TIDMAXI
RNS Number : 4559Y
Axiom European Financial Debt Fd Ld
22 August 2018
22 August 2018
Axiom European Financial Debt Fund Limited
Half-Yearly Report and Unaudited Condensed Financial Statements
A copy of the Company's Half-Yearly Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2018 will
shortly be available to view and download from the Company's website,
http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
Highlights
30 June 30 June 2017 31 December
2018 (unaudited) 2017
(unaudited) (audited)
Net assets GBP80,725,000 GBP60,246,000 GBP79,364,000
Net asset value ("NAV") per
Ordinary Share 95.84p 98.88p 104.43p
Share price 102.50p 97.50p 105.25p
Premium/(discount) to NAV 6.95% (1.40)% 0.79%
(Loss)/profit for the period GBP(4,816,000) GBP4,394,000 GBP9,743,000
Dividend per share declared
in respect of the period
([1]) 3.00p 3.00p 6.00p
Total return per Ordinary
Share (based on NAV) ([2]) -5.35% +7.16% +16.15%
Total return per Ordinary
Share (based on share price)
([2]) +0.24% +8.81% +20.43%
Ordinary Shares in issue 84,228,525 60,930,764 75,999,351
[1] Only 1.50p of the 3.00p per Ordinary Share dividends declared
out of the profits for the period ended 30 June 2018 had been
deducted from the 30 June 2018 NAV as the dividend of 1.50p
per Ordinary Share announced on 18 July 2018, payable to Shareholders
on record at 3 August 2018, and which will be paid on 24 August
2018, had not been provided for in these unaudited condensed
half-yearly financial statements at 30 June 2018 as, in accordance
with IFRS, it was not deemed to be a liability of the Company
at that date.
[2] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
period with the NAV or share price, as applicable, plus dividends
paid, at the period end.
William Scott, Chairman, commented:
"The results for the first half of the year were disappointing,
largely the result of a severe market correction in May, itself
the consequence of perceived political risks around election results
in Germany, Italy and Turkey and, of course, Brexit. Regulatory
developments also contributed to a degree with the possibility
that, on the margin, some legacy capital instruments might still
serve a useful purpose at least for an extended period and therefore
might not be called or refinanced as soon as had been hoped. Most
of these concerns have abated to some extent since and consequently
both the markets and the Company's performance have continued
to recover post the half-year end to date.
We are working on refreshing the Company's Placing Programme Prospectus
to enable the Company to continue to expand by placing new shares
at not less than the prevailing NAV (cum income) per share at
the time of issue plus a premium to cover the costs and expenses
of the relevant placing.
The markets in which the Company operates improved in July and
as a result the Company's net assets increased by 1.60% to 97.37p
per Ordinary Share as at 31 July 2018. The current month to date
has been more challenging and the Company's estimated net asset
value per Ordinary Share at 17 August 2018 (after deducting the
dividend of 1.50p per Ordinary Share which went ex on 2 August
2018) was 94.74p (a decrease of 1.15% from the 30 June 2018 net
asset value). More information can be found in the Investment
Manager's report.
The Board believes that the volatility in the markets will stabilise
in the future and as a result looks forward to the future with
confidence and we thank Shareholders for their continued support
and confidence as we look to develop the Company further."
Gildas Surry, Investment Manager, said:
"The first six months of 2018 have seen a strong correction in
valuations of financial subordinated debt. Geopolitical risks
acted as a catalyst to the repricing, with the formation of the
new government in Italy at the end of May, the slow progress of
Brexit negotiations, and the resulting long-term challenges brought
to the integrity of the European Union and its currency.
As the trading activity showed, the Company remained active in
the correction, in order to continuously exploit the dislocation
of prices across all five strategies. We believe the Company continues
to be ideally positioned after adding risk selectively since mid-May
and that the current environment will continue to present attractive
opportunities over the coming quarters. On the secondary market,
some illiquid positions are being offered at levels not seen since
the start of 2017, while, on the primary market, issuers are increasingly
sounding investors to issue large but also sub-benchmark transactions,
under the scope of our Midcap Origination sub-strategy."
Enquiries to:
Axiom Alternative Elysium Fund Management MHP Communications
Investments Limited 6 Agar Street
SARL PO Box 650 London
David Benamou 1(st) Floor WC2N 4HN
Gildas Surry Royal Chambers
Jerome Legras St Julian's Avenue Reg Hoare
St Peter Port Giles Robinson
www.axiom-ai.com Guernsey Charles Hirst
Tel: +44 20 3807 0670 GY1 3JX
axiom@mhpc.com
axiom@elysiumfundman.com Tel: +44 20 3128
Tel: +44 1481 810 100 8100
The following text is extracted from the Half-Yearly Report and
Financial Statements of the Company for the six months ended 30
June 2018:
Overview and Investment Strategy
General information
Axiom European Financial Debt Fund Limited (the "Company") was
incorporated as an authorised closed-ended investment company,
under the Companies (Guernsey) Law, 2008 (the "Law") on 7 October
2015 with registered number 61003. Its Ordinary Shares were admitted
to trading on the Specialist Fund Segment ("SFS") (formerly the
Specialist Fund Market) of the London Stock Exchange on 5 November
2015 ("Admission").
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market although instruments have
been, and may also in the future be, subscribed in the primary
market where the Investment Manager, Axiom Alternative Investments
SARL ("Axiom"), identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
For a more detailed description of the investment policy, please
see the Company's Prospectus, which is available on the Company's
section of the Investment Manager's website
(http://axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf).
Chairman's Statement
I am pleased to present our report for the half-year to 30 June
2018.
Results
The results for the first half of the year were disappointing,
largely the result of a severe market correction in May, itself
the consequence of perceived political risks around election results
in Germany, Italy and Turkey and, of course, Brexit. Regulatory
developments also contributed to a degree with the possibility
that, on the margin, some legacy capital instruments might still
serve a useful purpose at least for an extended period and therefore
might not be called or refinanced as soon as had been hoped. Most
of these concerns have abated to some extent since and consequently
both the markets and the Company's performance have continued
to recover post the half-year end to date.
Our investment managers, Axiom Alternative Investments SARL, were
active on the Company's behalf across the full range of sub-strategies
and, as is their practice, they give a detailed, comprehensive
report on both the markets and portfolio composition and so I
refer readers to that for more detail on the events of the period.
Taking into account dividends paid, the Company's net assets per
share over the six months net of all expenses decreased by 5.3%.
The Company reported a net loss after tax for the period ended
30 June 2018 of GBP4.8 million (30 June 2017: profit of GBP4.4
million), representing a loss per Ordinary Share of 5.85p (30
June 2017: earnings per Ordinary Share of 7.21p).
The Company's NAV at 30 June 2018 was GBP80.7 million (95.84p
per Ordinary Share) (31 December 2017: GBP79.4 million, 104.43p
per Ordinary Share).
Dividends
The Company has declared two dividends each of 1.50p per Ordinary
Share in relation to the half-year: one was paid on 12 May and
the other, declared after the balance sheet date, will be paid
on 24 August to Shareholders on the register at 3 August. Together,
they total 3.00p per Ordinary Share and the Company is therefore
well on track against its target of at least 6.00p for the year.
During the period, actual payments of 3.00p were made, being the
12 May dividend and the 1.50p dividend in respect of the year
ended 31 December 2017, which was paid on 23 February 2018.
Placing programme and fundraising
On 13 February 2018, the Company completed a further placing of
8,229,174 new Ordinary Shares at a price of 107.50p per new Ordinary
Share, raising gross proceeds of GBP8.85 million. On 15 August
2018, the Company completed an additional placing of 1,223,499
new Ordinary Shares at a price of 98.50p per new Ordinary Share,
raising gross proceeds of GBP1.21 million.
Although the performance over the first half of the year was below
what we would like it to be and below our long-term target of
10% p.a. net of expenses, the consequence is that the current
level of both markets and our share price present attractive entry
points for new investors, and I refer readers to Section 5 of
the Investment Manager's report where the Investment Manager sets
out the key metrics of the portfolio. The Company's portfolio
now yields in excess of our target dividend. The Company's share
price continues at a modest premium to net assets per share.
Shareholders will note that on 26 July 2018 we announced that
following the Company's AGM earlier that month, the Investment
Manager had conducted update meetings with our principal Shareholders.
The Company is pleased with the response to these meetings and
is aware that a number of investors are potentially interested
in buying shares in the Company. Recognising the limited liquidity
available in the secondary market, the Board will consider issuing
new shares to satisfy demand. The share price premium to net assets
should allow this at levels which are fair and reasonable both
to existing Shareholders, who would benefit from the improved
economics of a larger asset base and a marginal accretion to net
asset value per share, and to new Shareholders who would have
the advantage of an attractive entry point at the current lower
market levels.
We are working on refreshing the Company's Placing Programme Prospectus
to enable the Company to continue to expand by placing new shares
at not less than the prevailing NAV (cum income) per share at
the time of issue plus a premium to cover the costs and expenses
of the relevant placing.
We are also actively considering a transition of the Company's
listing from the Specialist Fund Segment of the London Stock Exchange
to a Premium Listing which may make the Company's shares more
accessible to some categories of investor and improve trading
liquidity for all Shareholders.
Outlook
The markets in which the Company operates improved in July and
as a result the Company's net assets increased by 1.60% to 97.37p
per Ordinary Share as at 31 July 2018. The current month to date
has been more challenging and the Company's estimated net asset
value per Ordinary Share at 17 August 2018 (after deducting the
dividend of 1.50p per Ordinary Share which went ex on 2 August
2018) was 94.74p (a decrease of 1.15% from the 30 June 2018 net
asset value). More information can be found in the Investment
Manager's report.
The Board believes that the volatility in the markets will stabilise
in the future and as a results looks forward to the future with
confidence and we thank Shareholders for their continued support
and confidence as we look to develop the Company further.
William Scott
Chairman
21 August 2018
Investment Manager's Report
1- Market developments
In January, subordinated financials started on a very strong tone
despite new MiFID 2 rules impacting trading conditions. In a context
of rates steadily increasing on the back of the "broadest synchronised
global growth upsurge since 2010" as observed by the IMF's Christine
Lagarde on her way to Davos, banks were in strong demand and investors
kept searching for yield with limited duration. Additional Tier
1s ("AT1s") rallied strongly in the first three weeks followed
by legacy instruments, floaters in particular.
On Non-Performing Loans, the ECB pressure found some positive
response in Italy with banks such as Intesa, UBI and Banco BPM
raising their targeted NPL sales.
The start of the quarter 4 earnings season was more mixed with
poor performance in Investment Banking (UBS), the impact of one-offs
(like IFRS 9) and provisions from specific corporates: Carillion
for UK banks or Duro Felguera in Spain (Santander). Still, capital
ratios remained stable overall and asset quality continued to
improve.
