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Third Point Offshore Fund, Ltd. 2009 Annual Performance 2009 Fourth Quarter Annual Standard Deviation Monthly Correlation to S&P 38.6% 8.0% 13.7% 0.4 S&P TR 26.5% 6.0% 16.4% 1.00 CS Event Driven 20.4% 4.9% 6.4% 0.6
The top winners for the quarter were Delphi Corp, Dana Holding, Chrysler, Health Net Inc., and General Growth Properties. The top losers for the quarter were Barclays, PHH, Fortis, Short Financial A, and Punch Taverns. Firm assets under management at January 1, 2010 were $2.5 billion. Quarterly Results Performance for the quarter was driven primarily by gains in post‐reorganization equities, distressed credit, mortgage bonds, and equity investments in health care companies. The following is a brief discussion of selected positions that impacted the portfolio during the fourth quarter. Credit Investments/PostReorganization Equities CIT Group Inc. filed a “pre‐arranged” Chapter 11 reorganization plan on November 1, 2009 after several months of planning and negotiations with key creditor constituents. The bankruptcy filing was necessitated by CIT’s inability to fund significant debt maturities due to the dislocation in the credit markets and the lack of government support via TLGP, which the company had hoped in vain would be forthcoming in July 2009. We had been monitoring the situation, and the Chapter 11 filing provided us with an opportunity to
This path will require regulatory approvals. We created our equity position at approximately 0. we were not interested in participating in P‐PIP. but saw the opportunity to trade around it as enticing. Mortgage Securities Mortgage securities contributed significantly to our returns during the fourth quarter. significantly exceeding the results of the S&P 500 (flat) and the BKX KBW bank index (+10. Late in the third quarter. Since the beginning of the year. starting with a short of the ABX in the spring of 2007. we entered the CMBX index of commercial mortgages as a means of expressing our conviction that the government’s Public‐Private Investment Partnership (first announced in the fall of 2008) would in fact be funded during the fourth quarter of 2009. CIT shares have appreciated approximately 32%. and have also performed strongly so far in 2010. 2009) was virtually unprecedented.purchase senior unsecured debt at what we believed to be a 25%+ discount to the asset values that could be realized in an orderly wind‐down. but the company has already reduced debt by some $10B and has extended maturities so that it has time to attempt this transition to a bank‐centric model while optimizing the value of its non‐bank eligible businesses (e. However. the Fed. which quickly traded up to 0. A restructuring of a $53B non‐bank financial completed within six weeks (plan confirmation was December 8. we have invested opportunistically in mortgage indices as event‐driven trades from time to time. and the FDIC that was developed to return liquidity to markets for previously issued CMBS and non‐agency RMBS by providing government equity co‐investment and favorable debt financing. Most of our current portfolio is composed of single‐name. senior RMBS positions with an average size of $10M. 2 . CIT is currently one of our largest positions because we believe it presents a compelling option on the potential revitalization of one of the country’s largest middle‐market lenders as it transitions (according to our thesis) to a lending institution which will be funded eventually via a retail deposit base. we received as consideration $0.5%).7x plan book value upon listing on the NYSE.70 of a strip of 7% Second Lien Notes (2013‐2017). and our pro‐rata ownership of 77% of the new common equity of the company via the December emergence. transportation finance) as the economy stabilizes and asset values recover. The Legacy Securities component of the Public‐Private Investment Program (aka P‐ PIP) is a joint initiative between Treasury.g.4x plan book value (~$3B). both in terms of bond appreciation and pre‐ payments. Through our initial sizeable November debt investment in senior unsecured bonds. As mentioned in previous letters.
The Company has significant cost reduction opportunities and is well positioned to take advantage of consolidation in the healthcare industry once the regulatory environment stabilizes. A few investments made during the Fourth Quarter highlighted the value in this approach. over time. and CEO Jay Gellert is a significant shareholder in the company. Based on the low risk nature of the asset and our conviction that the government partnership was imminent. It generates almost 60% of its sales from emerging markets in Asia and 3 . the benefits of scale will become increasingly important as the industry focuses on wringing costs out of the system. MJN is a global leader in infant formula and pediatric nutrition and is most well‐known for its flagship product. Health Net’s high quality management team is focused on maximizing shareholder value.As the manger selection and subsequent private capital fundraising process wore on. we established a position in Health Net common equity when the stock sold off following the announcement of the company’s loss of its Tricare contract with the US Department of Defense and the sale of its Northeast assets to United Health. We also felt that the resolution of healthcare reform legislation would remove the current valuation overhang across the managed care space. the company has a highly attractive earnings growth profile. and we profited in the fourth quarter as P‐PIP starting buying bonds and they tightened. we primarily focus on mergers and acquisitions as fertile ground for compelling fundamental investment opportunities as more often than not. The bonds we purchased were the top 70% of the capital structure and we believed that they were covered by their underlying asset values and that. Enfamil. we find unlevered arbitrage spreads uninteresting. giving us the opportunity to buy the CMBX at a price that translated to a 17‐18% levered return for eventual P‐PIP participants. we thought these securities would tighten. Post health care reform. We expect Health Net will increase profitability over the next several quarters as management focuses on reducing costs. Risk Arbitrage Investments Mead Johnson Nutrition As we mentioned in our Third Quarter 2009 letter. First. Equity Investments Health Net In the midst of the chaos during last summer’s healthcare debate. they would return par. Our thesis proved correct. We believed this contract loss was not a fait accompli and that the prevailing price did not reflect the residual value in the business. one of which was a new long position in the shares of Mead Johnson Nutrition (MJN). the market pulled back its conviction that P‐PIP would be funded. though not as quickly as we had anticipated. We like the MJN story for two reasons.
