Global Investments

[D123]

Some thoughts on GIL's assets:

1. Their loan portfolio and securitization assets (LPSA) consists mainly of "fixed income" securities with floating rate coupons. There is very little interest rate risk. The most important risk is credit risk since they are mostly mezzanine loans (except for the US RMBS notes). With a Bloomberg machine, it can be quite easy to see the track record of payments in these notes. What is harder to tell is what the payment pattern would be like going forward, since you cannot possibly check the credit ratings of the individual obligors of each note.

2. A large part of its assets receive cash flows denominated in USD. With the outlook of the USD dim, how badly would this impact cash flows in SGD? Another large exposure is to AUD, which seems to be more stable, at least as long as their commodity-based economy thrives. In my DCF calculations for the cash flows from the USD assets, I would factor in a 1.5% - 2% depreciation in the USD per annum on average.

3. If valuing the company by book value, investors should remember to apply a discount to the DCF-calculated book value of the LPSA to arrive at the value attributable to unitholders. This is to factor in management fees and operating expenses. If 1H2011's net margins are indicative of net margins going forward, a discount of about 30% seems appropriate. The margin will likely narrow once share price hits above $0.36 since incentive fees will need to be paid.

4. As mentioned in (3), incentive fees will only be paid if share prices are above $0.36. Management has their work cut out for them. Base fees, at 1% of average market cap, are currently not very high and the rate is in place as long as market cap remains below $1.5bn. At current market cap of about $82mn, they have a long way to go.

Day-to-day expenses are fixed at $0.65mn per annum, excluding third party fees. Low acquisition fees of 1%. 3% divestment fees, with no divestment fees paid if company doesn't make a profit on the divestment. All in all, the fee structure looks good for unitholders. I think the fund has one of the lowest fees for listed funds in SG, and is certainly lower than most REIT's fees.

Perhaps the best way for the manager to increase its returns is to generate yield from its assets, and hope that this would push up the share price. This can be done by paying out as much as they can in distributions, hope the market pushes down the yield by increasing the share price, then raise fresh equity to try and increase AUM, NAV and market cap. As long as equity raised is larger than distributions (and consequently, the amortization of its LPSA), it will be able to attain incentive fees in time. It may be a good thing for potential shareholders who believe in this growth story to set aside some cash for future rights issues.

A relevant question would be if the managers have set the bar too high for themselves. This might perversely result in disincentives to work hard for unitholders.

5. The manager STAM is 100% Temasek-owned. Chairman Boon Swan Foo has so far acquired an 8.4% stake in the fund for $7.7mn, at the average price of $0.168. Even if he didn't foresee the $10mn impairment taken in FY2010, the counter should still be worth at least $0.148 according to him.

Just my 2 cents.

[Nick]

GIL ANNOUNCES S$4.3 MILLION NET PROFIT AFTER TAX FOR 2Q 2011 AND S$11.6 MILLION NET PROFIT AFTER TAX FOR 1H 2011

http://www.globalinvestmentslimited.com/...1H2011.pdf [Press Release]

http://www.globalinvestmentslimited.com/...1H2011.pdf [SGX Report]

http://www.globalinvestmentslimited.com/...1H2011.pdf [1H Presentation]

http://www.globalinvestmentslimited.com/...1H2011.pdf [Current Asset Review]

Results are within expectation with GIL meeting its earlier 1H 2011 guidance of 0.75 cents/share distribution. GIL generated cash economic income of 0.83 cents/share in 1H 2011. Personally, I prefer to use its operating cash-flow less interest expense and loan repayment to derive the net distributable cash-flow. In 1H 2011, GIL generated $5.2 mil distributable cash-flow of which $4.1 mil will be paid to shareholders. It also acquired $11.99 mil worth of new loans (mainly CLOs) which was funded partially by the return of loan capital ($4.7 mil) and the rights issue completed early this year. Debt continues to be repaid regularly with only $16.9 mil worth of loans as of 30 June 2010 ($18.7 mil as of 31 Dec 2010). It also owns highly liquid assets - $37.6 mil cash and $15.2 mil of NYSE-listed FLY Leasing shares.

