough margin for error in my view for market volatility, a unfavorable fee structure, and slop in the NAV calculation.

 

And next year if shares are still hanging out in this area, I will press for another tender offer.

 

 

 

 

[brendanb22]

Does anyone have a good reason why this is trading at 50% of NAV? Only thing holding me back from purchasing is confirming that I'm not missing something here

[thepupil]

Does anyone have a good reason why this is trading at 50% of NAV? Only thing holding me back from purchasing is confirming that I'm not missing something here

 

- Fee structure (no high water mark, externally managed), that deserves a big discount, I own the stock and think that the discount is too big but it is a shitty structure for sure

 

 

[thepupil]

And some diluting is coming