TFG / TGONF - Tetragon Financial

[MicroValue]

Tetragon will soon announce another tender offer for $50 million.  Accretive to NAV, clear out more sellers.

 

It has me quite pleased. 

 

 

[thepupil]

http://www.forbes.com/sites/nathanvardi/2016/11/30/hedge-fund-resurrection/#5aa776dbae51

[MicroValue]

Tetragon has been trading as low as 12.05 in Amsterdam and 11.94 OTC (although higher than that now OTC).  Has anyone heard news on it?

 

I suppose some investors were disappointed on no buyback news, but with an NAV of $20ish it still seems like a good deal in an expensive market. 

[bskptkl]

I haven't seen any news, but I noticed recently Fidelity charges me an extra $50 to trade this stock and had been for 3 years! They say they are passing along the fee to settle the stock. Something to do with being an "F" stock. Fidelity did credit me a bunch of free trades when I brought it up so no complaints with Fidelity.

 

Anyone else get charged extra? Never seen that before.

[Jurgis]

I haven't seen any news, but I noticed recently Fidelity charges me an extra $50 to trade this stock and had been for 3 years! They say they are passing along the fee to settle the stock. Something to do with being an "F" stock. Fidelity did credit me a bunch of free trades when I brought it up so no complaints with Fidelity.

 

Anyone else get charged extra? Never seen that before.

 

Fidelity charges additional $50 for a number of five-letter-F stocks.

[thepupil]

I have heard no news. It's an illiquid stock with still quite a sizable legacy shareholder base that is fatigued. My thesis remains unch'd and it's my largest position.

[writser]

bskptkl: can't you trade the Amsterdam listing with Fidelity?

[thepupil]

You can't trade international stocks in a Fidelity IRA (at least that's what they told me). Most U.S. investors want to hold TFG / TGONF in an IRA to avoid PFIC tax filing complexity (it still isn't 100% clear to me that PFICs require no filing if held in an IRA but every bit of research I did seemed to indicate that to be the case), so trading the Amsterdam listed one with Fido isn't an option for U.S. based investors,.

[bskptkl]

Yes - agree w pupil.

[MicroValue]

Tetragon announces dividend and a tender offer. 

 

I had hope they would announce a tender offer.  At such a large discount to book, a tender offer is highly accretive to NAV and clears out sellers. 

 

The tender is occurring at an opportune time!  In my taxable account, I intend to sell before year end, take short term gains at max rates, and avoid filing a PFIC.  I plan on holding in my IRAs where there are no tax issues.

 

MV

 

 

[thepupil]

Since the beginning of thread, this has returned about 12.2% annualized versus

 

S&P 500:                9.0%

ACWI                      5.2%

US Asset Managers: 1.6%

 

So all things considered, a good (not great) result thus far and pretty much in line with my kind of run-rate expected return.

 

NAV per share has gone from $16.8 to $22-$23. 

 

The interesting thing is that over this time period, Tetragon has not re-rated. It was about 44% discount to NAV at beginning of thread and is now at a 45% discount. BUT that is November 2018 NAV. We actually know that NAV has increased by about 4% from the valuation uplift of a recently sold division. AND we know that TFG just bought another 4-5% of shares at $11.50 which should add another 2-3% to NAV/share. So NAV as of today should be 3-6% higher than November 30,  which brings this close to a 50% discount to NAV as of today.

 

I would also point out that the sale of GreenOak provides external validation of what is the most squishy part of their NAV: their internal valuations of asset management companies.

 

Tetragon’s Net Asset Value (NAV) for 31 October 2018 is U.S.$2.08 billion. Taking into account the GreenOak merger and other portfolio gains and losses through 30 November 2018, it is estimated that Tetragon’s NAV will increase by approximately 4%, with the GreenOak valuation uplift portion being reflected in December.

 

It's kind of like watching paint dry, but I love to earn my 6% yield as the company buys back 3-10% / year of stock and continues to grow NAV per share. Despite earning a satisfactory absolute and relative return, the stock remains as cheap if not cheaper than when purchased.