Consolidation remained a wishful thought from regulators as UniCredit
CEO dismissed it and Arkéa confirmed its plan to exit Crédit
Mutuel. In restructurings, NordLB confirmed it would keep Deutsche
Hypo and Cerberus together with JC Flowers having been selected
as bidders for HSH Nordbank.
Three new AT1s were issued by RBI, UBS and Belfius. Monte dei
Paschi and IKB issued a Tier 2 ("T2"), while BFCM, Santander,
Unicredit, SocGen and BPCE issued new Non-Preferred Seniors. Santander
UK called the rump of its 6.984 Perp step-up, and Intesa launched
a tender on government guaranteed senior bonds.
In ratings, we would highlight the upgrade of RBS's ringfenced
entity at Moody's, and the positive outlook of Unicredit.
In February, subordinated financials saw a negative trend in valuations
driven by investor concerns towards rate increases, Italian elections,
the formation of a government in Germany and a lack of progress
in the Brexit negotiations. Still, the quarter 4 earnings season
showed some fundamental improvements: annual profits for RBS;
resumption of dividends for RBI, Standard Chartered and Bank of
Ireland; and mitigation of IFRS 9 and Basel IV impacts. An emerging
theme was capital return and some, like Lloyds and Barclays, discussed
share buybacks.
Intesa, Sabadell and Bankia presented their strategic plans and
others like Mediobanca and Banco BPM received the approval of
their internal capital models, confirming the trend towards regulatory
forbearance. The EBA stress tests were announced for November
but were not expected to bring any surprises. Lastly, the EIOPA
released a report that provided enough clarity for insurers to
contemplate new RT1 issues.
In corporate actions: the sale of HSH was announced within the
deadline set by the EC; Credito Valtellinese launched its highly
dilutive capital raise; and Provident announced a rights issue.
In addition, Credit Mutuel Arkéa was leading an initiative
to split from its parent, and Vivat's shareholder was facing governance
issues in China. On the IPO front, NIBC was about to launch and
Deutsche Bank was selling down its asset management unit (DWS).
Rating actions were mixed: Barclays and HSBC Bank were on review
for downgrading for the impact of ringfencing and Caixa Geral
in Portugal was upgraded to Ba3.
Unipol and BNP issued T2s and SCOR announced an insurance RT1
deal. Lastly, Nordea announced the call of its EUR CMS, a situation
we followed since November.
In March, European financials had a negative month in line with
the rest of the markets, while outflows accelerated in High Yield
funds (EUR18 billion since the beginning of the year). European
long-term rates fell in fear of a new trade war, while concerns
rose about the pace of tightening led by the Fed. On a positive
note, Spain's rating was upgraded to A- by S&P for the rebound
of its economy.
European authorities published their proposals on NPLs. Draghi
widened the debate to Level 3 or hard-to-value assets, diverting
the attention away from the Italian sector. Still, BPER launched
its NPL securitisation, Banco BPM announced it could dispose more
and UBI Banca got its NPL reduction plan approved.
Litigation risk resurfaced with RBS and SocGen indicating they
were within weeks of settling with the US on mortgages and US
sanctions respectively.
Deutsche Bank successfully completed the IPO of its asset management
arm but communicated poorly about its performance this year so
far. Barclays got the approval of its ringfencing plans and Credito
Valtellinese successfully completed its IPO.
Consolidation continued. 15 bidders were interested in Banco Caixa
Geral in Spain. Bankia considered itself a perfect fit for a would-be
acquirer and, in Italy, Credito Emiliano was ready for acquisitions.
In insurance, Axa surprised the consensus by announcing a transformational
acquisition of XL and Prudential announced a demerger of their
European asset management M&G.
Aviva also moved aggressively against its preference share investor
base by threatening a repayment at nominal value. After unprecedented
political and investor pressure, management backtracked but the
broader UK preference share market had been rattled.
MACIF announced the call of its floater perp, BBVA and CS the
call of their first AT1s. Santander, Unicaja Banco and Caixabank
each issued AT1s but it was HSBC and Axa who repriced down the
market with generous pricing terms in their new issues.
In April, European financials had a constructive month after geopolitical
tensions eased around Syria, and Brexit softened towards a bespoke
customs union, which offset the impact from US rate increases.
Ratings were upgraded for Spanish banks and other issuers like
SocGen or de Volksbank in the Netherlands. NPL de-risking continued
to be a priority for lawmakers in Europe, especially in Germany,
and banks in Italy: Intesa announced a large disposal of its NPLs
with Intrum. The earnings season started rather well with strong
results in IB equities for Barclays and UBS, and in UK retail
banking for Lloyds and RBS. On governance, there were management
changes at SocGen, Natixis, BPCE and more importantly Deutsche
Bank, where the IB would be rightsized and the franchise refocused
on Germany. Credit Mutuel Arkéa in France went against the
flow of bank consolidation - a wishful thinking by European regulators
- by voting for the separation from its central body, to the unprecedented
risk of seeing its management dismissed.
New AT1s were issued by SocGen, Pfandbriefbank, KBC and Bawag.
Phoenix issued a new RT1, while Aegon, Leeds, Quilter and Caixabank
issued new T2s.
In calls, UBS confirmed the call of its USD 4.75 low trigger coco
issued in 2013, DB called its 8% Fixed-to-Fixed and Aegon announced
it would call its legacy instruments by 2026.
Last but not least, investors in Aviva prefs would receive a compensation
if they sold their position on the back of the contentious comments
by the CEO last month.
During May, European financials went through a severe correction
and a flight to quality due to the newly formed populist Italian
government, the change of prime minister in Spain, the lack of
progress on Brexit preparations in the UK and concerns about the
Turkish economy.
Quarter 1 results were resilient as banks reported an improvement
in asset quality and stable costs, offsetting a slowdown in revenues.
More positively, RBS confirmed the resolution of its litigation
on US RMBS and SocGen announced that it was near a settlement
on LIBOR and Libya transactions. Deutsche Bank completed its integration
with Postbank but was downgraded one notch by S&P.
On the regulatory front, the EU released a new proposal for CRR2
with some new grandfathering provisions towards 2024 for non-EU
instruments in line with the draft from March. This new context
prompted HSBC to requalify some legacy T2 instruments. The extension
risk led to a market wide repricing of the disco instruments.
Unicredit was also challenged by an investor with respect to the
recognition of its Cashes (equity-linked instruments) as regulatory
capital.
Issuers continued to call their legacy perpetuals: HSBC 8% and
8.125%, Aegon 6%, BNP 7.781% and DB 8% Fixed-to-Fixed, and Intesa
8.047% step-up.
The subordinated debt market experienced much volatility in June
amid a fickle political environment: the EU cohesion and the German
coalition both threatened by migration policies, the lack of significant
progress on Brexit and the elections in Turkey.
Despite all this, the ECB aimed to reassure with its decision
to keep interest rates unchanged until at least the end of summer
2019. The Itraxx Sub Fin Index tightened slightly and ended the
month at 180 bps (compared to 205bps at the end of May).
All bar one of the 35 establishments tracked by the FED passed
the US stress tests (results as at 21 June). Only the American
subsidiary of Deutsche Bank failed. This was a warning that should
result in an acceleration of the restructuring already initiated
by the bank.
On the regulatory front, several recent changes were a source
of new opportunities for our strategies. The European Parliament
published its CRR2/BRR2 bill at the end of June, which followed
the European Council's bill published at the end of May. There
were divergent views on the existence of a transitional period
for instruments issued by non-EU member states. Both bodies must
now agree on the final CRR2/BRR2 text by the end of the year.
The Bank of England published its latest rules on MREL which go
against HSBC's decision to requalify some of the Legacy instruments
into T2, pushing up the prices of some discos.
Capital transactions continued despite market volatility with
Standard Chartered, Bawag and even Novo Banco launching buybacks
or exchange offers on their legacy Instruments.
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued
by European financial institutions, predominantly legacy T1s,
T2s, and AT1s across five sub-strategies:
* Liquid Relative Value: instruments issued by large
and strong quality institutions, with significant
liquidity. These can be purchased on either primary
or secondary markets.
* Less Liquid Relative Value: instruments issued by
large and strong quality institutions, with limited
liquidity due to past tenders or complex features
(secondary market).
* Restructuring: instruments issued by institutions in
preparation or implementation of a restructuring
process (secondary market).
* Special Situations: instruments issued by entities in
run-off, under a merger process or split between
several entities (secondary market).
* Midcap Origination: instruments issued by small
institutions or small subsidiaries of larger
institutions (primary market).
3- Trade activity and positioning
January
In Liquid Relative Value, the Company increased its exposure to
the AT1 segment in the early part of the month but refrained from
taking part in the new issues as valuations got stretched.
In Less Liquid Relative Value, the Company selectively added on
some defensive carry positions such as Fixed-to-Fixed bonds from
BNP Paribas and Rabobank's insurer. The Company held a small position
in the Santander UK bond being called.
In Special Situations, the Company added a perpetual ex-convertible
hybrid issued by the Belgian insurer Ageas with a floating rate
coupon at a significant discount. After the strong appreciation,
some positions on CMS-linked perpetuals were reduced.
In Restructuring, the Company took part in the new T2 issued by
IKB, reduced its exposure to legacy T1s issued by another German
lender (bought at 47.00, sold at 52.00) and sold its legacy T1
issued by a Greek bank (bought at 29.00, sold at 56.50).
February
The Company increased its size by 11% following a successful fifth
placing on 13 February and deployed its new capital as follows:
* Liquid Relative Value: It bought two defensive AT1s
that underperformed in the correction (CS 7.5, and
BNP 7.375). It also benefited from the appreciation
of its Vivat T2 position as the issues impacting its
shareholder made it an acquisition target, and sold
the Nordea called bond above par (1% bought at 91 in
November).
* Less Liquid Relative Value: It continued to add carry
positions in Fixed-to-Fixed bonds from the largest UK
banks, insurance and building societies and a Dutch
insurer. It took profit on its Crédit Logement
hybrid.
* Special Situation: It increased its exposure to an
equity-linked hybrid issued by a French bank and a
discounted Perp issued by HSBC, while reducing its
exposure to French CMS.
* Restructuring: It sold its Valtellinese bond at 105
(bought at 84 in January), reduced its exposure to
HSH hybrids above 60 (bought at 52) and bought a
small hybrid issued by a Portuguese bank.
* Midcap Origination: It increased its holding in an
illiquid issue from a Spanish mutual.
March
The Company traded the market context with a defensive approach
by proceeding to selective switches of positions.
* Liquid Relative Value: The Company sold its holdings
in Vivat and Santander 5.25 AT1 and, to capture the
new issue premia, took part in the new AT1s by
Santander and Caixabank, the new Scor RT1 and the new
Axa T2.
