BGHL August 2008 newsletter

| Source: BOUSSARD AND GAVAUDAN HOLDING LIMITED (GBP) BOUSSARD AND GAVAUDAN HOLDING LIMITED (GBP)

I.      Company Information
 
 
 
 
 
II.   Overview
 
Boussard & Gavaudan Holding Limited ("BGHL") is a Guernsey closed-ended investment company and is registered with the Dutch Authority for the Financial Markets as a collective investment scheme under article 1:107 of the Dutch Financial Markets Supervision Act. BGHL invests its assets in order to deliver an exposure to multiple alternative investment strategies managed by the Investment Manager. The investment objective is to seek to produce long-term appreciation of its assets. BGHL will seek to achieve this by investing into Sark Fund Limited ("Sark Fund"). In addition, a proportion of the net assets of the BGHL may, at the discretion of the Investment Manager, be invested in other hedge funds and/or other financial assets selected by the Investment Manager. As at today's note, two investments have been made. BGHL aims to generate a target annualised return in excess of 10% (net of all fees).
 
I.      Share information
 
 
 
 
 
 
 
In the context of the current discount to NAV, the Company continues to purchase some of its own shares into treasury.
 
 
 
II.         BGHL Composition
 
The proceeds of the initial public offering of BGHL have been invested into the Sark Fund as of October 31, 2006 (net of a certain amount retained by BGHL for working capital requirements). The proceeds of the secondary offering of BGHL (approximately €534 million) have been entirely invested into the Sark Fund: €530 million as of July 1, 2007 and approximately €4 million as of August 1, 2007 (as a result of the over-allotment).
 
In addition to having 100% of its proceeds invested into the Sark Fund, BGHL is invested in private equity companies.
 
A.     Sark Fund Limited
 
Note that trade examples detailed in each strategy below are among the best and worst performances of the month.
 
 
Commentary and highlights
European equities markets were very quiet in August. The Eurostoxx 50 ended the month flat and volatilities on stock markets decreased further with the VDAX index down to 19.7% from 21% and the VStoxx index down to 21.1% from 23.3%. Corporate credit spreads widened to some extent with the Itraxx Crossover at 548bps (+27 points).
 
Credit strategies
Credit strategies continued to perform poorly in August, and weighed -7bps* on the fund's return. We suffered from further re-pricing on one of our stressed positions, as liquidations from CLOs, late in the month, drove price action. This caused a substantial re-pricing of the debt, despite better than expected results from the company in June. This position remains challenging, and we expect the debt to exceed its financial leverage covenant at the end of the year. We think the sponsor of this deal will elect to solve the situation through an "equity cure".
 
Funded instruments continued to underperform CDS in August, and we expect this behavior to prevail for the foreseeable future. The Q2 earnings season for high yield issuers is ending with, at large, results that are not as bad as one would have feared for industrial and chemical companies. This has challenged short risk positions in the credit market in the 2nd half of the month, and we will take advantage of tighter spreads to add to several hedges. Indeed, the biggest story of recent weeks is a decisive turn for the worse in non-US macro data.  Once again, we still think we are at the onset of a credit cycle, and therefore are looking to allocate capital only to very specific situations. Furthermore, we do not think risk/reward is ultra compelling on most short-term directional trades right now.
 
Equity Strategies
Equity strategies contributed a positive 47bps* in August. Seat Pagine Gialle, the Italian yellow pages, contributed positively during the month following results announcement better than market expectations. IFI-IFIL, the Agnelli holding companies, outperformed following the sale of Amber capital's stake to the Agnellis, triggering speculation of corporate restructuring. GFI Informatique, the French IT services provider, also performed on a resilient set of results.
 
On the negative side, the Thomson Reuters dual listing spread widened due to continued availability issues with the Canadian line. Additional modest losses were spread across a number of investments in the portfolio.
 
