In this quarterly update, unless otherwise stated, we report on the consolidated business incorporating TFG and Tetragon Financial Group Master Fund Limited.(1) References to "we" are to Polygon Credit Management LP, TFG's investment manager.

Q2 2009 results at a glance:

Overview: The second quarter was generally characterized by continued pressure on TFG's investment portfolio emanating from, among other factors, underlying collateral losses. The pace of underlying collateral deterioration, however, was slower than in the previous quarter, which is reflected in both a reduced earnings loss and reduced utilization of the Accelerated Loss Reserve in Q2 2009 as compared to Q1 2009. Against this challenging backdrop, TFG continued to focus on the preservation of its existing investment portfolio and mainly used cash receipts to help strengthen its balance sheet.

Financial Results:

Net Income: Q2 2009 saw a reduced consolidated net loss of $(26.7) million, compared to a loss of $(414.3) million in Q1 2009.

Cash Receipts: The investment portfolio generated $31.9 million of cash during Q2 2009, or approximately $0.25 per share (calculated using the average number of shares outstanding in TFGMF during the period based on quarter-end holdings). This compares to $47.1 million of cash generated during Q1 2009.

Earnings per Share: EPS for Q2 2009 was approximately $(0.21) per share resulting in a consolidated EPS of approximately $(3.51) for the first half of 2009.

Net Assets and NAV per Share: Consolidated net assets were $693.1 million, or $5.50 per share, as of June 30, 2009, down from $723.4 million as of March 31, 2009, or $5.75 per share.

Cash Balance: Cash holdings increased during Q2 to $123.8 million at June 30, 2009, or approximately $0.98 per outstanding share, compared to $94.3 million at the end of Q1 2009. TFG continued to have no outstanding borrowings.

Dividend: On July 29, 2009, the Board of TFG declared a dividend of $0.03 per share in respect of Q2 2009, which will be payable on August 24, 2009. Please refer to the website (http://www.tetragoninv.com/) for additional information regarding the dividend, including the Optional Stock Dividend Plan.

IRRs: The weighted-average IRR ended the quarter at 9.2%, down 1.4% from the end of Q1 2009. This reflected, among other factors, continued downward pressure from collateral losses on O/C cushions in certain investments.

Life-to-Date Net Loss Reserves:(2) Excess loss reserves fell in Q2 2009, with approximately $38.9 million of excess loss reserves having been factored into our IRR calculations as of June 30, 2009. At the end of Q1 2009, excess loss reserves were approximately $50.3 million.

Accelerated Loss Reserve:(3) As of the end of Q2 2009, the Accelerated Loss Reserve totaled $254.1 million, compared to $315.0 million at the end of the prior quarter. Overall, Accelerated Loss Reserves of approximately $60.9 million were released against certain investments in the portfolio due to, among other factors, collateral losses.

Hurdle Rate: The hurdle rate for Q3 2009 incentive fee has been reset at 3.2354% (Q2: 3.8247%) as per the process outlined in TFG's 2008 Audited Financial Statements and in accordance with TFG's investment management agreement.(4) No incentive fee was paid for Q1 or Q2 2009.

Portfolio Summary:

Portfolio Size: As of the end of Q2 2009, the estimated fair value of the investment portfolio totaled $565.0 million, with look-through exposure to over $17.0 billion of leveraged loans. No new collateralized loan obligation ("CLO") investments were made during the quarter.

Portfolio Composition: The portfolio currently consists of 61 CLO investments managed by 32 CLO managers.(5)

Collateral Performance: As of the end of Q2 2009, 25 or approximately 41.7% of our CLO investments were failing their most junior O/C test.(6) This was an increase from 24 investments or 40.0% at the end of the prior quarter. As O/C tests are breached, CLO structures may divert excess interest cash flows away from the equity tranche holders, such as TFG, to pay down the CLO's debt thereby curing the O/C breach through deleveraging. Accordingly, the aforementioned 25 investments have ceased to generate cash flows to TFG or are expected to cease generating cash flows on the next applicable payment date. Once enough debt has been repaid to cure the O/C test breach, however, distributions of excess interest cash flows to equity tranche holders could resume to the extent not precluded due to the investments' realized or unrealized losses.

Portfolio Credit Quality: As of June 30, 2009, the weighted-average percentage of corporate obligors rated Caa1/CCC+ or below in our 61 CLO investments was 11.6% compared to an approximate 7.8% weighted-average maximum level permitted under the terms of our investments.(7) The weighted-average WARF stood at approximately 2,800. Each of these foregoing statistics represents a weighted-average summary of all of our 61 investments.(8) Each individual investment's metrics will differ from this average and vary across the portfolio.