* Less Liquid Relative Value: At the time of Aviva's
warning for a redemption of its preference shares at
nominal value, the Company had a marginal exposure of
0.40% only and, after reducing slightly its overall
exposure, it opportunistically increased its holding
in Ecclesiastical as well as in preferred shares
issued by an opco within RBS group. These securities
have more protective language because the bylaws
prevent ordinary shareholders from diluting the vote
of preferential shareholders. It also tactically
added on some Aviva preference shares at discounted
levels.
* Special Situations: The Company added on Standard
Life which, following the sale of its insurance
business to Phoenix, should see the guarantee of its
bonds trigger a tender.
* Restructuring: The Company reduced further its
holding in NDB and added on HSH Nordbank.
* Midcap Origination: Finally, the Company invested in
the new Ibercaja AT1.
April
The Company continued to trade with selective switches of positions.
* Liquid Relative Value: The Company reduced its
holdings in insurance RT1s (Direct Line and SCOR) and
bank AT1s (Nordea, Credit Suisse, Baer and Virgin
Money) that had held well, and invested into the new
KBC and Bawag AT1s.
* Less Liquid Relative Value: The Company reduced its
holdings in Prudential Fixed-to-Fixed, and added on
RBS and Lloyds preference shares.
* Special Situations: The Company added on discounted
Perps issued by Aegon.
* Restructuring: The Company sold its holdings in NDB
following the reinstatement of coupons.
* Midcap Origination: The Company invested in Quilter
and Leeds new issues, and increased its holding in
the Spanish mutual, Caser.
May
In the correction, the Company remained underweight on Italian
bonds and covered its shorts on SocGen discos and Bankinter AT1s.
More specifically:
* Liquid Relative Value: The Company sold its remaining
position in Virgin Money AT1s after CYBG had been
confirmed as a potential acquirer. It also sold its
holdings in USD Fixed-to-Fixed BNPs given the cost of
hedging back into GBP.
* Less Liquid Relative Value: The Company reduced its
holdings in Aviva and Ecclesiastical preference
shares after the recent rebound, reduced its exposure
to UK discos (HSBC and Barclays) and sourced a rare
T1 step-up issued by Banco BPM in Italy.
* Special Situations: The Company sold its residual
position in Unicredit Cashes around 65.00.
* Restructuring: The Company started a position in IPF
and added on Caixa Geral legacy step-ups.
* Midcap Origination: The Company sold Quilter's recent
issue and took part in new issues: Provident GBP 7%
Senior, Oaknorth Bank GBP 7.75%, Sydbank 5.25% EUR
AT1, and added on PTSB AT1s.
June
Overall, the Company added risk selectively throughout the month:
* Liquid Relative Value: The Company initially sold its
Lloyds AT1 and then took part in the new insurance
RT1 deals from CNP and Vivat. It later sold its Vivat
position on M&A speculation more than 3pts above new
issue price.
* Less Liquid Relative Value: The Company reduced its
holding in RBS 5.25% and CMZB 8.151% in USD, for its
hedging cost and lower likelihood of take-out, and
added on BBVA's subsidiary in Turkey.
* Special Situations: Benefiting from the opportunities
brought by the BoE MREL update, the Company added
some Legacy bonds issued by ring-fenced retail
entities, towards a call or tender by 2021. The
Company increased its holding of a rare Caixa Geral
legacy which could be called anytime following the
issuance of T2. The Company invested in a Prudential
long dated bond with an attractive make-whole call.
* Restructuring: The Company reduced its UK exposure by
selling its Co-Operative Bank equity and bought some
Monte T2 bonds at the lows.
* Midcap Origination: The Company sold its remaining
position in Provident seniors at a gain and invested
in T2s issued by Metro Bank in the UK and a regional
bank in Denmark.
4- Portfolio (as at 30 June 2018)
4.1- Strategy Allocation (as a % of investments held)
Liquid Relative
Value 18.6%
Less Liquid Relative
Value 27.5%
Restructuring 13.5%
Special Situations 15.1%
Midcap Origination 22.2%
Cash 3.2%
4.2- Currency breakdown (as a % of investments held)
EUR 62.8%
GBP 23.1%
USD 13.2%
DKK 0.9%
4.3- Portfolio Breakdown (as a % of investments held, excluding
cash)
By rating By subordination
A 5.4% Additional Tier 1 28.1%
BBB 32.6% Legacy Tier 1 44.9%
BB 36.7% Tier 2 22.5%
B 15.7% Senior 1.7%
Below B 6.7% Equity 2.9%
NR (Equity) 2.9%
By maturity By country
<1 year 1.9% UK 26.4%
1-3 15.4% Spain 14.6%
3-5 44.1% France 12.4%
5-7 7.2% Netherlands 10.0%
7-10 15.7% Portugal 8.7%
>10 12.8% Italy 7.7%
NR (Equity) 2.9% Germany 7.6%
Denmark 4.1%
Belgium 2.3%
Ireland 2.2%
Jersey 2.1%
Austria 1.4%
Sweden 0.6%
4.4- Specific exposures
Security Strategy % of
NAV
Less Liquid Relative
Achmea 6% Perp Value 6.2%
Less Liquid Relative
BNP Paribas 4.9% Perp Value 6.0%
Shawbrook Perp-22 Midcap Origination 5.7%
BNP Fortis frn Perp Special Situation 3.5%
Caser 8 2025 Midcap Origination 3.1%
Caixa Geral Perp Special Situation 2.9%
Less Liquid Relative
HBOS 6.85% Perp Value 2.9%
Less Liquid Relative
Banco BPM 9% Value 2.6%
OSB 9.1 Perp-22 Midcap Origination 2.6%
HSBC FRN Perp Special Situation 2.3%
5- Company metrics (as at 30 June 2018)
Share price and 29-Sep-17 31-Dec-17 29-Mar-18 30-Apr-18 31-May-18 29-Jun-18
NAV
Share price (mid) 98.00 105.25 106.00 105.50 102.50 102.50
NAV per share
(daily) 101.56 104.43 103.38 104.56 96.95 95.84
Dividends paid
over
last 12mths 6.15 6.15 6.00 6.00 6.00 6.00
Shares in issue 60,930,764 75,999,351 84,228,525 84,228,525 84,228,525 84,228,525
Market
capitalisation
(GBP mn) 59.712 79.989 89.282 88.861 86.334 86.334
Total net assets
(GBP mn) 61.880 79.364 87.097 88.066 81.656 80.725
Premium/(Discount) (3.51)% 0.79% 2.53% 0.90% 5.72% 6.95%
Portfolio information 29-Sep-17 31-Dec-17 29-Mar-18 30-Apr-18 31-May-18 29-Jun-18
Modified duration* 1.77 3.11 2.75 2.54 1.92 1.88
Sensitivity to credit* 3.20 5.21 7.69 7.66 7.68 7.74
Positions 83 89 108 103 98 97
Average price 95.84 96.01 97.33 96.99 96.15 95.03
Running yield 5.48% 5.26% 5.99% 5.94% 6.85% 7.01%
Yield to perpetuity* 5.42% 6.30% 6.46% 6.31% 7.16% 7.49%
Yield to call* 8.94% 7.25% 6.65% 6.34% 7.92% 8.41%
Gross Assets 108.2% 120.4% 118.4% 130.2% 128.3%
Net gearing =
(Gross assets -
collateral)/
Net assets 101.7% 104.2% 114.0% 112.0% 121.6% 119.4%
Investments / Net
Assets 101.3% 94.7% 113.7% 111.6% 117.4% 115.6%
Cash 0.4% 9.5% 0.4% 0.5% 4.2% 3.8%
Collateral 8.5% 4.0% 6.4% 6.4% 8.5% 9.0%
Repo / Net Assets 10.0% 6.9% 17.2% 16.4% 23.2% 23.4%
CDS / Net Assets 89.3% 89.5% 96.7% 105.6% 114.1% 117.3%
*"Modified duration" measures the sensitivity of bond prices to
interest rates
"Sensitivity to credit" measures the sensitivity of bond prices
to credit spreads
"Yield to perpetuity" is the yield of the portfolio assuming that
securities are not repaid but kept outstanding to perpetuity
"Yield to call" is the yield of the portfolio at the expected
repayment date of the bonds
Total performance
3 months 6 months 1 year Annualised since
inception
-5.84% -5.35% 2.99% 4.22%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
% % % % % % % % % % % % %
2015 0.19 -1.48 -1.29
2016 -4.02 -4.59 3.57 1.16 2.62 -1.97 2.83 1.69 -0.21 2.06 -1.60 1.91 2.92
2017 2.67 0.93 1.12 2.01 1.72 -1.41 1.86 0.58 1.76 2.72 1.31 0.23 16.14
2018 3.12 -0.70 -1.95 1.14 -5.84 -1.14 -5.35
6- NAV evolution
Share price Share price
Date NAV (mid) NAV + dividends (mid) + dividends
05/11/2015 97.97 101.50 97.97 101.50
27/11/2015 98.19 101.50 98.19 101.50
31/12/2015 96.74 101.50 96.74 101.50
29/01/2016 92.85 101.50 92.85 101.50
26/02/2016 88.24 101.25 88.59 101.60
24/03/2016 91.39 96.50 91.74 96.85
29/04/2016 92.45 96.50 92.80 96.85
27/05/2016 93.87 95.50 95.22 96.85
30/06/2016 92.02 95.50 93.37 96.85
29/07/2016 94.62 93.50 95.97 94.85
26/08/2016 94.72 94.50 97.57 97.35
30/09/2016 94.52 95.50 97.37 98.35
28/10/2016 96.47 95.50 99.32 98.35
25/11/2016 93.43 93.50 97.78 97.85
31/12/2016 95.21 92.50 99.56 96.85
31/01/2017 97.75 92.50 102.10 96.85
28/02/2017 97.01 95.00 103.01 101.00
31/03/2017 98.10 100.50 104.10 106.50
28/04/2017 100.07 99.50 106.07 105.50
31/05/2017 100.29 101.50 107.79 109.00
30/06/2017 98.88 97.50 106.38 105.00
31/07/2017 100.72 97.50 108.22 105.00
31/08/2017 99.80 96.00 108.80 105.00
29/09/2017 101.56 98.00 110.56 107.00
31/10/2017 104.32 98.25 113.32 107.25
30/11/2017 104.19 102.50 114.69 113.00
31/12/2017 104.43 105.25 114.93 115.75
31/01/2018 107.69 108.50 118.19 119.00
28/02/2018 105.44 107.00 117.44 119.00
31/03/2018 103.38 106.00 117.73 118.00
30/04/2018 104.56 105.50 116.56 117.50
31/05/2018 96.95 102.50 110.45 116.00
30/06/2018 95.84 102.50 109.34 116.00
7- Outlook
The first six months of 2018 have seen a strong correction in
valuations of financial subordinated debt. Geopolitical risks
acted as a catalyst to the repricing, with the formation of the
new government in Italy at the end of May, the slow progress of
Brexit negotiations, and the resulting long-term challenges brought
to the integrity of the European Union and its currency. The sector
was impacted by a general spread widening.