At the asset level, cash income from its operating assets remain steady. FLY Leasing has proposed a major acquisition in the previous week so it will be interesting to see its impact on their distributions in 4Q 2011 onwards. Ascendos has been fully written down nearly two years ago but continues to make distributions to GIL this year. The 2 aircraft leased to Thomson Airways to 2013 might face lease renewal risk in the future. The loans segment are more fragmented - the Avoca Notes registered higher market value despite potential default risk and threat of interest suspension to its junior tranches. Seiza Augustus Series - 2007 (fully written down to 0 last year) has suspended loan interest payment to GIL's investment tranche. The US CLO Notes acquired in 2Q 2011 should (hopefully) make a positive impact in 2H 2011. STAM investment in RMBS Notes at significant discount to par value looks relatively shrewd a year later - it managed to divest a portion of its RMBS purchased for $1.67 mil at a profit of US$0.85 mil in Aug 2011. GIL will receive the cash-inflow of US$1.16 mil in 3Q 2011. It is still holding on to US$9.72 mil of RMBS notes with face value of US$25.13 mil as of 30 June 2010. Forex risk remains an issue for GIL since 54% of its cash economic income is in AUD, 22% in Euro and 24% in USD. Strangely, they managed to book in forex gain so I guess they have some hedging ?

Considering the heightened fears of a global economy crash, the ability of GIL's loan and operating investment to continue performing to expectations should be watched carefully. While GIL has a much more stronger balance sheet, the 'weird' investments coupled with its untested new Management will unlikely result in it trading at its NAV level. Time is needed for the Management to show-case their talent to justify such a valuation. GIL is also saddled with legacy assets which may drag down its overall performances. It is good that the Management has reduced its operating expenses and fees significantly - I guess it was necessary to win unit-holders' support in the 2009 EGM. Ultimately, investing in mutual funds (like GIL, MIIF etc) is akin to investing in the Manager (and not the asset). A good Manager will lead to growth in DPU and NAV over time while a poor Manager will not achieve such returns leading to poor returns in the unit price.

http://www.globalinvestmentslimited.com/...sIssue.pdf - GIL announces it has purchased Credit-Linked Floating Rate Notes of Sealane II (Trade Finance) Limited for $9.78 million.

Personally, the only way to narrow the gap between its unit price and NAV is to reduce its exposure in junk assets and instead increase its exposure on a variety of more senior notes. Management skill comes into play - acquiring Notes below par value (for higher yield) and eventually selling it for capital gains - will lead to higher rating. Time is needed. The possibility of liquidating its fully written off investments could also lead to a re-rating. For the moment, I will judge STAM by the investments it has made rather than the performance of the legacy assets. I don't think buying junk Notes for the high yield will work. B&B tried to do that and it didn't turn out well.

I did initiate a position on GIL a month ago. GIL is a high risk investment. This isn't an ordinary 'yield' stock - just look at its history ! This is not a buy/sell call.

[cif5000]

I thought this would be a good stock to short/sell.

I would cover my short if the panic is over.

It also owns highly liquid assets - $37.6 mil cash and $15.2 mil of NYSE-listed FLY Leasing shares.

The liquidity of FLY could be an issue.

For the moment, I will judge STAM by the investments it has made rather than the performance of the legacy assets.

I did just the opposite. I determined a conservative value for these legacy assets and make sure they comfortably cover the stock price. That provides the "margin of safety". The value of the new investments are really birds in the bush. For now, I don't really know how good STAM is in catching birds.

[D123]

While GIL has a much more stronger balance sheet, the 'weird' investments coupled with its untested new Management will unlikely result in it trading at its NAV level. Time is needed for the Management to show-case their talent to justify such a valuation.

Some brief information about STAM can be found on their website.
http://www.stassetmgt.com/
It seems that they have had at least 9 years of operations as an accredited fund manager, and have dealt with CDOs extensively in the past.

Management skill comes into play - acquiring Notes below par value (for higher yield) and eventually selling it for capital gains - will lead to higher rating.

I agree that investing in undervalued bonds can be a profitable strategy, and hope that STAM can execute that well. Let's look at their investments since taking over.

US RMBS:
Seems like they have done well for themselves here by purchasing these notes at 50% discount to par on average. Coupon rates may not be attractive at 1mL + <100bp, but if principal is fully repaid, returns should be satisfactory. I say satisfactory and not superb because I think it may take at least 20 years for the notes to be fully repaid since they are mortgage notes issued in 2005-2007. That's why the depreciating USD is such a big concern.