 

I expect some volatility in NAV as the CLO equity book gets marked but at 15% of NAV, even something cataclysmic would be no more than a flesh wound.

 

Also the incentive fee of 25% over a libor based hurdle is more palatable with 3mL at 2.75. The hurdle is now ~5.4%.

 

As a reminder: PFIC PFIC PFIC PFIC. US investors should not own in taxable.

[petec]

Good timing-I was wondering what had happened here! Has the NAV grown, or “just” NAVPS?

[thepupil]

 Total NAV for TFG rose to $1,882.0 million at 31 March 2015, which equated to Pro Forma Fully Diluted NAV per Share(12) of

$17.57, compared to $17.05 at the end of 2014.

 

As of November 2018, NAV was $2,089 million. This will increase with mark-up of GreenOak and decrease with the $50 million of repurchase.

 

NAV grew, but they paid out a lot in dividends and repurchases, so not by as much.

 

The way I think about it is I buy a share for $10 in 2015 that had a NAV of $17, get like $2.50-$2.8 in divvies for net cost of over $7-$8 and  investment returns and re-purchases grow NAV to the low $20's, my cost basis becomes a lower percent of NAV over time. This is kind of a dumb way to look at it (very dividend growth "yield on cost", ignore IRR, type of thinking).

 

The other way to think about it is TFG has been able to maintain a low-double digit ROE while holding net cash (15% of NAV, 30% of market cap on average-ish). Things that have low double digit ROE's generally don't trade at 1/2 book. If it perpetually trades at half book, then TFG will just keep retiring shares and dividends can be used to buy back shares at a low price. If it never re-rates, then you compound at the ROE (so far low double digits); this is basically what has happened. If it re-rates eventually, you make a lot.

 

If investments do poorly, it may re-rate down but, net cash and capital return make this difficult (is it going to trade to 30 points of NAV?)* unless they REALLY mess up.

 

The likelihood of REALLY messing (or doing very well) will decrease over time as they grow more diversified (ie heading into the GFC they were 100% CLO equity, now they are 15%). So I see the rate of compounding becoming more certain over time (and honestly think it's probably lower than low double digits). I haven't been adding for a while, but may add if it widens any further

 

*and yes, I know it traded to like 10% of NAV in the crisis, but the portfolio was VERY different.

 

[petec]

Recently dipped a toe in this. Just too cheap.

 

The Bentall-Greenoak deal is a very nice confidence boost for me, although it arguably weakens the potential IPO of TFGAM slightly. Nonetheless, an IPO of TFGAM followed by a fat buyback with the proceeds would be very nice.

 

I wonder when management own enough of this that it makes sense to merge the company with the GP, eliminate the fees, and benefit from a reduced discount - not a small thing if you own 27% of the company. Pure speculation but I wonder if they might inject the management company into TFGAM before they IPO it. Halve the fees and you arguably get a double win - a stronger IPO candidate and a reduced discount.

 

Yes, I know, won't happen. But it's nice to daydream once in a while.

 

 

 

[thepupil]

TFG cut their dividend substantially (by 7 cents a quarter)= 28 cents/yr = 3.1% of stock price.

 

TFG also announced they’ll be tendering for $25 million of stock ~3% of market cap

 

You sly man, Reade Griffith.

 

You will pry my units from my cold dead hands.

 

#nevertender

#readeandpupilwillownthelastshares

 

In all seriousness at $6-$7 and like 30% of NAV I thought this had de-rated too much.

 

At $9 and 40% of new NAV, which I think needs further write downs specifically in the CLO book and CLO manager, I’m less relatively excited than I was.

 

This is the cheapest but slimiest stock I own, still a big position, but I want to see the mark to market losses come through in the CLO book before I’d consider adding. I think a lot of the assets are in trouble in this environment.