Legacy instruments were also impacted by extension risk, after
one issuer, HSBC, announced in its annual disclosure that its
discounted perpetuals could retain some capital recognition beyond
2021. However, this move, in our view, will soon be challenged
by the new resolution strategies outlined by regulators like the
BoE and the ECB's SSM, and the Financial Stability Board, and
the implementation of the ringfencing in the UK by 2019.
The new AT1 segment was also impacted by extension risk as investors
took notice of the negative convexity in the spread widening,
and a number of issuers tried to prefinance the first calls coming
up over the near term. Some like Credit Suisse ended paying significant
premia and we expect more issuers to try, despite the difficult
market conditions.
As the trading activity showed, the Company remained active in
the correction, in order to continuously exploit the dislocation
of prices across all five strategies. We believe the Company continues
to be ideally positioned after adding risk selectively since mid-May
and that the current environment will continue to present attractive
opportunities over the coming quarters. On the secondary market,
some illiquid positions are being offered at levels not seen since
the start of 2017, while, on the primary market, issuers are increasingly
sounding investors to issue large but also sub-benchmark transactions,
under the scope of our Midcap Origination sub-strategy.
Gildas Surry
Axiom Alternative Investments SARL
21 August 2018
Notes
Share price and NAV 31-Jan-18 28-Feb-18 29-Mar-18 30-Apr-18 31-May-18 29-Jun-18
Share price (mid) 108.50 107.00 106.00 105.50 102.50 102.50
NAV per share (daily) 107.69 105.44 103.38 104.56 96.95 95.84
Dividends paid over
last 12mths 6.15 6.00 6.00 6.00 6.00 6.00
Shares in issue 75,999,351 84,228,525 84,228,525 84,228,525 84,228,525 84,228,525
Market capitalisation
(GBP mn) 82.459 90.125 89.282 88.861 86.334 86.334
Total net assets
(GBP mn) 81.841 88.811 87.097 88.066 81.656 80.725
Premium/(Discount) 0.75% 1.48% 2.53% 0.90% 5.72% 6.95%
Portfolio information 29-Sep-17 31-Dec-17 29-Mar-18 30-Apr-18 31-May-18 29-Jun-18
Modified duration 1.97 2.71 2.75 2.54 1.92 1.88
Sensitivity to credit 5.80 7.09 7.69 7.66 7.68 7.74
Positions 101 105 108 103 98 97
Average price 98.47 99.18 97.33 96.99 96.15 95.03
Running yield 5.75% 5.70% 5.99% 5.94% 6.85% 7.01%
Yield to perpetuity 6.26% 6.13% 6.46% 6.31% 7.16% 7.49%
Yield to call 6.57% 6.03% 6.65% 6.34% 7.92% 8.41%
Gross Assets 117.9% 117.9% 120.4% 118.4% 130.2% 128.3%
Net gearing =
(Gross assets - collateral)/
Net assets 112.3% 111.8% 114.0% 112.0% 121.6% 119.4%
Investments / Net
Assets 114.8% 109.4% 113.7% 111.6% 117.4% 115.6%
Cash -2.4% 2.4% 0.4% 0.5% 4.2% 3.8%
Collateral 5.6% 6.1% 6.4% 6.4% 8.5% 9.0%
Repo / Net Assets 17.4% 17.0% 17.2% 16.4% 23.2% 23.4%
CDS / Net Assets 86.8% 104.8% 96.7% 105.6% 114.1% 117.3%
Principal Risks
Risk is inherent in the Company's activities, but it is managed
through an ongoing process of identifying and assessing risks
and ensuring that appropriate controls are in place. The key risks
faced by the Company, are set out below:
* macroeconomic risk;
* investment risk;
* counterparty risk;
* credit risk;
* share price risk;
* regulatory risk; and
* reputational risk.
Further details of each of these risks and how they are mitigated
are discussed in the Principal Risks section of the Strategic
Report within the Company's Annual Report for the year ended 31
December 2017. The Board believes that these risks are applicable
to the six month period ended 30 June 2018 and the remaining six
months of the current financial year.
On behalf of the Board.
William Scott
Chairman
21 August 2018
Statement of Directors' Responsibilities
The Directors are responsible for preparing the unaudited half-yearly
report and condensed financial statements, which have not been
audited or reviewed by an independent auditor, and are required
to:
* prepare the unaudited half-yearly financial
statements in accordance with Disclosure and
Transparency Rules ("DTR") 4.2.4R and International
Accounting Standard 34, Interim Financial Reporting,
as adopted by the European Union;
* include a fair review of the information required by
DTR 4.2.7R, being important events that have occurred
during the period and their impact on the unaudited
half-yearly report and condensed financial statements
and a description of the principal risks and
uncertainties for the remaining six months of the
financial year; and
* include a fair review of information required by DTR
4.2.8R, being related party transactions that have
taken place during the period which have had a
material effect on the financial position or
performance of the Company.
The Directors confirm that the unaudited half-yearly report and
condensed financial statements comply with the above requirements.
On behalf of the Board.
William Scott
Chairman
21 August 2018
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 30 June 2018
Period from Period from
1 January 1 January
2018 to 30 2017 to 30
June 2018 June 2017
Note (unaudited) (unaudited)
GBP'000 GBP'000
Income
Capital instrument income 2,227 1,251
Credit default swap income 444 364
Bank interest receivable 37 5
------------ ------------
Total income 2,708 1,620
------------ ------------
Investment gains and losses on investments
held at fair value through profit or
loss
Realised gains on disposal of capital
instruments 12 1,220 2,571
Movement in unrealised losses on capital
instruments 12 (5,235) (2,142)
Realised gains on derivative financial
instruments 15 949 431
Movement in unrealised (losses)/gains
on derivative financial instruments 15 (3,877) 2,010
------------ ------------
Total investments gains and losses (6,943) 2,870
------------ ------------
Expenses
Investment management fee 8a (363) (213)
Administration fee 8b (62) (61)
Directors' fees 8f (47) (47)
Other expenses 9 (231) (137)
------------ ------------
Total expenses (703) (458)
------------ ------------
(Loss)/profit from operating activities
before gains and losses on foreign currency
transactions (4,938) 4,032
Gain on foreign currency 122 395
------------ ------------
(Loss)/profit from operating activities
after gains and losses on foreign currency
transactions and before taxation (4,816) 4,427
------------ ------------
Taxation 10 - (33)
------------ ------------
(Loss)/profit for the period attributable
to the Owners of the Company (4,816) 4,394
------------ ------------
(Loss)/earnings per Ordinary Share -
basic and diluted 11 (5.85)p 7.21p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 June 2018
Distributable
reserves
and total
Note (unaudited)
GBP'000
At 1 January 2018 79,364
Loss for the period (4,816)
Contributions by and distributions to
Owners
Ordinary Shares issued 18 8,846
Share issue costs 18 (266)
Dividends paid 6 (2,403)
------------
At 30 June 2018 80,725
------------
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 June 2017
Distributable
reserves
and total
Note (unaudited)
GBP'000
At 1 January 2017 58,010
Profit for the period 4,394
Contributions by and distributions to
Owners
Ordinary Shares issued 18 -
Share issue costs 18 (239)
Dividends paid 6 (1,919)
------------
At 30 June 2017 60,246
------------
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Financial Position
as at 30 June 2018
As at As at
30 June 31 December
2018 2017 (audited)
Note (unaudited)
GBP'000 GBP'000
Assets
Investment in capital instruments 12,
at fair value through profit or loss 16 88,862 72,113
Other investments at fair value through
profit or loss 12,16 2,607 2,345
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 13 7,246 3,143
Derivative financial assets at fair
value through profit or loss 15 402 2,046
Other receivables and prepayments 14 1,836 672
Cash and cash equivalents 3,897 16,808
------------ ------------
Total assets 104,850 97,127
------------ ------------
Current liabilities
Bank overdrafts (856) (9,249)
Derivative financial liabilities
at fair value through profit or loss 15 (22,630) (6,958)
Short position covered by sale and
repurchase agreements 12 - (838)
Other payables and accruals 17 (639) (718)
------------ ------------
Total liabilities (24,125) (17,763)
------------ ------------
Net assets 80,725 79,364
------------ ------------
Share capital and reserves
Share capital 18 - -
Distributable reserves 80,725 79,364
------------ ------------
Total equity holders' funds 80,725 79,364
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 19 95.84p 104.43p
These unaudited condensed half-yearly financial statements were
approved by the Board of Directors on 21 August 2018 and were
signed on its behalf by:
William Scott John Renouf
Chairman Director
21 August 2018 21 August 2018
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Cash Flows
for the six months ended 30 June 2018
Period from Period from
1 January 1 January
2018 to 30 2017 to 30
June 2018 June 2017
Note (unaudited) (unaudited)
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit before taxation (4,816) 4,427
Adjustments for:
Foreign exchange movements (122) (395)
Total investment losses/(gains) at fair
value through profit or loss 6,943 (2,870)
Cash flows relating to financial instruments:
Payment to collateral accounts for derivative
financial instruments 13 (4,103) (826)
Purchase of investments at fair value
through profit or loss 12 (58,175) (76,856)
Sale of investments at fair value through
profit or loss 12 36,590 66,565
Premiums received from selling credit
default swap agreements 15 511 1,402
Premiums paid on buying credit default
swap agreements 15 (82) (1,705)
Purchase of foreign currency derivatives 15 (125,056) (90,777)
Close-out of foreign currency derivatives 15 126,102 90,279
Purchase of bond futures 15 (2,825) (990)
Sale of bond futures 15 2,372 1,068
Proceeds from sale and repurchase agreements 15 87,312 8,043
Payments to open reverse sale and repurchase
agreements 15 (350) -
Payments for closure of sale and repurchase
agreements 15 (74,840) (5,078)
Proceeds from closure of reverse sale
and repurchase agreements 15 1,244 -
Opening of short positions 12 333 -
Closure of short positions 12 (1,132) -
------------ ------------
Net cash outflow from operating activities
before working capital changes (10,094) (7,713)
Increase in other receivables and prepayments (644) (13)
(Decrease)/increase in other payables
and accruals (152) 43
Taxation paid 10 - (33)
------------ ------------
Net cash outflow from operating activities (10,890) (7,716)
Cash flows from financing activities
Proceeds from issue of Ordinary Shares 8,846 -
Share issue costs paid 22 (193) (192)
Dividends paid 6 (2,403) (1,919)
------------ ------------
Net cash inflow/(outflow) from financing
activities 6,250 (2,111)
------------ ------------
Decrease in cash and cash equivalents (4,640) (9,827)
Cash and cash equivalents brought forward 7,559 6,152
Effect of foreign exchange on cash and
cash equivalents 122 395
------------ ------------
Cash and cash equivalents carried forward
* 3,041 (3,280)
------------ ------------
* Cash and cash equivalents at the period end includes bank overdrafts
that are repayable on demand and form an integral part of the Company's
cash management
Supplemental disclosure of cash flow
information
Interest purchased during the period 617 989
Interest sold during the period 2,630 2,595
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Notes to the Unaudited Condensed Half-Yearly Financial Statements
for the six months ended 30 June 2018
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Law on 7 October 2015 with registered number
61003. Its Ordinary Shares were admitted to trading on the Specialist
Fund Segment of the London Stock Exchange on 5 November 2015.
