DISCLOSURES

PACIFICOR, LLC HY OPPORTUNITIES STRATEGY IMPORTANT DISCLOSURES AND OTHER INFORMATION Updated March  17, 2017

 

Confidentiality. This information is confidential and may not be forwarded, copied or otherwise distributed without the prior written consent of Pacificor, LLC (“Pacificor”).

 

No Offer or Solicitation. This information is not an offer to provide investment advisory services or an offer to sell or the solicitation of any offer to buy securities of the funds Pacificor manages. The only purpose of this document is to provide general background information on Pacificor and the Pacificor High-Yield Opportunities strategy (“Pacificor HY Opportunities”).

 

Risks. A prospective client or investor must review Pacificors Form ADV, Part 2A for additional details, risk factors and potential conflicts of interest of an investment with Pacificor. Prospective separate account investors must also review the separate document entitled Risk Factors.Prospective investors in Pacificor Fund III, L.P. (“Fund III”), must carefully review its Offering Circular. All of the information provided herein is subject to and qualified in its entirety by those documents. Pacificor will provide copies of those documents, as applicable, before a client or investor invests. Only by carefully reading the materials Pacificor provides to you, and discussing any questions you may have with Pacificor, can you determine whether the investment’s risks and potential conflicts of interest are acceptable to you.

 

No Duty to Update. Pacificor and its affiliates assume no duty to update any information in this presentation. The investment objectives, methods and limitations summarized herein represent Pacificor’s current intentions. Depending on conditions and trends in securities markets and the economy generally, Pacificor may pursue any other objectives or use any other techniques that it considers appropriate and in the best interest of clients.

 

Forward-Looking Statements. This document may contain forward-looking statements based on Pacificor’s expectations about the methods by which it expects to invest. These statements are sometimes indicated by words such as expects, believes,” will and similar expressions. In addition, any statements that refer to expectations, projections or characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guaranties of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual returns could differ materially and adversely from those expressed or implied in any forward-looking statements.

 

Preparation of Document.  Pacificor prepared this document.   It has not been reviewed or audited by an independent accountant or other independent testing firm. Pacificor believes the data is correct but does not assume any liability if such data is incorrect.

 

General Information and Cautions Regarding Performance Information.  In April 2002, all assets and employees of Peritus Asset Management, LLC were acquired by Core Wealth Management, LLC. On January 1, 2007, Core Wealth Management, LLC changed its name to Pacificor, LLC. Two portfolio managers were primarily responsible for the results of Pacificor HY Opportunities until May 2004. In June 2004, Andrew Mitchell became Pacificor’s portfolio manager. Pacificor believes that at all times, Pacificor HY Opportunities has been managed with an investment philosophy and methodology similar to that described herein and that will be used to manage that strategy in the future, but it is not possible to compare Pacificor HY Opportunities’ previous performance to its future performance. New clients and investors may not experience returns, if any, comparable to those shown in these materials. These returns are shown only to demonstrate Pacificor’s (and its predecessors’ and affiliates’) experience in managing that strategy.

 

From April 2002, the performance shown is the actual performance of all positions (other than certain private positions that were carved out beginning in December 2005 as described below) that Pacificor purchased on behalf of its client accounts (and all cash, cash equivalents and short-term bonds in those portfolios).

 

Beginning December 2005, Pacificor entered into certain private placement and other restricted securities transactions described below in “Private Positions.Pacificor would not now make those types of investments in Pacificor HY Opportunities accounts. The results shown from December 2005 through June 2014 exclude the performance of those private positions and are referred to as the Carve-Out”. The Carve-Out includes one private placement, however, Prado CDO tranche D, that is fairly illiquid, but has been included because there are specialized brokers that trade in this kind of instrument and the instrument is backed by publicly traded high yield bonds. This position was in client portfolios from 2003 through 2012.

 

The Carve-Out does not reflect the performance of any actual client portfolios.  The performance of the actual client accounts used to prepare the Carve-Out was significantly lower than the results shown (due to the performance of the excluded private positions).  Please contact Pacificor for actual performance of the client accounts that were used to prepare this analysis and for more detail regarding the manner in which the Carve-Out performance was calculated (including the number of public positions incorporated in the Carve-Out performance for each month).

 

No Guarantee of Performance Returns. These results are provided only to sophisticated investors and only for their information. There is no guarantee that any portfolio using Pacificor HY Opportunities would have achieved the performance shown from December 2005. For example, the Carve-Out results may not reflect the effect of economic and market factors on Pacificor’s decision-making if Pacificor managed a portfolio that excluded private positions during that period. Any account that Pacificor manages in the future will invest under different economic conditions and will invest in different securities than those during the periods shown. The information reflects the investment of limited funds for the period from April 2002 to present. No account will or is likely to profit in a manner similar to that shown. Actual performance results may differ substantially from the performance shown.

 

 

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. A CLIENT OR INVESTOR MAY LOSE ITS ENTIRE INVESTMENT.