 

Been buying holding since 2013 and clipping a nice divvy/capital return, NAV has gone from $15–> $22,AUM grown,dividend paid (though just cut), shares bought back, stock down

 

 

[matts]

TFG cut their dividend substantially (by 7 cents a quarter)= 28 cents/yr = 3.1% of stock price.

 

TFG also announced they’ll be tendering for $25 million of stock ~3% of market cap

 

You sly man, Reade Griffith.

 

You will pry my units from my cold dead hands.

 

#nevertender

#readeandpupilwillownthelastshares

 

In all seriousness at $6-$7 and like 30% of NAV I thought this had de-rated too much.

 

At $9 and 40% of new NAV, which I think needs further write downs specifically in the CLO book and CLO manager, I’m less relatively excited than I was.

 

This is the cheapest but slimiest stock I own, still a big position, but I want to see the mark to market losses come through in the CLO book before I’d consider adding. I think a lot of the assets are in trouble in this environment.

 

Been buying holding since 2013 and clipping a nice divvy/capital return, NAV has gone from $15–> $22,AUM grown,dividend paid (though just cut), shares bought back, stock down

 

I'm also in this. Also surprised how little they wrote down their CLO book and manager. But I guess not enough loans have stopped paying for the waterfalls to trigger and the equity cashflows to tetragon being shut off completely. I think this will happen in the months ahead.

 

In 2009 they took the opportunity to massively write down their illiquid assets in order to double-dip on their performance fees which did not have a high watermark. So, I guess we should be happy they are too optimistic on the CLO marks?

 

Other thoughts:

 

They got smoked in event-driven, which kind of makes sense and then quickly plowed 30M more into the strategy so i guess they see opportunity?

 

Hawke's point doesn't make sense to me. I thought it was mostly 2 gold companies so how are they down 30% in March

 

Their Real estate marks are also odd. they wrote down their US RE by 30% and wrote UP the US RE by 15%.

 

Hope we get more color on the call at 10:30 EST

[petec]

#readeandpupilwillownthelastshares

 

You're never having mine ;)

[matts]

Here are some of my notes from the call:

 

As I suspected, the mark to market on the CLOs have nothing to do with the marks on the underlying loans. as long as the waterfall isn't triggered, TFG is marking their equity tranche at or near par.

 

I read about this practice somewhere and TFG confirmed it. The Manager can always buy a defaulted loan from the CLO to avoid a cashflow trigger. Sounded like TFG will be doing some of that. That way they don't have to mark down the CLO but the risk is just transferred to their own balance sheet.

 

The real estate funds are valued as of Dec 31, not March. The European portfolio sold some assets in Q4, hence the markup in value.

 

"The first is that these funds have relatively low exposures to the hardest-hit sectors, so very few exposure to hotels and retail. Secondly, the funds in all 3 regions, the active funds are relatively uninvested. So that hopefully can take advantage of -- with the dry powder of some of the current dislocations. And lastly, in particular in Europe, the Manager sold a substantial portfolio of assets at the end of last year,"

 

"I think it's fair to say infrastructure is probably closer to business as usual than those others"

 

So it looks like the marks on the RE will continue to fall and the CLO marks don't reflect reality. Do you guys think it's all priced in now or will there be more selling in May/June as the NAV catches up?

 

 

 

[petec]

So it looks like the marks on the RE will continue to fall and the CLO marks don't reflect reality.

 

This may be true but is potentially at least partly offset by the opportunity set and the buybacks.

 

As to whether it's all priced in, who on earth knows? This thing has always traded at a huge discount so I have no idea what the market will decided the "right" discount is. I do know that I remain a happy holder and expect to be reasonably pleased with my returns in 5 and 10 years, plus there is some optionality if they IPO the asset manager or wind up TFG.