In their current asset reviews, they called these notes senior notes. However, with ratings like Caa and C (Moody's) I wonder how reliable future payments will be.

US CLOs:
With initial face values of $10.87mn and an investment price of $9.37mn, it seems they did not manage to get much of a discount here. Perhaps they are investing for yield (coupon rates are 3mL + 180 to 425 bp, rated B and NR by Moody's)? If so, I think Singaporean investors can get better yields elsewhere after adjusting for the USD depreciation. There is also relatively less disclosure on these notes (duration, collaterals, underlying business etc.)

[freedom]

Caa and C by Moody's can sell at 50 cents on the dollar? the price is not low, imo.

[Nick]

While GIL has a much more stronger balance sheet, the 'weird' investments coupled with its untested new Management will unlikely result in it trading at its NAV level. Time is needed for the Management to show-case their talent to justify such a valuation.

Some brief information about STAM can be found on their website.
http://www.stassetmgt.com/
It seems that they have had at least 9 years of operations as an accredited fund manager, and have dealt with CDOs extensively in the past.

Agreed. But nonetheless, we have to see whether they can perform well in the coming years. I am not too sure what STAM's strategy is - do they intend to hold on to their CDOs till maturity or are they skewed towards the trading side ? There is an article here on STAM's boss - http://propertyhighlights.blogspot.com/2...tered.html

Management skill comes into play - acquiring Notes below par value (for higher yield) and eventually selling it for capital gains - will lead to higher rating.

I agree that investing in undervalued bonds can be a profitable strategy, and hope that STAM can execute that well. Let's look at their investments since taking over.

US RMBS:
Seems like they have done well for themselves here by purchasing these notes at 50% discount to par on average. Coupon rates may not be attractive at 1mL + <100bp, but if principal is fully repaid, returns should be satisfactory. I say satisfactory and not superb because I think it may take at least 20 years for the notes to be fully repaid since they are mortgage notes issued in 2005-2007. That's why the depreciating USD is such a big concern.

The Notes have an amortizing feature and since the notes were purchased at 40% discount to par value, the profits accrued will be faster. In middle of 2010, GIL invested $11.97 million in the RMBS notes and till date, they have collected $2.87 million worth of principal. There seems to be a slight recovery in the valuation of the RMBS notes judging by the sale. The low yield isn't attractive though - I guess this is a capital gain play ?

In their current asset reviews, they called these notes senior notes. However, with ratings like Caa and C (Moody's) I wonder how reliable future payments will be.

US CLOs:
With initial face values of $10.87mn and an investment price of $9.37mn, it seems they did not manage to get much of a discount here. Perhaps they are investing for yield (coupon rates are 3mL + 180 to 425 bp, rated B and NR by Moody's)? If so, I think Singaporean investors can get better yields elsewhere after adjusting for the USD depreciation. There is also relatively less disclosure on these notes (duration, collaterals, underlying business etc.)

They could improve the quality of their presentations to include such information. Perhaps, they want us to read the individual Notes Prospectus on our own !!! I am not sure why they keep booking in forex gains when the USD is depreciating ? Are they hedging the exposure ?

Any thoughts on their latest purchase ? There is a short article here describing the product - http://www.theasset.com/article/20261.html

On a separate note, S&P Research has issued a short report on GIL - http://research.sgx.com/reports/rpt_view.pl?id=6554

(Vested)

[D123]

I am not too sure what STAM's strategy is - do they intend to hold on to their CDOs till maturity or are they skewed towards the trading side ?

Why is this important? My view is that investors should chiefly be concerned about how much they have to put in and how much they can get back, and when. It is STAM's incentive to deliver consistent, high pay-outs in order to generate both a market re-rating and subsequently, reason for rights issues. I think consistent, high pay outs can be delivered by both held-to-maturity and trading tactics.

I am not sure why they keep booking in forex gains when the USD is depreciating ? Are they hedging the exposure ?

I can't figure this out either. I can't find any hedging instruments on their book, but they did say that they may employ SPEs from time to time. Perhaps the hedges are hidden somewhere?

Anyway, maybe it is more useful to look at the total gain/(losses) taken by the company during the period. For this, we can look at the statement of comprehensive income. If you add the forex gains in the income statement and the forex losses in the statement of comprehensive income for 1H2011 and FY2010, you will get approximately net forex losses of (S$2.17mn) and (S$4.21mn) respectively.

