NBDG Distressed Debt Closed End Fund

[GN100]

In October Skyship posted on TMF his thoughts on NBDG - I think that he mentioned 10% return within 6 months. Well, the investment intrigued me and, having read up all I could find I bought some on 18th October.
Including the return of capital XD on 10th November my total return to date is 6%. Hat tip to Skyship for the heads up on this one.

GN

[Carcosa]

In October Skyship posted on TMF his thoughts on NBDG... I bought some on 18th October.

Seems I bought one day ahead of you!

Distressed debt is something that i would usually walk away from without getting past the headline but I too looked at this quite closely and it is an investment that I became quite enamoured about. Essentially the securitised distressed debt in which they invest in are backed by hard assets e.g. if a car park operator is in financial difficulties and can only manage to pay the interest payments then that is where NBDG come in. Provided the car park operator owns the land then if the operator goes bankrupt then the assets more than pay for the investment that NBDG have made for the debt. So its (relatively) safe.

The other interesting aspect of NBDG is that they will be winding up the fund (called 'harvesting') from End March 2017. The process may take a while but in essence they are getting out of the business and returning funds to investors.

And finally the other very interesting aspect of NBDG is that they are currently standing at 16% discount to NAV (published daily). So (in theory) there is a 16% gain to be had if nothing changes once the harvesting period is finished. Changes in NAV can be quite lumpy because nothing may change for long periods of time until a particular investment comes to fruition which normally improves NAV in steps/jumps. Most (all) of their business is in USA and its really a US dollar based business.

The other 'safety factor' is that a large percentage (14.6%) of the fund is actually in cash when they last reported. Plus, almost daily buybacks given the discount to NAV representing about 9% of the issued share capital and, somewhat unexpectedly, they recently announced their first distribution of capital to shareholders albeit a bit small(!)

So overall, I think it is quite interesting and hence I bought some shares in NBDG. Note that there are three classes of shares so if you want to look at the RNS's start here or the company website

Carcosa

[GN100]

I found the length of the 'harvesting' period a bit difficult to understand but I finally found somewhere that it could be as much as 2 years. This length of time would be until the last investment had been disposed of. However one could always sell in the market if the time/reward curve proved to be too long. On the other hand one may have reached the stage when all the original investment had been returned plus some profit and a viewpoint could be taken that one might as well hang on for the rest. Interesting stuff.

GN

[SKYSHIP]

Hi Garth. Hello Carcosa

Fistly, for anyone reading this and wanting to know more, I repeat below my post on The Mike Walters website from July. Unable to find the October one on TMF...but would have been similar, though the price 10% higher by then!

Anyway, NBDG continues to perform and to my mind still promises great, secure returns for the next 3yrs.

From sources close to the Company, it is realistic to expect a final redemption in excess of 110p. For my model purposes I assume just 110p over 4yrs:

# 20% repayment in 2017
# 30% repayment in 2018
# 30% repayment in 2019
# 20% repayment in 2020

Averaging out, this delivers a GRY from 80p of 10.03% to 31st Mar'20. I view this as conservative. To give you an idea of the realistic upside, 115p by 31st Dec'19 would deliver 12.49%pa.

NBDG remains my largest holding with an allocation in excess of my normal 10%MAX rule

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NB Distressed Debt Investment Fund
(Shares listed on the SFQQ – for Professional / Experienced investors only please)

NB Distressed Debt Investment Fund Limited ("NBDDIF") is a Guernsey-incorporated closed-ended investment company launched in Jun,10. NBDDIF's primary objective is to provide investors with attractive risk-adjusted returns through long-biased, opportunistic stressed, distressed and special situation credit-related investments while seeking to limit downside risk.

NBDDIF owns holdings diversified across distressed, stressed and special situations investments, with a focus on senior debt backed by hard assets. The portfolio is managed by the Distressed Debt team at Neuberger Berman which in total manages assets of c$26bn, and claims to possess one of the largest and most experienced non-investment grade credit teams in the industry.

The modus operandi is to invest for a 3yr period, then place the fund into run-off mode and return capital to shareholders over the following 3-4yrs.
There are 3 classes of capital, equating to 3 funds:

# The Ordinary shares (NBDD). Launched Jun’10. Jun’13 the investment period expired & the “harvest” period commenced. At this time 72% of shareholders voted to convert into:
# Extended Life shares NBDX). These have an investment period extended for a further 2yrs to Jun’15
# Global shares (NBDG). A third class was issued in Mar’14 with an investment period to Mar’17

It is NBDG which really looks an extremely attractive proposition for a 3-4yr investment likely to return in excess of 10%pa.
The sp is 67p, the NAV is 81.3p; so the shares can be bought at a 17.6% discount. Over the next 3-4yrs they should very conservatively repay par, which provides a Gross Redemption Yield of 10.7%. A more likely 110p would deliver a GRY of 13.4%.

The reason for H1’16 weakness has essentially been due to falls in Mark-to-Market valuations which bear little true resemblance to anticipated returns upon maturity. In this respect it is interesting to note the large director purchases a few days ago when 3 directors collectively bought 80,000 shares at 62p.

The Company also maintains an active buyback programme which originally was intended to act as a Discount Control Mechanism to limit the discount to just 5%. This 5% target was suspended earlier this year when the distressed debt market took a hit, though merely in sentiment rather than substance. Still, the discount was allowed to extend out to 20%. IMO the directors were rather self-serving buying those 80,000 shares for their own benefit rather than the benefit of all shareholders through a buyback. Since those purchases the price has risen 7%.

At some stage surely the Company will need to return to the stated aim of the Discount Control Mechanism, namely a 5% target discount. This would imply an sp of c77p, ie 15% up from where we are now.

The last quarterly portfolio update on 29th July (see link below) revealed that NBDG is at 21% CASH; and now, with only just over 7months remaining in the investment period, one has to wonder what better investment can there be than their own stock! Problem remains – no sellers.

http://uk.advfn.com/stock-market/london ... t/72084298

Liberum reports that the debt market is again rising strongly – see this extract from their update on CIFU:
==============================
“CLOs experienced a positive month with junior post-crisis CLO positions rising sharply. BB tranches returned 10.6% and B-rated tranches rose 8.4% as spreads tightened during the month. The JP Morgan CLO Index of post-crisis equity tranches returned 3.2% during the month.

The CLO market is benefiting from positive sentiment in credit markets as evidenced by rising loan prices and an improved outlook from market forecasters. The default rate over the past year in the US market is 2.3% (0.89% excluding energy) and forecasters have raised expectations of CLO issuance in 2016 in Europe and the US. Primary markets have benefited from spread compression as demonstrated by Blackstone GSO's Griffith Park CLO with AAA notes priced at Eurobor +1.23% (27bps tighter than the level achiebved on the Elm Park CLO which closed in April).

Liberum view:
We regard the CLO sector as one of the most attractive on a relative basis in our alternatives universe. There is potential for further yield compression in the short-to-medium term and the underlying cash return from CLOs has been strong as defaults remain below historic levels. This is the ultimate driver of returns as CLOs benefit from a term leverage structure. The CLO funds trade on an average 3.7% discount to NAV and offer a 9.7% prospective dividend yield."
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Perm any one of these three:

# Strong underlying Market
# Excessive NAV discount
# “Harvesting” period now just 8months away

At 67.0p NBDG is an underwritten asset play and plainly just too cheap.

(Disclosure: NBDG is my largest holding!)

http://uk.advfn.com/cmn/fbb/thread.php3?id=31538763

[Carcosa]

What an excellent write-up. Consider yourself recced!

Carcosa