Volatility strategies
Convertible bond arbitrage
The convertible bonds book contributed a negative 40bps* to the fund's performance in August, with a negative 60bps* actually coming from the credit restructuring trades that were sharply remarked down in very light trading volumes, probably more due to market illiquidity rather than corporate fundamentals. Some of these bonds now trade with 30% bid/offer spreads!
The rest of the convertible bond book contributed positively to the performance of the fund, with a mix of theta from (other) credit-sensitive names, gamma/vega from the long volatility positions, and as the Fortis Convertible And Subordinated Hybrid Equity-linked Securities ('CASHES') were marked slightly up. There was no new issue in Europe in August, and our trading was extremely limited, reflecting the very low level of activity and liquidity on the European secondary market globally.
 
Mandatory convertible bond arbitrage
The mandatory convertible bond book stabilized this month, with a negative 6bps* contribution to the performance of the fund, in a context of muted activity, very low liquidity and lack of any significant flows on the secondary market, apart from one block which traded towards the end of the month. We bought that block in one of our most short-dated mandatory positions at a very good discount and intend to hold it until maturity. The long standing UBS/BBVA mandatory exchangeable bond position contributed negatively as UBS' credit spread widened on the back of the €1.75bn 5-year new issue by the Swiss bank (priced at mid swaps + 165bps). On the positive side, the Fresenius mandatory was marked up, and we benefited from strong gamma gains on the Lukoil mandatory position on the back of the recent volatility in the oil price and the uncertainties surrounding the Caucasus situation. The European mandatory market continues to be characterized by very low liquidity and a clear lack of participants, but we remain very excited and convinced that it offers extremely attractive opportunities for the Sark fund
 
Gamma Trading
Gamma trading posted a negative 10bps* to the performance of the fund. Markets recovered from their lows recorded mid-July and tensions about the health of the US financial system eased. As a typical holiday season, volatilities drifted slightly lower on low realized volatility and thin volumes. Dollar/ Oil sensitive sectors (cars, airlines) jumped higher while implied volatilities went lower.
 
Trading
Trading contributed a positive 29bps* to the fund's performance, mostly driven by the Société Générale rerating over earnings, both in absolute and relative terms.
 
 
As of September 1, 2008, Sark Master Fund Limited's assets under management were approximately €1.8bn.
 
Annex 1: Greeks
 
 
 
Annex 2: Performance attribution
 
 
 
 
Annex 3: Equity at Risk
 
 
 
Annex 4: Historical returns summary
 
Euro share class
 
 
 
US Dollar share class
 

 
Annex 5: Macroeconomic risks through stress tests
 
General stress tests
 
 
Stress tests with small and mid caps adjustments
 
 
Stress tests assuming a third of risk arbitrage trades breaks in case market drops by more than 10%
 
 
B.     Private Equity Investments
 
The private equity investment, entered into on May 23, 2007 and financed by a loan facility, is in the unlisted securities resulting from the public offer made by Apollo on Countrywide Plc, the largest network of UK real estate agents. BGHL holds Castle HoldCo 1 Ltd shares and Castle HoldCo 2 Ltd debt securities.
 
The historical price paid by BGHL for the unlisted securities was approximately £12m. The Investment Manager acquired its investment in Castle HoldCo for BGHL from certain other funds it manages. The purchase price paid by BGHL for the unlisted securities was equal to the cost to those other funds of acquiring those unlisted securities.
 
The Castle HoldCo investment is reviewed by a valuation committee which meets quarterly and has an independent member appointed by the board of BGHL. The investment has been marked down after the August quarterly review of the valuation committee.
 
The Company entered into a second small private equity investment in Rasaland on June 27, 2008 for $10m. This investment is currently marked at cost.
 
Both investments represent 1% of its assets under management.
 