The question of course, is why would they report gains and losses separate accounts? One resultant effect of this is that under the equity account of the books, they get to book more into the "accumulated gains/(losses)" account, using the "translation reserve" as the offsetting account. Not sure if this is their intention, but it does help to claw back the large amount of accumulated losses that they hold. (Not that it affect dividend payments, which is restricted by cash flows rather than accumulated gains)

Also, I got curious and double-checked the net forex loss figures by taking the carrying values of assets and liabilities (mainly the short-term USD loan derived from pledging FLY shares and long-term USD loan taken out on the aircraft) and calculating their forex gains/(losses) using google finance's mid-market rates at book closing dates. Turns out my calculations give figures close to the net forex losses. So if they had just booked forex gains and losses on the carrying values in one line, it would have been close to the net loss figures calculated above.

Well, as fun as this accounting exercise is, I guess what's more important is the free cash flows of the company as you (Nick) have pointed out. And so far, under STAM, the dividends have been well-covered by the free cash flows.

Some thoughts on GIL's assets

A bit more on GIL's assets:

They currently have about A$33.6mn worth of notes, and US$19.5mn worth of notes that have coupon rates with a floating component. If interest rates rise, does it mean that coupon payments, and thus, GIL's interest income will rise? (book value might stay the same due to increased discount rates in the valuation models)

Oh, and I just got my hands on a copy of the Sealane prospectus. Not sure where to find the other ones though.

[Nick]

Oh, and I just got my hands on a copy of the Sealane prospectus. Not sure where to find the other ones though.

I am not certain whether these prospectus refer to the investments made by GIL recently -

http://www.centralbank.ie/regulation/sec...69-BMI.pdf [BMI CLO 1)

http://www.ise.ie/debt_documents/Finalpr...it_847.pdf [Summit Lake CLO]

http://www.ise.ie/debt_documents/GOLDENT...7_9099.pdf [GoldenTree Loan IV]

http://research.sgx.com/reports/rpt_view.pl?id=6571 - S&P uploaded a report on GIL recent investments yesterday.

(Vested)

Disclaimer: Buy at your own risk !

[freedom]

I took a further look at the assets of GIL.

1. possible impairment for FLY holdings as current market value is much less than carrying value.

2. Does receiving full coupon/interest payment imply that the carrying value should not be impaired? Although receiving no coupon/interest payment implies the investment is almost worthless, imo, it is wrong to assume that receiving full coupon/interest payment means investment can be recovered/partly recovered as interest/coupon is only very small part of the whole investment and the maturity date is so far away, especially for one of the Europe securitized loan.

[Nick]

I took a further look at the assets of GIL.

1. possible impairment for FLY holdings as current market value is much less than carrying value.

2. Does receiving full coupon/interest payment imply that the carrying value should not be impaired? Although receiving no coupon/interest payment implies the investment is almost worthless, imo, it is wrong to assume that receiving full coupon/interest payment means investment can be recovered/partly recovered as interest/coupon is only very small part of the whole investment and the maturity date is so far away, especially for one of the Europe secularized loan.

1) This is likely since it is marked to market price. It will be more interesting to see whether will FLY increase its distribution after completing their mammoth acquisition or will GIL seek to divest the shares in the near future.

2) Yes it is possible. There are investments which are receiving interest income and yet have 0 valuation (fully impaired):

i) Ascendos was fully impaired in 2009 but generated GPB 0.49 million distributions in FY 2010 and GPB 0.36 million distribution in 1H 2011.
ii) Seiza Augustus Series 2007-1 was fully impaired but generated interest income amounting to A$0.64 million in FY 2010 and A$0.55 million in 1H 2011.

This implies that impairment is possible even if it generates income since the possibility of default could be large.

A significant portion of GIL's legacy assets have been written in value over the past two years. Yet, GIL still trades at 14.7 cents as compared to its NAV of 27.5 cents. The market has priced in further devaluation and drop in operating income due to defaults. Let's wait and see how it copes with this if the Western market continues to be turmoil. It is fairly risky business trust operation-wise. It has much smaller chance of going bust compared to the rest of the Trust since it doesn't have much debt but its revenue isn't as steady as compared to the Trust/REITs leasing models.