SEPTEMBER 30, 2017 | DOWNLOAD THE PDF
Dear Fellow Shareholders,
We are writing to update you on the liquidation of the Focused Credit Fund (the “Fund”). The largest position remaining in the Fund continues to be Ideal Standard International (“Ideal”). As we mentioned last quarter, Ideal is exploring various re-financing and strategic options ahead of our notes maturing May 1, 2018 which can result in a wide range of outcomes for our notes. This quarter we took an adjustment to the valuation of the Ideal securities due to the following:
- Ideal released new quarterly financial information to its bondholders. The company’s operations continue to improve however, negative currency effects more than offset the economic advancements for the Fund.
- Just about the entire capital structure is comprised of payment-in-kind securities (“PIKs”) therefore, with each interest payment, the Fund’s Ideal holdings get diluted by the larger, more senior tranches of debt.
The quantitative result of these two changes had a material effect given the leveraged nature of the Ideal capital structure. We continue to work towards realizing what we believe is a fair value for this investment and we continue to believe in the strength and growth prospects for the business which will hopefully generate more interest and higher bids for the Ideal securities.
We have engaged an outside valuation firm to help value our equity position in Thunderbird Resources. We continue to seek buyers for both of our Thunderbird and Geokinetics positions, each of which is tied to the energy industry. Although Hurricane Harvey has helped support certain commodity prices in the short term, the strongest impact was probably on the refining business, which is a segment that neither company participates in.
To date, Fund Management has maintained the portfolio in a manner which has allowed the Fund to continue to meet the requirements of Subchapter M of the Internal Revenue Code. Consistent with this objective, Fund Management intends to change the Fund’s fiscal and tax year-end to September 30, and the Fund will continue to be a tax pass-through investment vehicle through that year-end. However, given the increased concentration and continued liquidation of the Fund, we do not believe the Fund will be able to satisfy the Subchapter M diversification requirements after September 30th. Thus, at some point after October 1, 2017, Fund Management believes the Fund will become subject to, and be required to pay taxes on its income from such date. With Ideal as the last remaining income producing security, Fund Management does not believe that the Fund’s change in tax status will have a material impact on the overall return to Fund shareholders.
We anticipate making the next liquidating distribution to shareholders on or about October 25, 2017.
We appreciate your support and will continue to provide updates on the liquidation process. Should you have any questions, please call our client service group at 212-906-1160.
Third Avenue Management