TFG / TGONF - Tetragon Financial

[thepupil]

In May, Tetragon raised ~$66mm in cash mostly via sales of their event driven strategy, bringing net cash to ~$150mm (17% of market cap, ~7% of NAV). They seem to have timed the addition to this strategy well and quickly harvested gains.

 

Today, Tetragon announced a new $250 million 10 year credit facility, this gives Tetragon ~$400mm of dry powder (less some committments). The market cap is $866mm and management owns a fair amount of the stock (30%) so the float is materially lower. The credit facility was upsized from $150mm.

 

Thus far, CLO equity as an asset class (not at TFG specifically) is only down about 25% across the board. I expect more losses, but there's a potential it's not all worthless.

 

I think the recent cash raise as well as the new credit facility are de-risking events and that Tetragon is incrementally more compelling at 40% of NAV / 4.4% yield, with continued material share repurchases. If you write-off Ripple Labs (7% of NAV) and CLO equity its at 50% of NAV. 

 

https://www.tetragoninv.com/~/media/Files/T/Tetragon-V2/financial-report/2020/monthly-factsheet-may-2020.pdf

https://www.tetragoninv.com/news/press-releases/year-2020/16-07-2020

[thepupil]

Tetragon is currently tendering for $25mm of shares (that's about 2.7% of shares). because the stock trades for 40% of NAV, this small repurchase is actually quite accretive (+1.7% to NAVPS all else equal).

 

this thread was started at about $9.90 / share in April 2015. Since then $4.00 of dividends have been paid, and NAV has grown from $17 and change to $24.50 pro-forma for the tender.

 

i think the vaccine and recovery in credit has removed some of the worst case NAV writedown scenarios while a lot of other stuff has rallied.

 

5 years and counting, still like TFG.

 

i never thought myself a crypto guy, but having 6.5% of NAV in Ripple Labs when this trades at 40% of NAV (but 16% of the market cap) also adds a little bit of potential rocket fuel to the equation, but I have not idea how to think about the probability of that. as previously stated one can just write it off.

 

[rosemontseneca]

Do we think Ripple Labs is a zero at this point?  Been catching up on the SEC news over the past few days, and I'm not sure I see a way out for them. 

[Gregmal]

^ This "issue" with XRP, has largely been known and expected to a certain degree, for years. Ripple the company and Ripple coin/token/whatever TF one calls it are different things/issues. Perhaps there is a valuation hiccup at the next funding round, but 0 is farfetched. XRP was really just a mechanism through through which Ripple could print money but hardly XRP=Ripple; which is akin to concluding GS would go to 0 because it issued controversial mortgage bonds in the past.

[rosemontseneca]

Fair enough. Maybe I'm tainted by my crypto skepticism, but I'm struggling to see how the SEC issue gets resolved.  Seems like the disagreement is fundamental and there is a lot of vitriol on both sides, so not sure there is room for a settlement.  And how does Ripple work as an investment while the company is at war with the SEC?  Can't see an IPO happening while this is going on.  But then again, maybe they do better under a new administration?

 

But re: your point, what is Ripple the company beyond XRP?  Presume there is some unique technology that has value independent of the coin? Genuinely curious.

[Gregmal]

This simple what do they do answer is its a modernized payment system/processor. From the site:

https://ripple.com/company/

 

As to how its going to play out. We can deduce a few things. The government almost NEVER kills a company. Next, theres definitively a grey area simply because of the newness of the "asset class" here which means 100% it'll get settled. I mean the supposed function of XRP is to facilitate the use of the Ripple network. So its a bit of a product being sold, but its function is as a currency for its clients, should they be convinced to use it. As we've seen a million times even most recently with Luckin Coffee, settlements are usually a joke even when there is harm to investor. Here its hard to prove there was really any harm done by anyone invested in XRP by anyone other than the SEC.

 

The IPO would definitely get shelved. Fortunately in relation to this, I believe they own the 2019 Preferred issue which does IIRC contain IPO ratchets. It will happen though. Half of Silicon Valley is backing this company.

 

 

Disclosure: I took a flyer on some private Ripple company shares a few years ago but also think XRP the "currency/coin/thingamajig" is garbage.

[Spekulatius]

This simple what do they do answer is its a modernized payment system/processor. From the site:

https://ripple.com/company/

 

As to how its going to play out. We can deduce a few things. The government almost NEVER kills a company. Next, theres definitively a grey area simply because of the newness of the "asset class" here which means 100% it'll get settled. I mean the supposed function of XRP is to facilitate the use of the Ripple network. So its a bit of a product being sold, but its function is as a currency for its clients, should they be convinced to use it. As we've seen a million times even most recently with Luckin Coffee, settlements are usually a joke even when there is harm to investor. Here its hard to prove there was really any harm done by anyone invested in XRP by anyone other than the SEC.

 

The IPO would definitely get shelved. Fortunately in relation to this, I believe they own the 2019 Preferred issue which does IIRC contain IPO ratchets. It will happen though. Half of Silicon Valley is backing this company.

 

 

Disclosure: I took a flyer on some private Ripple company shares a few years ago but also think XRP the "currency/coin/thingamajig" is garbage.

 

Ripple labs may not be a zero, but it is considerably impaired. I agree the company issuing a token (which can be used a currency) and the token itself are two different things, but I think the idea with this was always that the issued token is the main source of cash flow and quite frankly the main upside, as a company serves as the Fed of it’s issued currency so to speak. If a token really evolves into a valuable digital currency the upside could be huge. Also, the cash from issuing the token could be used to develop other blockchain use cases etc.