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market although instruments may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present
the results of the Company for the six months ended 30 June 2018.
These unaudited condensed half-yearly financial statements have
been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Conduct Authority and International Accounting
Standard 34, Interim Financial Reporting, as adopted by the European
Union.
The unaudited condensed half-yearly financial statements for the
period ended 30 June 2018 have not been audited or reviewed by
the Company's auditors and do not constitute statutory financial
statements. They have been prepared on the same basis as the Company's
annual financial statements.
These unaudited condensed half-yearly financial statements were
authorised for issuance by the Board of Directors on 21 August
2018.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its income stream and Level
1 investments, the Directors have a reasonable expectation that
the Company has adequate resources to continue in operational
existence for the foreseeable future and do not consider there
to be any threat to the going concern status of the Company. Therefore,
the unaudited condensed half-yearly financial statements have
been prepared on a going concern basis.
c) Basis of measurement
These unaudited condensed half-yearly financial statements have
been prepared on a historical cost basis, except for financial
instruments (including derivative financial instruments), which
are measured at fair value through profit or loss. These unaudited
condensed half-yearly financial statements have been prepared
on a going concern basis.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRSs
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses. The estimates
and associated assumptions are based on historical experience
and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised, if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future periods.
Judgements made by management in the application of IFRSs that
have a significant effect on the unaudited condensed half-yearly
financial statements and estimates with a significant risk of
material adjustment in the next year are discussed in note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, bond income and credit default swap income is recognised
on a time-proportionate basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Transaction costs
Transaction costs incurred on the acquisition or disposal of a
financial investment designated at fair value through profit or
loss will be charged through the Statement of Comprehensive Income
in the period in which they are incurred.
c) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 30 June 2018 were
GBP1/EUR1.1303, GBP1/US$1.3207, GBP1/DKK8.4212, GBP1/CA$1.7347
and GBP1/SG$1.8003.
d) Taxation
The Directors intend to conduct the Company's affairs such that
the Company continues to qualify for exemption from Guernsey taxation.
Investment income is recorded gross of applicable taxes and any
tax expenses are recognised through the Statement of Comprehensive
Income as incurred.
The Company holds investments in several European countries, in
some jurisdictions, investment income and capital gains are subject
to withholding tax deducted at the source of the income. The Company
presents the withholding tax separately from the gross investment
income in the Statement of Comprehensive Income. For the purpose
of the Statement of Cash Flows, cash inflows from investments
are presented net of withholding taxes when applicable.
e) Financial assets and liabilities
The financial assets and liabilities of the Company are investments
at fair value through profit or loss, collateral accounts for
derivative financial instruments, cash and cash equivalents, other
receivables, derivative financial instruments and other payables.
These financial instruments are designated at fair value through
profit or loss upon initial recognition on the basis that they
are part of a group of financial assets which are managed and
have their performance evaluated on a fair value basis, in accordance
with investment strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that
require delivery of assets within the time frame generally established
by regulation or convention in the marketplace are recognised
on the trade date, i.e. the date that the Company commits to purchase
or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement)
and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the
asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the Statement of Financial Position
at fair value. All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets
which are classified at fair value through profit or loss, at
fair value. Subsequent changes in the fair value of those financial
instruments are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or loss. Interest
and dividend earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities
at fair value through profit or loss
The Company records its transactions in bonds and the related
revenue and expenses on a trade date basis. Unrealised gains and
losses comprise changes in the fair value of financial instruments
at the period end. These gains and losses represent the difference
between an instrument's initial carrying amount and disposal amount,
or cash payment on, or receipts from derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are reported net by
counterparty in the Statement of Financial Position, provided
that the legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
f) Derivative financial instruments
Derivative financial instruments, including credit default swap
agreements, foreign currency forward contracts, bond future contracts
and sale and repurchase agreements are recognised initially, and
are subsequently measured at fair value. Derivative financial
instruments are classified as assets when their fair value is
positive or as liabilities when their fair value is negative.
Derivative assets and liabilities arising from different transactions
are offset only if the transactions are with the same counterparty,
a legal right of offset exists, and the parties intend to settle
the cash flows on a net basis.
Fair value movements on derivative financial instruments are recognised
in the Statement of Comprehensive Income in the period in which
they arise.
g) Offsetting of derivative assets and liabilities
IFRS 7, Financial Instruments: Disclosures, requires an entity
to disclose information about offsetting rights and related arrangements.
The disclosures in note 15 provide users with information to evaluate
the effect of netting arrangements on an entity's financial position.
The disclosures are required for all recognised financial instruments
that could be offset in accordance with International Accounting
Standard ("IAS") 32, Financial Instruments Presentation. The disclosures
also apply to recognised financial instruments that are subject
to an enforceable master netting agreement or similar agreement,
irrespective of whether these are offset in accordance with IAS
32.
h) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair
value through profit or loss comprises cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
i) Receivables and prepayments
Receivables are carried at the original invoice amount, less allowance
for doubtful receivables. Provision is made when there is objective
evidence that the Company will be unable to recover balances in
full. Balances are written-off when the probability of recovery
is assessed as being remote.
There are instruments in the portfolio that do not pay any distributions
because the payment remains at the discretion of the issuer, or
is under regulatory or state aid restrictions. These are not classified
as "bad debts".
With respect to senior debt only:
* If bond interest has not been received within 30
calendar days of the expected pay date, unless there
is good reason, 50% of the interest will be provided
against; and
* If bond interest has not been received within 60
calendar days of the expected pay date, unless there
is good reason, 100% of the interest will be provided
against.
Bad debts will be considered on an investment by investment basis
and no general provision will be made.
j) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held
to maturity are carried at cost. Cash and cash equivalents are
defined as cash in hand, demand deposits and short-term, highly
liquid investments readily convertible to known amounts of cash
and subject to insignificant risk of changes in value.
k) Payables and accruals
Trade and other payables are carried at payment or settlement
amounts. Where the time value of money is material, payables are
carried at amortised cost. When payables are received in currencies
other than the reporting currency, they are carried forward, translated
at the rate prevailing at the period end date.
l) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as
a deduction from equity.
When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable
costs, is recognised as a deduction from equity. Repurchased shares
that are classified as Treasury Shares are presented as a deduction
from equity. When Treasury Shares are sold or subsequently reissued,
the amount received is recognised as an increase in equity and
the resulting surplus or deficit is transferred to/from retained
earnings.
Funds received from the issue of Ordinary Shares are allocated
to share capital, to the extent that they relate to the nominal
value of the Ordinary Shares, with any excess being allocated
to distributable reserves.
m) Distributable and non-distributable reserves
All income and expenses, foreign exchange gains and losses and
realised investment gains and losses of the Company are allocated
to the distributable reserve.
n) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the period end.
Earnings per share is calculated by dividing the earnings for
the period by the weighted average number of Ordinary Shares in
issue during the period.
o) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the
previous financial year. The Company adopted the following new
and amended relevant IFRS in the period:
IFRS Share-based payments
2
IFRS Financial instruments
9
IFRS Revenue from Contracts with Customers
15
The adoption of the above standards did not have an impact on
the financial position or performance of the Company.
The adoption of IFRS 9 has not impacted the financial position
or performance of the Company as:
* It continued to measure investments at fair value;
* No investments were impaired; and
* The Company does not designate any hedges as
effective hedging relationships.
p) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the
date of these financial statements. Any standards that are not
deemed relevant to the operations of the Company have been excluded.
The Directors have chosen not to early adopt these standards and
interpretations and they do not anticipate that they would have
a material impact on the Company's financial statements in the
period of initial application.
Effective date
IFRS Financial Instruments - amendments regarding 1 January 2019
9 prepayment features with negative compensation
and modifications of financial liabilities
IAS 12 Income Taxes - amendments resulting from annual 1 January 2019
improvements
4. Use of judgements and estimates
The preparation of the Company's unaudited condensed half-yearly
financial statements requires the Directors to make judgements,
estimates and assumptions that affect the reported amounts recognised
in the unaudited condensed half-yearly financial statements and
disclosure of contingent liabilities. However, uncertainty about
these assumptions and estimates could result in outcomes that
could require a material adjustment to the carrying amount of
the asset or liability in future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgement which had a significant
effect on the amounts recognised in the unaudited condensed half-yearly
financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although the majority of the Company's underlying
assets are held in currencies other than Sterling, because the
Company's capital is raised in Sterling, expenses are paid in
Sterling and the Company hedges substantially all of its foreign
currency risk back to Sterling the Directors consider Sterling
to be the Company's functional currency.
The Directors do not consider there to be any other judgements
which have had a significant impact on the financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the unaudited condensed half-yearly financial statements
were approved. However, existing circumstances and assumptions
about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such
changes are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 16.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes. The financial
results of this segment are equivalent to the results of the Company
as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company declared the following dividends during the period
ended 30 June 2018:
Total dividend declared Amount per Ordinary
in respect of earnings Share
Announcement date Pay date in the period
GBP'000
23 February
17 January 2018 2018 1,140 1.50p
11 April 2018 25 May 2018 1,263 1.50p
------------ ------------
Dividends declared and paid
in the period 2,403 3.00p
Less, dividend declared in
respect of the prior period
that was paid in 2018 (1,140) (1.50)p
Add, dividend declared out
of the profits for the period
but paid after the period end:
18 July 2018 24 August 2018 1,263 1.50p
------------ ------------
Dividends declared in respect
of the period 2,526 3.00p
------------ ------------
The Company declared the following dividends during the period
ended 30 June 2017:
Total dividend declared Amount per Ordinary
in respect of earnings Share
Announcement date Pay date in the period
GBP'000
24 February
19 January 2017 2017 1,005 1.65p
11 April 2017 12 May 2017 914 1.50p
------------ ------------
Dividends declared and paid
in the period 1,919 3.15p
Less, dividend declared in
respect of the prior period
that was paid in 2017 (1,005) (1.65)p
Add, dividend declared out
of the profits for the period
but paid after the period end:
19 July 2017 25 August 2017 914 1.50p
------------ ------------
Dividends declared in respect
of the period 1,828 3.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the period a total of GBP2,403,000 was recognised in respect
of dividends, none of which was outstanding at the reporting date.
The second dividend of GBP1,263,000 in respect of the earnings
during the period had not been provided for at 30 June 2018 as,
in accordance with IFRS, it was not deemed to be a liability of
the Company at that date.
