Carador Income Fund: Proposals To Extend The Life Of The Fund

Carador Income Fund (CIFU), managed by GSO Capital Partners (of the Blackstone Group), has underlying investment exposure to a highly diversified portfolio of US corporate senior secured loans through direct investments in collateralised loan obligations (CLOs). The portfolio is split (c 50:50) between US CLO income notes and mezzanine debt. Income notes are still producing high cash income returns, but these have reduced with the increase in loan refinancing and re-pricing at lower spreads. The reduction in income note cash flow has been reflected in the market value of these investments. Meanwhile, mezzanine debt investments have increased in value as investors seek attractive yield opportunities. Despite the pressure on cash flows, management believes that assuming current market conditions continue, the Q1 dividend is a reasonable guide to future 2013 payments, annualising at US$0.136 (a 13.1% yield).


US corporate loans via CLOs
Through direct investment in CLO income notes and mezzanine debt, CIFU is exposed to a diversified portfolio of US senior secured bank loans. Over the past three years, its investments have benefited from strong cash flow and revaluation gains. More recently, investors’ search for yield has seen loan spreads narrowing, driving high levels of loan re-pricing/refinancing, reducing current and expected future cash available to CIFU’s income notes (albeit from high levels), and this has been reflected in the valuation of the income notes. Mezzanine debt investments have seen their lower but more stable cash flows reflected in higher valuations.

Proposals to extend the life of the fund
The company believes there is now an attractive opportunity to commit an increasing amount of capital to primary (new) CLO income notes, in addition to ongoing but diminishing investment in the secondary market, CIFU’s current focus. An EGM on 26 June 2013 will consider a number of proposals, including extending the life of the company (replacing a 2017 continuation vote with a redemption opportunity), which will give CIFU the flexibility to pursue this objective.

Valuation
Stronger underlying loan prices and improving mezzanine debt valuations have been more than offset by declining income note valuations ytd. However, with still high income in absolute terms, NAV total return has been an annualised 5.9%. Management guidance suggests a prospective 2013 dividend yield of c 13%. The NAV is struck at market value (P/NAV 1.04x), a reasonable guide to liquidation value, but the real value is in the dividends and principal returned over the life of the fund. If shareholders decide to extend the fund’s life, we see the prospect of continuing attractive returns, although lower than in recent years.

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