 

This never made sense to me - why would a token that is connected to a private or public company ever would become valuable? The attractiveness of Bitcoin is that it is independent of everyone and untraceable, which I don’t think a token issued by a company wood ever be.

 

Anyways, this fiasko looks like this makes XRP use as a blockchain currency much less likely.

[thepupil]

myeh, i think it's worth $0, but it's not so clear that it's worth $0, such that TFG won't write it down and doubters will use this as evidence that the pro-forma (for complete writedown) 42% NAV multiple (58% discount) is justified by the poor capital allocation and "you can't trust the marks". If Ripple went up a lot "this deserves a discount because the NAV growth is driven by Ripple which is not sustainable".

 

Either way, a 60% discount is destiny lol.

[thepupil]

 

 

Ripple Investor Sues to Force Stock Redemption After SEC Claim

Tetragon cites SEC’s finding that the XRP token is a security

U.K.-based investment company wants to freeze Ripple’s assetsBy Christopher Yasiejko and Olga Kharif

(Bloomberg) -- Ripple Labs Inc., whose XRP token is the world’s third-largest cryptocurrency, was sued by a U.K. investment company after the U.S. Securities and Exchange Commission claimed the virtual tokens were sold improperly.

Tetragon Financial Group Ltd., with total assets of $2.32 billion, filed the complaint under seal Monday night in Delaware Chancery Court. In concurrent filings that are public, the investment company said it seeks to “enforce its contractual right to require Ripple to redeem” Series C preferred stock held by Tetragon and to block Ripple from using any cash or other liquid assets until the payment is made.

Tetragon also asked the court for a temporary restraining order, a preliminary injunction and an expedited trial. Its briefs in support of the requests also are sealed.

Representatives of Ripple and of Tetragon didn’t immediately respond to requests for comment.

Coinbase Inc., the biggest cryptocurrency exchange in the U.S., said last week it would stop selling XRP to the public after the SEC sued Ripple, alleging it misled investors by selling more than $1 billion of the virtual tokens without registering with the agency. Coinbase is the target of a proposed class-action lawsuit seeking to recover commissions paid on XRP trades, alleging the company knew the tokens qualified as securities.

That lawsuit, in San Francisco federal court, came about two weeks after Coinbase filed what’s expected to be the U.S.’s first crypto-related initial public offering, a watershed moment for the industry in gaining mainstream recognition. Bitcoin, the best-known cryptocurrency, is trading at all-time highs, rising above $32,000 Tuesday morning in New York. Bitcoin, according to JPMorgan Chase & Co., has the potential to reach $146,000 in the long term as it competes with gold as an asset class.

The case filed Monday is Tetragon Financial Group Ltd. v. Ripple Labs Inc., 2021-0007, Delaware Chancery Court.

[Gregmal]

Didnt they only invest like $30M? The series C was Dec 2019, no? Or were they there prior as well?

[thepupil]

they led the $200mm December 2019 Series C alongside Softbank and another investor, at a $10B valuation

 

they invested ~$150mm, and now have $170mm (7 ish %) of NAV in the instrument ( i assume the slight writeup represents a preferred coupon accrual)

[Gregmal]

Gotcha, thanks. Dont follow TFG really. I took a flyer on small bits of Bitcoin and Ripple(labs) some years back. Before the money left my account I realized it was the definition of high risk and speculative and that all the risks associated with the millions of disclosures about "loss of investment" definitely applied. The "its not a currency" issue has been around forever as well. So one would have to wonder what exactly the underwriting process at Tetragon is if this catches them so far off guard that it changes the entire outlook of their investment that they made barely a year ago. Will be interesting to watch for sure.

[rosemontseneca]

Interesting that the pref has that feature.  Presume it might have been drafted that way with this issue in mind.

 

The lawsuit probably means Tetragon already asked nicely to be redeemed and was told no.  Delaware courts are efficient, so the injunction at least probably gets heard soon.  If (big if) the documentation is cut and dry and if the cases moves quickly, Ripple may have have to file BK or get one of its other investors to cash Tetragon out.

 

Either way, feeling much better about Tetragon's recovery than I did before.

[Gregmal]

Unless they(Tetragon) act desperately(which the current action seems like thats a possibility), I dont think their investment will be even close to 0 or even impaired significantly. The combination of Ripple being both a private company, and a crypto related company, leads to lots of ignorance and assumption. If this was public(and with that, had a bit more concrete info) I'd probably be a dip buyer. The issue in part seemed political, and everything I've seen says its been going on and debated for years. See:

 

https://fortune.com/2020/12/21/ripple-to-be-sued-by-sec-cryptocurrency-xrp/

 

So even in terms of recouping the entire $200M Series C, we're talking about a company that per the valuation of its Series C, is 10x bigger than Tetragon. Before the company announced that the SEC was pulling this, it would have easily IPO'd at $20-30B. So raising a few hundred million to redeem, or an 8 figure sum to settle with a new administration, is chump change. If I had to predict the exact outcome, I'd wager on a 7 or low 8 figure "Settlement" and then a few compromises and this then continuing to exist as it has, with a following IPO, which occurs with a valuation much greater than $10B. Of course I could also be entirely wrong and it could be permanently impaired like no company before it, and it goes out of business because of the SEC...IDK. Ive never actually seen the later happen even in instances where I was certain it should have. Here, the entirety of EVERYTHING, comes down to the "interpretation" of something that is 1) ambiguous, and 2) a guideline put in place many years AFTER Ripple starting doing its thing.

 

In order for Tetragon to get 0, Ripple would likely have to be wiped out. In such a case we are assuming this is a BILLION dollar problem, which significantly exceeds some of the big bank, mortgage fraud settlements from the GFC. That sounds utterly preposterous to me.