The performance shown includes reinvestment of all dividends, interest and capital gains and has been weighted for the size of each account as of the beginning of each period. All accounts were valued monthly and the aggregated performance is linked to the Carve-Out. Figures include accounts no longer managed by Pacificor. New portfolios were included when they were substantially converted to Pacificor HY Opportunities.

 

Carve-Out Calculation Methodology. To create the Carve-Out performance each month from December 2005 through June 2014, Pacificor first identified the private positions in its client accounts in that month. Then, it calculated the performance of the portfolio that resulted when those positions were removed during that month (taking into account any realized and unrealized gains and losses during that month and the difference in the accrued earnings in the remaining positions at the end of that month).

 

Pacificor then reduced the results for each month by 0.125% (to account for Pacificor’s 1.5% management fee). After the hypothetical management fees were deducted, Pacificor further reduced any monthly positive net performance (in excess of high-water mark) by 20% to account for Pacificor’s 20% performance-based fee.

 

Then Pacificor linked the monthly percentage results to display cumulative returns. Thus, the performance shown reflects hypothetical performance from December 2005 through present, as if that amount had been invested solely in the public high yield positions in which Pacificor actually invested during that period. A client that established an account at a different time would have experienced different results.

 

Details Regarding Market Pricing. Market pricing for corporate bonds, equities, and bank loans was obtained using TRACE data and bid-side price quotes from broker/dealers. During 2007 and 2008, Pacificor based its month-end valuations for RMBS positions on price quotes from The Winter Group and Countrywide Securities Corp. From December 2008 through March 2009, it obtained RMBS quotes from Auriga USA, LLC and from a non-broker/dealer specialist asset valuation company, Harvest Investments, Ltd. Thereafter, except for two holdings for which a price quote was available from only a single broker, Terwin Micro A and Micro B, Pacificor based month-end valuations on quotes from two brokers Auriga USA, LLC and Wunderlich Securities through November 2015. Wunderlich Securities is no longer in business and was replaced by CapRok Capital LLC in December 2015.

 

Comparison to Indices. Pacificor believes that the comparison of the performance shown to any index, such as the S&P 500 Index, the HFRI Distressed Securities Index (HFRXDS) or the Merrill Lynch U.S. High-Yield Master II Index (MLHYII), is inappropriate. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 large U.S. companies designed to measure the performance of the broad U.S. economy. In contrast, Pacificor HY Opportunities invests a substantial portion of its assets in debt obligations and in issuers with lower capitalizations. The HFRXDS is obtained from the combined performance of hedge fund managers employing an investment process focused on corporate fixed income, primarily of companies trading at significant discounts. It does not represent the performance of any particular portfolio that could be duplicated, and it is subject to several biases, including survival bias.  In contrast, Pacificor HY Opportunities invests in obligations of U.S. and non-U.S. issuers and may invest in other types of instruments (equity and debt). The MLHYII is a commonly used benchmark for high-yield corporate bonds and a measure of the broad high-yield market. In contrast, Pacificor HY Opportunities includes other securities in addition to high-yield corporate bonds. Due to these differences, Pacificor believes that none of the indices shown nor any other index is directly comparable to the Pacificor HY portfolio. The index returns shown include the reinvestment of earnings.

 

Private Positions (excluded from the Carve-Out Results)

 

Star Ranch: First trust deed on a 2,150-acre working cattle ranch located in Campo, CA. The loan was to secure development entitlements for mixed residential and commercial use.

 

QHL loans: Direct investment protected by a first lien to provide financing to Quality Home Loans (QHL), a “hard-money (low loan-to-value) lender to home owners who have subprime credit scores.

 

Terminator Franchise: Originally a series of secured loans to The Halcyon Company, which owned the Terminator movie franchise against a combination of receivables stream from the previous Terminator 3 movie and the rights to future Terminator movies, TV rights, video games and merchandise. The Halcyon Company filed for bankruptcy protection in 2009 and as a result of a settlement Pacificor acquired the rights to future Terminator productions (including movies, TV, games and merchandising). Pacificor subsequently sold those rights for cash plus participation in cash flows from future Terminator movies.

 

Dura Automotive Systems: The bonds for this company were first purchased for client accounts after the company defaulted. In Q2 2007, Pacificor accumulated a blocking position and offered to backstop a plan to take Dura private. Although this plan was never implemented, Pacificor accounts were major debt holders, and involved in various restructuring initiatives that culminated in a sale to a private equity group. Pacificor accounts are now minority owners of Dura private stock.

 

TMTS 2007-QHL1 and Terwin Micro Securitization, October 2007: In October 2007, Pacificor backstopped the securitization of two mortgage pools of “hard-money” loans. Two trusts were created. TMTS 2007-QHL1, held about $110 million of first lien mortgages and the Terwin 2007-QHL Micro securitization of about $60 million of “scratch and dent” mortgages.  The resulting tranches are private placements, and seldom trade in public markets.