[brk64311]

No position here. CLO equity cash flow can be stopped if junior OC level falls below certain threshold. Junior OC level can decline due to default, downgrade to Caa (B3/B- on negative watch included).  S&P calls those credits weakest link and size of those credits has seen a significant increase.  See below

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/leveraged-loan-weakest-links-ranks-skyrocket-as-coronavirus-batters-market

[matts]

No position here. CLO equity cash flow can be stopped if junior OC level falls below certain threshold. Junior OC level can decline due to default, downgrade to Caa (B3/B- on negative watch included).  S&P calls those credits weakest link and size of those credits has seen a significant increase.  See below

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/leveraged-loan-weakest-links-ranks-skyrocket-as-coronavirus-batters-market

 

Correct. that's why I mentioned that the managers/equity holders typically buy out the defaulted/downgraded debt to protect their cashflow. In normal times, this is usually one or 2 loans at a time. But now, you might be putting on a ton of crap on your BS to protect the CLO.

 

 

 

[ben267]

Silly question, but when you say CLO mangers buying out the defaulted debt to protect cashflows, how does that work? Do they buy the defaulted loan out of the CLO collateral so that the CLO equity cash flows will still be in compliance with the OC test?

[matts]

Silly question, but when you say CLO mangers buying out the defaulted debt to protect cashflows, how does that work? Do they buy the defaulted loan out of the CLO collateral so that the CLO equity cash flows will still be in compliance with the OC test?

 

yes. That is what I mean. It's standard practice. Problems arise for the CLO when the manager no longer wants to take the defaulted collateral on their BS.

[neil9327]

The shares are non-voting shares. What's to prevent the directors from deciding to suspend dividends and buy-backs for an indefinite period, if shareholders can't vote them off the board?

 

I also noticed from the 2019 annual report that $17.6m of the dividends paid this year, were paid as (newly-generated) stock rather than cash ($47.5m cash dividends paid). These do not transfer wealth from the company to the investors in aggregate, because they dilute the shares owned by everyone. It means that inferences made from the dividend payments as to the cash-generating ability of the company, need to be scaled back by this amount.

 

Secondly while it is true that the company has been buying back stock over the past 10+ years, they also seem to have been minting stock to pay performance/incentive/other expenses, because the reduction in the number of shares out seems to be reducing over the years around 30% less than the rate at which they are buying them back.

 

I think I might buy if bad news about their loans caused their share price to decline, or if their convertible arbitrage trading should blow up, but not at the moment.

[thepupil]

The shares are non-voting shares. What's to prevent the directors from deciding to suspend dividends and buy-backs for an indefinite period, if shareholders can't vote them off the board?

 

nothing, you are in Reade and company's hands, for better or worse

 

I also noticed from the 2019 annual report that $17.6m of the dividends paid this year, were paid as (newly-generated) stock rather than cash ($47.5m cash dividends paid). These do not transfer wealth from the company to the investors in aggregate, because they dilute the shares owned by everyone. It means that inferences made from the dividend payments as to the cash-generating ability of the company, need to be scaled back by this amount.

 

the company allows you to receive dividends in stock, for each dividend there is an optional election, this is a feature not a bug, it allows you to re-invest your dividends without having to buy in the open market, for large holders this is helpful given the illiquidity in the stock. I agree you shouldn’t use the divi as a measure of cash generation ability, which will depend on investment returns of the various assets and the capital allocation decisions of the management

 

Secondly while it is true that the company has been buying back stock over the past 10+ years, they also seem to have been minting stock to pay performance/incentive/other expenses, because the reduction in the number of shares out seems to be reducing over the years around 30% less than the rate at which they are buying them back.

 

share compensation has been high, there is high expense/fee drag generally, one should haircut expectations of net ROE however one expects this to develop. net of all of that capital return and net share count reduction and NAV growth have been satisfactory

 

I think I might buy if bad news about their loans caused their share price to decline, or if their convertible arbitrage trading should blow up, but not at the moment.

 

I don't think it is any cheaper than it has been over the past 5+ years because this is the bad scenario which shareholders have been worried about. CLO equity is long volatility and short realized defaults; i expect high spread vol (good) but high defaults/low recoveries (devastating). their other stuff has some risk too. I own a good but and it's cheap but don't think it has become wildly attractive relative to before