7. Related parties
Details of the relationships between the Company and its related
parties, being the Investment Manager and the Directors are disclosed
in notes 8a and 8f.
Details of the relationships between the Company and its other
advisers and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 30 June 2018, the Company had holdings in the following
investments which were managed by the Investment Manager:
30 June 2018 31 December 2017
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Long Short C
FCP 3,110 2,879 2,607 - - -
Axiom Premium Multi
Strategies - - - 1,739 2,146 2,345
During the period, the Company sold 1,739 units in Axiom Premium
Multi Strategies for GBP2,315,000, realising a gain of GBP168,000
(30 June 2017 and 31 December 2017: GBPnil).
During the period ended 30 June 2017, the Company sold 2,000 units
in Axiom Contingent Capital for GBP1,985,000, realising a gain
of GBP526,000.
During the period ended 30 June 2017, the Company sold 740 units
in Axiom Equity C FCP for GBP545,000, generating a realised gain
of GBP125,000.
Following the period end, the Company sold 2,073 units in Axiom
Long Short C FCP for GBP1,961,000, generating a realised loss
of GBP185,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement
with Axiom under which the Company receives investment advice
and management services.
Management fee
Under the terms of the Investment Management Agreement, a management
fee is paid to the Investment Manager quarterly in arrears. The
quarterly fee is calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to GBP250 million, 1% per annum
of NAV;
ii. where NAV is greater than GBP250 million but less than or
equal to GBP500 million, 1% per annum of NAV on the first GBP250
million and 0.8% per annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million, 0.8% per annum
of NAV, in each case, plus applicable VAT.
If in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company (excluding management
fees, performance fees, interest charged on sale and repurchase
agreements, bank charges and withholding tax) during such quarter
exceed an amount equal to one-quarter of 1.5% of the average NAV
of the Company during such quarter (such amount being a "Quarterly
Expenses Excess"), then the management fee payable in respect
of that quarter shall be reduced by the amount of the Quarterly
Expenses Excess, provided that the management fee shall not be
reduced to an amount that is less than zero and no sum will be
payable by the Investment Manager to the Company in respect of
the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceed an
amount equal to 1.5% of the average NAV of the Company during
such accounting period (such amount being an "Annual Expenses
Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Annual Expenses Excess.
If such reduction would not fully eliminate the Annual Expenses
Excess (the amount of any such shortfall being a "Management Fee
Deduction Shortfall"), the Investment Manager shall pay to the
Company an amount equal to the Management Fee Deduction Shortfall
(a "Management Fee Deduction Shortfall Payment") as soon as is
reasonably practicable.
During the period, a total of GBP363,000 (30 June 2017: GBP213,000)
was incurred in respect of Investment Management fees, of which
GBP174,000 (31 December 2017: GBP83,000) was payable at the reporting
date.
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall Payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess and Annual Expenses Excess for the
period was GBP35,000, and at 30 June 2018 the Quarterly Expenses
Excess and Annual Expenses Excess which could be payable to the
Investment Manager in future periods was GBP499,000 (31 December
2017: GBP464,000) (see note 24).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of Total Shareholder Return ("TSR")
where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the number of shares
in issue during the period from 5 November 2015 to the end of
the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited annual
accounts.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
During the period, no performance fee was payable by the Company
(30 June 2017: GBPnil). GBP234,000 of the GBP469,000 performance
fee for the year ended 31 December 2017 that is to be settled
in shares remained payable at the period end date, although an
agreement of how this would be settled had been reached.
b) Administrator and Company Secretary
Elysium Fund Management Limited has been appointed by the Company
to provide day to day administration services to the Company,
to calculate the NAV per share as at the end of each calendar
month and to provide company secretarial functions required under
the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of GBP115,000 per annum, which is
subject to an annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding year. In
addition, the Company pays the Administrator a fee for any work
undertaken in connection with the daily NAV, subject to a maximum
aggregate amount of GBP10,000 per annum.
During the period, a total of GBP62,000 (30 June 2017: GBP61,000)
was incurred in respect of Administration fees and GBP31,000 (31
December 2017: GBP31,000) was payable to the Administrator at
the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") was appointed to
act as Corporate Broker ("Broker") for the Company with effect
from 31 October 2017. In consideration of Winterflood agreeing
to act as Broker, the Company pays Winterflood an annual retainer
fee of GBP35,000 per annum.
Prior to Winterflood's appointment, Liberum Capital Limited ("Liberum")
had been appointed to act as Broker for the Company. In consideration
of Liberum agreeing to act as Broker, the Company paid Liberum
an annual retainer fee of GBP75,000 per annum.
For the period ended 30 June 2018, the Company incurred Broker
fees of GBP18,000 (30 June 2017: GBP38,000) of which GBP6,000
was payable at the period end date (31 December 2017: GBP6,000).
d) Registrar
Link Market Services (Guernsey) Limited (previously Capita Registrars
(Guernsey) Limited) has been appointed Registrar of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled
to receive from the Company certain annual maintenance and activity
fees, subject to a minimum fee of GBP5,500 per annum.
During the period, a total of GBP10,000 (30 June 2017: GBP10,000)
was incurred in respect of Registrar fees, of which GBP4,000 was
payable at 30 June 2018 (31 December 2017: GBP3,000).
e) Depositary
CACEIS Bank France has been appointed by the Company to provide
depositary, settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum
annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis point fee charge
based on the country of settlement and the value of the assets;
and
iii. an administration fee on each transaction, together with
various other payment/wire charges on outgoing payments.
During the period, a total of GBP34,000 (30 June 2017: GBP11,000)
was incurred in respect of depositary fees, and GBP6,000 (31 December
2017: GBP6,000) was payable to the Depositary at the reporting
date.
CACEIS Bank Luxembourg is entitled to receive a monthly fee from
the Company in respect of the provision of certain accounting
services which will, subject to a minimum monthly fee of EUR2,500,
be calculated by reference to the following tiered sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP20,000 (30 June 2017: GBP12,000)
was incurred in respect of fees paid to CACEIS Bank Luxembourg,
of which GBP10,000 was payable at 30 June 2018 (31 December 2017:
GBP6,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum, John Renouf
(Chairman of the Audit Committee) is paid GBP32,500 per annum,
and Max Hilton is paid GBP27,500 per annum.
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the period, a total of GBP47,000 (30 June 2017: GBP47,000)
was incurred in respect of Directors' fees, of which GBPnil (31
December 2017: GBPnil) was payable at the reporting date. No bonus
or pension contributions were paid or payable on behalf of the
Directors.
9. Other expenses
Period from Period from
1 January 1 January
2018 to 30 2017 to 30
June 2018 June 2017
(unaudited) (unaudited)
GBP'000 GBP'000
Bank charges and interest 55 8
Depositary fees (including valuation
agent fees) (note 8e) 53 35
Interest on sale and repurchase
agreements 49 1
Broker fees (note 8c) 18 38
PR expenses 18 21
Registrar fees (note 8d) 10 10
Audit fees 5 12
Other expenses 23 10
------------ ------------
231 137
------------ ------------
10. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
The Company has a number of investments in bonds issued in Italy.
Until 6 September 2016, as a Guernsey registered Company, any
income received on Italian bonds suffered Italian withholding
tax at 26%. In addition, Italian withholding tax was calculated,
by the Depositary, and either charged or received on the purchase
or sale of bond interest bought or sold with bonds at a rate of
26%. From 6 September 2016, foreign investors resident in Guernsey
became entitled to benefit from exemption on interests on Italian
Government and Corporate bonds and therefore no further Italian
withholding tax should be payable.
11. Loss per Ordinary Share
The loss per Ordinary Share of 5.85p (30 June 2017: earnings of
7.21p) is based on a loss attributable to owners of the Company
of GBP4,816,000 (30 June 2017: profit of GBP4,394,000) and on
a weighted average number of 82,273,528 (30 June 2017: 60,930,764)
Ordinary Shares in issue since 1 January 2018. There is no difference
between the basic and diluted earnings per share.
12. Investments at fair value through profit or loss
Period Period
from 1 from 1
January January Year ended
2018 to 2017 to 31 December
30 June 30 June 2017 (audited)
2018 (unaudited) 2017 (unaudited)
GBP'000 GBP'000 GBP'000
Investments in capital instruments
Opening balance 72,113 49,145 49,145
Additions in the period 55,296 76,857 126,942
Sales in the period (34,795) (66,564) (108,075)
Movement in unrealised (losses)/gains
in the period (4,761) (2,142) 250
Realised gains in the period 1,009 2,571 3,851
------------ ------------ ------------
Closing valuation 88,862 59,867 72,113
------------ ------------ ------------
Other investments
Opening balance 2,345 - -
Additions in the period 2,879 - 2,147
Sales in the period (2,315) - -
Movement in unrealised gains in
the period (470) - 198
Realised gains in the period 168 - -
------------ ------------ ------------
Closing valuation 2,607 - 2,345
------------ ------------ ------------
Short position covered by sale and
repurchase agreement
Opening balance (838) - -
Sales in the period (333) - (842)
Purchases in the period 1,132 - -
Movement in unrealised gains in
the period (4) - 4
Realised gains in the period 43 - -
------------ ------------ ------------
Closing valuation - - (838)
------------ ------------ ------------
Investments in capital instruments at fair value through profit
or loss comprise mainly of investments in bonds, and also preference
shares, structured notes and other securities that have a similar
income profile to that of bonds. The other investments at fair
value through profit or loss consists of investments in open ended
funds managed by the Investment Manager (see note 7) to obtain
diversified exposure on bank equities.
As at 30 June 2018, the Company had nine open sale and repurchase
agreements (see note 15). The reverse sale and repurchase agreement
in place at 31 December 2017 was open ended and was used to cover
the sale of a capital instrument (the short position noted above).
The reverse sale and repurchase agreement was closed in the period.
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short position) at 30 June
2018 was GBP22,002,000 (31 December 2017: GBP7,234,000, net of
the short position GBP6,395,000).
13. Collateral accounts for derivative financial instruments at
fair value through profit or loss
30 June 31 December
2018 (unaudited) 2017
(audited)
GBP'000 GBP'000
JP Morgan 3,860 1,370
Goldman Sachs International 2,476 1,066
Credit Suisse 602 598
CACEIS Bank France 308 109
------------ ------------
Total collateral held by brokers 7,246 3,143
------------ ------------
With respect to derivatives, the Company pledges to third parties
cash and/or other liquid securities ("Collateral") as initial
margin and as variation margin. Collateral may be transferred
either to the third party or to an unaffiliated custodian for
the benefit of the third party. In the case where Collateral is
transferred to the third party, the third party pursuant to these
derivative arrangements will be permitted to use, reuse, lend,
borrow, hypothecate or re-hypothecate such Collateral. The third
parties will have no obligation to retain an equivalent amount
of similar property in their possession and control, until such
time as the Company's obligations to the third party are satisfied.