 
Boussard & Gavaudan Asset Management update
 
Transaction in the Company's securities
Please note that transactions in the Company's securities that have been performed by officers, directors and persons referred to in the section 5:60 of the Financial Supervision Act ("Wft") are reported:
-         directly on the AFM website: www.afm.nl  (public database > notification > insider-transactions 5:60 wft);
-         on the Company's website through a link to the AFM notification: www.bgholdingltd.com (Investment Manager > Regulatory information).
 
Transactions in the Company's own securities are also reported on:
-         the AFM website: www.afm.nl  (public database > notification > price-sensitive press releases);
-         the Company's website: www.bgholdingltd.com (Investor Relations > Financial announcements).
 
Béatrice Cardona (operations team) and Céline Epeirier (asset management team) have left us. We wish them luck for the future.
 
We are pleased to welcome Olivier Nobile, Aurelio Rodriguez, Julien Hazan and Pierre Potier.
 
Olivier and Aurelio join BG as equity traders.
Olivier worked previously at HSBC before joining CAI Cheuvreux as deputy head of risk arbitrage. In his last position at Calyon, he was global head of risk arbitrage.
Aurelio Rodriguez worked as a consultant in risk management before joining Calyon in 2006 as trader on the equity derivatives proprietary trading desk.
 
Julien joins the asset management team. He is a graduate from Paris Pantheon Sorbonne University and was an intern for 10 months at Dexia Asset Management where he focused on alternative investments and long short European equity hedge funds.
 
Pierre joins the operations team after completing a 6 months internship at BG. He is a graduate from Ecole Supérieure de Rouen.
 
 
Sincerely,
 
E. Boussard & E. Gavaudan
 
Contact information
 
Investors
Boussard & Gavaudan Asset Management, LP
Emmanuel Gavaudan
1 Dover Street
London W1S 4LA
 
Media
Financial Dynamics
Robert Bailhache / Nick Henderson
Holborn Gate
26 Southhampton Buildings
London WC2A 1PB
 
 
Disclaimer
This newsletter contains forward-looking statements, including statements relating to market conditions and environments, estimated performance of investment strategies, investment activities and funding of BGHL.  Such forward-looking statements involve unknown risk, uncertainties and other factors, which may cause the actual results, financial condition, performance or achievement of BGHL, or market conditions or investment strategies, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  BGHL does not undertake an obligation to update its forward-looking statements to reflect future events.
This announcement is not (i) an offer to sell or a solicitation of any offer to buy the ordinary shares of BGHL (the "Securities") or any other securities in the United States or in any other jurisdiction, (ii) any invitation or inducement to engage in investment activity or financial promotion of any kind, or (iii) investment advice or a recommendation.
BGHL is established as an investment company domiciled in Guernsey.  BGHL has received the necessary approval of the Guernsey Financial Services Commission and the States of Guernsey Policy Council. BGHL is registered with the Dutch Authority for the Financial Markets as a collective investment scheme under article 1:107 of the Dutch Financial Markets Supervision Act.
 
You should always bear in mind that:
  • all investment is subject to risk;
  • results in the past are no guarantee of future results;
  • the investment performance of BGHL may go down as well as up.  You may not get back all of your original investment; and
  • if you are in any doubt about the contents of this communication or if you consider making an investment decision, you are advised to seek expert financial advice.
BGHL has not been and will not be registered under the US Investment Company Act of 1940, as amended (the "Investment Company Act").  In addition, the Securities have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act").  Consequently, the Securities may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, US persons except in accordance with the Securities Act or an exemption therefrom and under circumstances which will not require BGHL to register under the Investment Company Act.  Accordingly, US Persons acquiring the Securities are subject to significant restrictions on transfer.  In addition, US persons who are not qualified purchasers (within the meaning of section 3(c)(7) of the Investment Company Act) will be prohibited from purchasing the Securities at any time, including on the secondary market.  No public offering of the Securities has been or will be made in the United States.
 
This communication is for information purposes only and the information contained in this communication should not be relied upon as a substitute for financial or other professional advice.

 
* Estimated figures