   TFG Investment    Weighted-Average   Summary              Q2 2009  Q1 2009 Q4 2008 Q3 2008 Q2 2008 Q1 2008   Caa1/CCC+ or   Below Obligors:        11.6%     11.4%    7.6%    4.9%    4.4%    3.4%   WARF:                 2,800     2,758   2,577   2,490   2,472   2,443     Portfolio Summary (continued):  

TFG and Market Default Rate: The lagging 12-month U.S. institutional loan default rate increased to 9.15% by principal amount as of June 30, 2009,(9) according to S&P/LCD, up from approximately 8.0% during the prior quarter.(10) TFG's lagging 12-month corporate loan default rate increased to 5.1% during the second quarter.(11)

                          Q2 2009 Q1 2009 Q4 2008 Q3 2008 Q2 2008 Q1 2008   TFG Trailing 12-Month   Default Rate: (10)        5.1%    4.0%    2.5%    1.5%    1.3%    0.8%     Market Summary:  

Broad-based secondary loan price improvement: The second quarter of 2009 saw continued improvement in secondary loan market conditions. The S&P/LSTA Index rose 26% during the first half of 2009 as the average bid price of Index loans increased to approximately $77.8, up $16.2 from year-end.(12) Furthermore, compared to the first quarter, the gains recorded during Q2 2009 were more broad-based, reaching across the credit spectrum to Caa1/CCC+ or below rated credits, second-liens and covenant-lite loans. We believe that investors were likely attracted to these lower-quality credits given their potential for greater upside, inflows from high yield funds and hedge funds, as well as CLOs.

Refinancing activity drives primary loan issuance: The U.S. primary institutional loan market held its ground relative to the first quarter of 2009, with institutional new issue volumes increasing to $7.0 billion during Q2 2009, up from $5.1 billion in Q1 2009 and $3.3 billion during Q4 2008.(13) In Europe, Q2 2009 new issue volume registered at approximately EUR9.6 billion, up from EUR1.2 billion during Q1 2009, however, this figure was dominated by the EUR8.9 billion all pro-rata Heidelberg Cement loan.(14) We believe that the majority of both U.S. and European loan issuance was motivated by refinancing. Transactions brought to market tended to be highly rated and, in our view, attractively priced and structured, with features such as LIBOR floors.

Bond refinancing swaps and amendments contribute to improved loan performance: We believe two themes of Q2 2009 were the continued strength of the high yield bond markets and significant volume of refinancing swaps, maturity extensions and other amendments. In our view, high yield bond take-outs of institutional loans represented a key driver of loan performance during the second quarter. During Q2 2009, 10 obligors issued a total of $5.6 billion of bonds and used those proceeds to repay institutional loans.(15) Additionally, amendments to extend upcoming debt maturities were a prevalent feature in restructuring activity. Amendment activity was accompanied by significant pay-down and re-pricing activity; of the 206 amendments completed in the U.S. during 1H 2009, 20 or approximately 10% offered partial pay-downs in an average amount of 16% of the loan outstanding.(16) Finally, due to among other factors, the continued rally in secondary loan prices and increased corporate borrower access to high yield bond take-outs, the pace of below-par loan buybacks slowed noticeably during the second quarter with a volume of only $1.3 billion as compared with $5.1 billion during Q1 2009.(17)

Loan repayments increase in Europe: Repayments for issuers represented in the S&P European Loan Index rose to EUR1.6 billion during Q2 2009, up from a low of EUR412 million during Q1 2009. This level translated to a quarterly repayment rate of 1.1% (as of July 2, 2009), up from 0.3% at the end of Q1 2009. Q2 2009 U.S. institutional loan prepayments on the other hand, decreased to $16.0 billion, down from $21.2 billion during Q1 2009, amounting to a repayment rate of 2.8% for Q2 2009 based on the S&P/LSTA Leveraged Loan Index, versus 3.65% during Q1 2009.(18)

Key loan market challenges remain: Despite these positive loan market developments, we believe key challenges continue to loom on the horizon for the loan market. Firstly, to-date, high yield bond and broader capital markets access has generally been limited to the stronger, "blue-chip" leveraged loan issuers. Lower-tier companies, therefore, continue to face tight covenants and liquidity pressures, which could leave them vulnerable to future earnings volatility.