The Company has no right to this Collateral but has the right
to receive fungible, equivalent Collateral upon the Company's
satisfaction of the Company's obligation in respect of the derivatives.
14. Other receivables and prepayments
30 June 31 December
2018 (unaudited) 2017
(audited)
GBP'000 GBP'000
Accrued capital instrument income receivable 1,269 634
Sale of capital instrument not due to
settle until after period end 520 -
Interest due on credit default swaps 26 22
Other receivables and prepayments 21 16
------------ ------------
1,836 672
------------ ------------
15. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The International Swaps and Derivatives Association ("ISDA") establishes
the nature of the credit event and such events include bankruptcy
and failure to meet payment obligations when due.
Period Period
from 1 from 1
January January
2018 to 2017 to
30 June 30 June
2018 (unaudited) 2017 (unaudited)
Year ended
31 December
2017
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 915 (2,238) (2,238)
Premiums received from selling credit
default swap agreements (511) (1,402) (1,877)
Premiums paid on buying credit default
swap agreements 82 1,705 1,838
Movement in unrealised (losses)/gains
in the period (2,081) 1,660 2,100
Realised (losses)/gains in the period (35) 802 1,092
------------ ------------ ------------
Outstanding (liabilities)/assets due
on credit default swaps (1,630) 527 915
------------ ------------ ------------
Credit default swap assets at fair
value through profit or loss 396 936 1,093
Credit default swap liabilities at
fair value through profit or loss (2,026) (409) (178)
------------ ------------ ------------
Outstanding (liabilities)/assets due
on credit default swaps (1,630) 527 915
------------ ------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Unaudited Condensed Statement of
Comprehensive Income as it has been incurred or received. At the
period end, GBP26,000 (31 December 2017: GBP22,000) of interest
on credit default swap agreements was due to the Company.
Collateral totalling GBP6,938,000 (31 December 2017: GBP3,034,000)
was held in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for trading purposes
and are used to hedge the Company's exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings. A foreign
currency forward contract is a commitment to purchase or sell
a foreign currency on a future date and at a negotiated forward
exchange rate.
Period Period
from 1 from 1
January January
2018 to 2017 to
30 June 30 June
2018 (unaudited) 2017 (unaudited)
Year ended
31 December
2017
(audited)
GBP'000 GBP'000 GBP'000
Opening balance (390) (190) (190)
Purchase of foreign currency derivatives 125,056 90,777 189,706
Closing-out of foreign currency derivatives (126,102) (90,279) (190,792)
Movement in unrealised (losses)/gains
in the period (1,320) 460 (200)
Realised gains/(losses) in the period 1,045 (498) 1,086
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (1,711) 270 (390)
------------ ------------ ------------
Foreign currency forward assets at
fair value through profit or loss - 271 54
Foreign currency forward liabilities
at fair value through profit or loss (1,711) (1) (444)
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (1,711) 270 (390)
------------ ------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to
purchase or sell bond futures for a predetermined price, with
payment and delivery of the bond future at a predetermined future
date.
Period Period
from 1 from 1
January January
2018 to 2017 to
30 June 30 June
2018 (unaudited) 2017 (unaudited)
Year ended
31 December
2017
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 5 9 9
Purchase of bond futures 2,825 990 1,906
Sale of bond futures (2,372) (1,068) (1,954)
Movement in unrealised (losses)/gains
in the period (246) 2 50
Realised (losses)/gains in the period (214) 70 (6)
------------ ------------ ------------
Balance (payable)/receivable on bond
futures (2) 3 5
------------ ------------ ------------
Bond future assets at fair value through
profit or loss 6 7 5
Bond future liabilities at fair value
through profit or loss (8) (4) -
------------ ------------ ------------
Balance receivable on bond futures (2) 3 5
------------ ------------ ------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement one party in
the agreement acts as a borrower of cash, using a security held
as collateral, and the other party in the agreement acts as a
lender of cash. Almost any security may be employed in the sale
and repurchase agreement. Interest is paid by the borrower for
the benefit of having funds to use until a specified date on which
the effective loan needs to be repaid.
Period Period
from 1 from 1
January January
2018 to 2017 to
30 June 30 June
2018 (unaudited) 2017 (unaudited)
Year ended
31 December
2017
(audited)
GBP'000 GBP'000 GBP'000
Opening balance (5,442) - -
Opening of sale and repurchase agreements (87,312) (8,043) (38,670)
Opening of reverse sale and repurchase
agreements 350 - 893
Closing-out of sale and repurchase
agreements 74,840 5,078 32,367
Closing-out of reverse sale and
repurchase agreements (1,244) - -
Movement in unrealised (losses)/gains
in the period (230) (113) 5
Realised profit/(loss) in the period 153 56 (37)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (18,885) (3,022) (5,442)
------------ ------------ ------------
Sale and repurchase assets at fair
value through profit or loss - - 894
Sale and repurchase liabilities
at fair value through profit or
loss (18,885) (3,022) (6,336)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (18,885) (3,022) (5,442)
------------ ------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Unaudited Condensed Statement of Comprehensive Income
as it has been incurred. At 30 June 2018 GBP12,000 interest (31
December 2017: GBP5,000) on sale and repurchase agreements was
payable by the Company.
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short position) at 30 June
2018 was GBP22,002,000 (31 December 2017: GBP7,234,000). The fair
value of the short position at 31 December 2017 was GBP6,395,000.
Offsetting of credit default swap agreements
The Company presents the fair value of its derivative assets and
liabilities on a gross basis, no such assets or liabilities have
been offset in the Unaudited Condensed Statement of Financial
Position. Certain derivative financial instruments are subject
to enforceable master netting arrangements, such as ISDA master
netting agreements, or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised financial
assets and liabilities that are subject to the above arrangements,
together with amounts held or pledged against these assets and
liabilities:
Effect of remaining
rights of offset
that do not
Amounts Net amount meet the criteria
offset presented for offsetting
Gross in in Unaudited in the Unaudited
carrying accordance Condensed Condensed Statement
amount with Statement of Financial
before offsetting of Financial Position - Cash
offsetting criteria Position held as collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2018 (unaudited)
Financial
assets
Derivatives 402 - 402 - 402
Collateral
accounts
for
derivative
financial
instruments
(note 13) 7,246 - 7,246 (2,333) 4,913
------------ ------------ ------------ ------------ ------------
Total assets 7,648 - 7,648 (2,333) 5,315
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives (22,630) - (22,630) 2,333 (20,297)
------------ ------------ ------------ ------------ ------------
Total
liabilities (22,630) - (22,630) 2,333 (20,297)
------------ ------------ ------------ ------------ ------------
31 December 2017 (audited)
Financial
assets
Derivatives 2,046 - 2,046 - 2,046
Collateral
accounts
for
derivative
financial
instruments
(note 13) 3,143 - 3,143 (287) 2,856
------------ ------------ ------------ ------------ ------------
Total assets 5,189 - 5,189 (287) 4,902
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives (6,958) - (6,958) 287 (6,671)
------------ ------------ ------------ ------------ ------------
Total
liabilities (6,958) - (6,958) 287 (6,671)
------------ ------------ ------------ ------------ ------------
Of the GBP20,297,000 net derivative liabilities as at 30 June
2018 (31 December 2017: GBP6,671,000):
* GBP1,412,000 (31 December 2017: GBP336,000) was in
respect of derivative positions held through CACEIS
Bank France, for which the cash at bank and
investments at fair value through profit or loss
totalling GBP72,508,000 (31 December 2017:
GBP74,784,000) and derivative assets of GBP6,000 (31
December 2017: GBP59,000) were used as collateral;
* GBP10,164,000 (31 December 2017: GBP1,369,000) was in
respect of derivative positions held through JP
Morgan, for which derivative assets of GBP186,000 (31
December 2017: GBP674,000) and capital instruments
totalling GBP12,637,000 (31 December 2017:
GBP1,727,000) were used as collateral; and
* GBP8,721,000 (31 December 2017: GBP4,966,000) was in
respect of derivative positions held through BRED
Banque Populaire, for which capital instruments
totalling GBP9,365,000 (31 December 2017:
GBP5,507,000) were used as collateral.
16. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At the period end, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
30 June 2018 (unaudited)
Listed capital instruments at fair
value through profit or loss 84,691 4,171 - 88,862
Other investments at fair value through
profit or loss (note 12) 2,607 - - 2,607
Credit default swaps - (1,630) - (1,630)
Derivative financial instruments (2) (20,596) - (20,598)
Short position covered by sale and - - - -
repurchase agreements
------------ ------------ ------------ ------------
87,296 (18,055) - 69,241
------------ ------------ ------------ ------------
31 December 2017 (audited)
Listed capital instruments at fair
value through profit or loss 69,620 2,493 - 72,113
Other investments at fair value through
profit or loss (note 12) 2,345 - - 2,345
Credit default swaps - 915 - 915
Derivative financial instruments 5 (5,832) - (5,827)
Short position covered by sale and
repurchase agreements - (838) - (838)
------------ ------------ ------------ ------------
71,970 (3,262) - 68,708
------------ ------------ ------------ ------------
Level 1 financial instruments include listed capital instruments
at fair value through profit or loss, an unlisted open ended fund
and bond future contracts which have been valued at fair value
by reference to quoted prices in active markets. No unobservable
inputs were included in determining the fair value of these investments
and, as such, alternative carrying values for ranges of unobservable
inputs have not been provided.
Level 2 financial instruments include credit default swap agreements,
foreign currency forward contracts and sale and repurchase agreements.
Each of these financial investments are valued by the Investment
Manager using market observable inputs. The fair value of these
securities may be based on, but are not limited to, the following
inputs: market price of the underlying securities; notional amount;
expiration date; fixed and floating interest rates; payment schedules;
and/or dividends declared.
The model used by the Company to fair value credit default swap
agreements prices a credit default swap as a function of its schedule,
deal spread, notional value, credit default swap curve and yield
curve. The key assumptions employed in the model include: constant
recovery as a fraction of par, piecewise constant risk neutral
hazard rates and default events being statistically independent
of changes in the default-free yield curve.
The fair values of the derivative financial instruments are based
on the forward foreign exchange rate curve.
Transfers between levels
Transfers between levels during the period are determined and
deemed to have occurred at each financial reporting date. There
were no investments classified as Level 3 during the period, and
no transfers between levels in the period. See notes 12, 13 and
15 for movements in instruments held at fair value through profit
or loss.