where structural tailwinds like increasing middle class births. knowing we paid a fair price for a truly best‐in‐class asset with a long runway of emerging markets‐led growth. However. since it is difficult to predict which of these "monsters in the closet" will reveal themselves and when (just as it was difficult to predict when the sub‐prime crisis would come home to roost). We have begun to set up various trades to hedge against "fat tail risk". Though the timing of such an event is of course difficult to predict. interest rates. state and federal levels. it is important to continually monitor each of these risks. we believe the company represents a compelling acquisition target for multiple parties following its complete separation from Bristol‐Myers Squibb in December 2009. Second. Unlike the subprime debacle. even as event‐driven. MJN’s geographic footprint (high market share in North America and key emerging markets around the world and low market share in Europe) is highly complementary to that of Nestle or Danone. legal and regulatory hurdles may first need to be overcome. but presenting real risks to robust economic recovery. against this backdrop remain numerous issues that weigh on sentiment. While we have only a 4 . credit quality and currency volatility • “Peak Oil” impact on geopolitical stability and economic welfare • Climate change Accordingly.Latin America. Now that MJN is fully independent. and growth • Unwise US regulatory intervention • European sovereign default risk weighing on the Euro • Middle Eastern defaults • Japanese fiscal/demographic crisis • Chinese economic growth. and higher female participation in the workforce are driving sustainable double‐digit sales growth. and their impact on inflation. Investment Outlook We are relatively constructive about markets generally in light of modest valuations. I am concerned that many of the issues we monitor today could unravel quickly in a step function.7x EBITDA for Gerber and Danone paid 21. have acquired infant nutrition assets in the past (Nestle paid 15. bottom‐up investors. accommodating monetary policy and economic data which suggest growth from the pre‐ crisis lows. including entitlement liabilities. Additionally. both companies are focused on health and wellness. Among the issues we track that have the potential to create market dislocations are: • US government deficits at the municipal. where it was possible to set up bearish bets even after the market started to fail. Once birth rates normalize in the developed world. the company will generate one of the fastest long‐term sales and profit growth rates in the large cap consumer staples universe. and several tax. creating opportunities for investors. we are content to wait for a buyer to emerge.7x EBITDA for Numico). Bristol‐Myers Squibb’s low tax basis in the asset no longer complicates a potential transaction. and are currently large enough to swallow MJN. as we did early in 2009. greater levels of consumer education.
Daniel S. All performance results are estimates and should not be regarded as final until audited financial statements are issued. gold. All P&L or performance results are based on the net asset value of fee‐paying investors only and are presented net of management fees. including cyclical and commodity stocks. and capital gains. which may be materially different from such performance depending on numerous factors. While immediate opportunities in corporate performing credit have waned. all of which were terrific performers for other funds last year but do not meet our framework or qualify as part of the knitting we do best and to which we are sticking. and we are ever grateful for the votes of confidence that so many of you have shown. While the performances of the Funds have been compared here with the performance of a well‐known and widely recognized index. we have found ample opportunity within our investment framework to exceed market returns and to meet our partners’ capital gains needs. we expect to increase the amount of protection purchased to about 2% per annum over the coming weeks and months – capital we would be very pleased to lose should such protection prove unnecessary. and include the reinvestment of all dividends. which produces investment possibilities directly in risk arbitrage investments and sometimes around the fringes. Chinese and other emerging markets. The performance above represents fund‐level returns.small percentage of capital at risk in such protective trades. Notwithstanding a challenging start to the year. as noted above. All 5 . with markets flat as of this writing. Capital inflows to the funds suggest that our existing and new investors share these sentiments. In particular. Sincerely. the index has not been selected to represent an appropriate benchmark for the Funds whose holdings. performance and volatility may differ significantly from the securities that comprise the index. and accrued performance allocation. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. Please feel free to contact Investor Relations or me directly with questions or thoughts. administrative expenses. Past performance is not necessarily indicative of future results. brokerage commissions. special situations and certain short positions are doing well. if any. interest. We have also avoided many consensus trades. distressed credits and post‐ reorganization equities. While we have taken down our exposures since their peak in mid‐January. Loeb _____________________ The performance data presented represents that of Third Point Offshore Ltd. we like our portfolio and remain excited by the new event‐driven situations we are seeing every day. and is not an estimate of any specific investor’s actual performance. we are seeing a strong surge in corporate M&A activity.
This transmission is confidential and may not be redistributed without the express written consent of Third Point LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. may constitute non‐public information regarding Third Point Offshore Investors Limited. or otherwise provided with respect to a potential investment in the Funds.investments involve risk including the loss of principal. a feeder fund listed on the London Stock Exchange. Information provided herein. _____________________ 6 . Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum. and accordingly dealing or trading in the shares of that fund on the basis of such information may violate securities laws in the United Kingdom and elsewhere.
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