17. Other payables and accruals
30 June 31 December
2018 (unaudited) 2017
(audited)
GBP'000 GBP'000
Performance fee (note 8a) 234 469
Investment management fee (note 8a) 174 83
Other accruals 149 72
Administration fee (note 8b) 31 31
Audit fees 23 35
Interest payable on sale and repurchase
agreements (note 15) 12 5
Depositary fees (note 8e) 6 6
Broker fee (note 8c) 6 6
Registrar fees (note 8d) 4 3
Accrued interest payable on capital instrument
short position - 8
------------ ------------
639 718
------------ ------------
18. Share capital
30 June 2018 (unaudited) 31 December 2017
(audited)
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of no par value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and fully
paid:
Ordinary Shares of no par value 84,228,525 - 75,999,351 -
------------ ------------ ------------ ------------
On 13 February 2018 the Company completed a further placing of
8,229,174 new Ordinary Shares of no par value at 107.50p per share,
raising GBP8,846,000.
At 30 June 2018, the total number of Ordinary Shares in issue
was 84,228,525 (31 December 2017: 75,999,351).
On 15 August 2018, the Company completed an additional placing
of 1,223,499 new Ordinary Shares at a price of 98.50p per new
Ordinary Share, raising gross proceeds of GBP1.21 million. Following
this placing, the total number of Ordinary Shares in issue was
85,452,024.
The Ordinary Shares carry the right to receive all dividends declared
by the Company. Shareholders are entitled to all dividends paid
by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled
to all of the surplus assets of the Company. Shareholders will
be entitled to attend and vote at all general meetings of the
Company and, on a poll, will be entitled to one vote for each
Share held.
19. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to owners of the Company of GBP80,725,000 (31 December
2017: GBP79,364,000), and on 84,228,525 (31 December 2017: 75,999,351)
Ordinary Shares in issue at the period end.
20. Changes in liabilities arising from financing activities
During the period ended 30 June 2018, the Company raised GBP8,846,000
(year ended 31 December 2017: GBP15,989,000) through the placing
of 8,229,174 (31 December 2017: 15,068,587) new Ordinary Shares
of no par value. In addition, during the period, the Company commenced
the work required to update its Prospectus. Share issue costs
were incurred in relation to the placing and renewal of the Prospectus,
and at the period end GBP128,000 (31 December 2017: GBP56,000)
of these costs were outstanding, resulting in cash flows in relation
to share issue costs in the period of GBP193,000 (31 December
2017: GBP624,000).
21. Financial instruments and risk management
The Investment Manager manages the Company's portfolio to provide
Shareholders with attractive return, while limiting downside risk,
through investment in the following financial institution investment
instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks, and the Board of Directors receives regular risk reports
from the Investment Manager.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
The market in which the Company participates is competitive and
rapidly changing.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or
geographical location. Concentrations of risk arise when a number
of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged
in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic, political or other conditions. Concentrations
of liquidity risk may arise from the repayment terms of financial
liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations
of foreign exchange risk may arise if the Company has a significant
net open position in a single foreign currency, or aggregate net
open position in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investments,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, an
unlisted open ended fund and bond futures at fair value through
profit or loss (see notes 12, 15 and 16) are exposed to price
risk and it is not the intention to mitigate the price risk.
At 30 June 2018, if the valuation of these investments at fair
value through profit or loss had moved by 5% with all other variables
remaining constant, the change in net assets would amount to approximately
+/- GBP4,573,000 (31 December 2017: GBP3,681,000). The fair value
of financial instruments exposed to price risk at 30 June 2018
was GBP91,469,000 (31 December 2017: GBP73,625,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the period. At 30 June 2018,
the Company held the following foreign currency forward contracts:
Maturity date Amount to be sold Amount to be purchased
12 July 2018 EUR66,075,000 GBP58,017,000
12 July 2018 US$24,693,000 GBP17,528,000
12 July 2018 SG$1,042,000 GBP579,000
At 31 December 2017, the Company held the following foreign currency
forward contracts:
Maturity date Amount to be sold Amount to be purchased
16 January EUR47,192,000 GBP41,546,000
2018
16 January US$12,452,000 GBP9,292,000
2018
As at the period end a proportion of the net financial assets
of the Company were denominated in currencies other than Sterling,
as follows:
Investments
at fair Foreign
value through Cash and currency
profit or cash forward
loss Receivables equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2018 (unaudited)
Euros 40,060 951 903 41,914 (58,535) (16,621)
US Dollars 12,209 147 2,341 14,697 (18,706) (4,009)
Danish Krone 855 - (855) - - -
Canadian
Dollars - - - - - -
Singapore
Dollars - - 581 581 (579) 2
------------ ------------ ------------ ------------ ------------ ------------
53,124 1,098 2,970 57,192 (77,820) (20,628)
------------ ------------ ------------ ------------ ------------ ------------
31 December 2017 (audited)
Euros 40,980 412 (4,125) 37,267 (41,990) (4,723)
US Dollars 13,038 110 (5,123) 8,025 (9,238) (1,213)
Danish Krone - - 417 417 - 417
Canadian
Dollars - - 688 688 - 688
------------ ------------ ------------ ------------ ------------ ------------
54,018 522 (8,143) 46,397 (51,228) (4,831)
------------ ------------ ------------ ------------ ------------ ------------
The net exposure to Euros and US Dollars at 30 June 2018 was predominantly
as a result of the open sale and repurchase agreements. At 30
June 2018, the liabilities arising from the Euro and US Dollar
denominated sale and repurchase agreements were valued at GBP16,430,000
and GBP4,280,000 respectively.
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 30 June 2018, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 30 June 2018 would have decreased/increased by GBP1,031,000
(31 December 2017: GBP242,000).
iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP59,055,000 (31 December
2017: GBP43,298,000), cash and cash equivalents, net of overdrafts,
of GBP3,042,000 (31 December 2017: GBP7,559,000) and collateral
account balances of GBP7,246,000 (31 December 2017: GBP3,143,000)
were the only interest bearing financial instruments subject to
variable interest rates at 30 June 2018. Therefore, if interest
rates had increased/decreased by 50 basis points, with all other
variables remaining constant, the change in the value of interest
cash flows of these assets in the period would have been GBP383,000
(31 December 2017: +/- GBP286,000).
Fixed Variable Non-interest
interest interest bearing Total
30 June 2018 (unaudited) GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 24,309 59,055 8,105 91,469
Cash and cash equivalents - 3,897 - 3,897
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 6,938 308 7,246
Derivative financial assets at fair
value through profit or loss 402 - - 402
Other receivables - - 1,836 1,836
------------ ------------ ------------ ------------
Total financial assets 24,711 69,890 10,249 104,850
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (856) - (856)
Derivative financial liabilities
at fair value through profit or loss (22,630) - - (22,630)
Short positions covered by sale and
repurchase agreements - - - -
Other payables and accruals - - (627) (627)
------------ ------------ ------------ ------------
Total financial liabilities (22,630) (856) (627) (24,113)
------------ ------------ ------------ ------------
Total interest sensitivity gap 2,081 69,034 9,622 80,737
------------ ------------ ------------ ------------
31 December 2017
Financial assets
Investments at fair value through
profit or loss 24,170 43,298 6,990 74,458
Cash and cash equivalents - 16,808 - 16,808
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 3,143 - 3,143
Derivative financial assets at fair
value through profit or loss 1,987 - 59 2,046
Other receivables - - 650 650
------------ ------------ ------------ ------------
Total financial assets 26,157 63,249 7,699 97,105
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (9,249) - (9,249)
Derivative financial liabilities
at fair value through profit or loss (6,514) - (444) (6,958)
Short positions covered by sale and
repurchase agreements - - (838) (838)
Other payables and accruals - - (713) (713)
------------ ------------ ------------ ------------
Total financial liabilities (6,514) (9,249) (1,995) (17,758)
------------ ------------ ------------ ------------
Total interest sensitivity gap 19,643 54,000 5,704 79,347
------------ ------------ ------------ ------------
It is estimated that the fair value of the capital instruments
at 30 June 2018 would increase/decrease by +/-GBP305,000 (0.94%)
(31 December 2017: +/-GBP486,000 (0.65%)) if interest rates were
to change by 50 basis points.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic
conditions, market expectations and its own views as to likely
movements in interest rates.
Although it has not done so to date, the Company may implement
hedging and derivative strategies designed to protect investment
performance against material movements in interest rates. Such
strategies may include (but are not limited to) interest rate
swaps and will only be entered into when they are available in
a timely manner and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy
of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has
entered into with the Company, resulting in a financial loss to
the Company.
At 30 June 2018, credit risk arose principally from investment
in capital instruments of GBP91,469,000 (31 December 2017: GBP72,113,000),
cash and cash equivalents of GBP3,897,000 (31 December 2017: GBP16,808,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP7,246,000 (31 December
2017: GBP3,143,000) and investments in sale and repurchase assets
of GBPnil (31 December 2017: GBP894,000). The Company seeks to
trade only with reputable counterparties that the Investment Manager
believes to be creditworthy.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 30 June 2018, the capital instrument rating profile
of the portfolio was as follows:
31 December
30 June 2018 2017
Percentage Percentage
A 5.40 4.76
BBB 32.60 32.69
BB 36.73 36.74
B 15.69 13.53
CCC and below 6.73 4.77
No rating 2.85 7.51
------------ ------------
100.00 100.00
------------ ------------
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or
P-1 (Moody's) to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse, JP Morgan and Goldman Sachs, rated
A, A+ and A+ respectively. At 30 June 2018, the overall net exposure
to these counterparties was 9.09% of NAV (31 December 2017: 5.44%).
The collateral held at each counterparty is disclosed in note
13.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 30 June 2018 was
low since the ratio of cash and cash equivalents (net of overdrafts)
to unmatched liabilities was 5:1 (31 December 2017: 11:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December
30 June 2018 2017
Percentage Percentage
Less than 1 year 1.92 1.16
1 to 3 years 15.45 13.79
3 to 5 years 44.15 51.74
5 to 7 years 7.17 6.95
7 to 10 years 15.67 11.82
More than 10 years 12.79 14.54
No maturity 2.85 -
------------ ------------
100.00 100.00
------------ ------------
As at 30 June 2018, the Company's liabilities fell due as follows:
31 December
30 June 2018 2017
Percentage Percentage
1 to 3 months 53.94 86.72
3 to 6 months 0.25 -
6 to 12 months - -
1 to 3 years 0.77 -
3 to 5 years 45.04 13.28
------------ ------------
100.00 100.00
------------ ------------
22. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 30 June 2018 the Company had nine
open sale and repurchase agreements, committing the Company to
make a total repayment of GBP18,885,000 post the period end (31
December 2017: GBP6,336,000 and receive GBP894,000 as a result
of the reverse sale and repurchase agreement).
The raising of capital through the ongoing placing programme forms
part of the capital management policy. See note 18 for details
of the Ordinary Shares issued since incorporation.
As disclosed in the Unaudited Condensed Statement of Financial
Position, at 30 June 2018, the total equity holders' funds were
GBP80,725,000 (31 December 2017: GBP79,364,000).
23. Capital commitments
The Company holds a number of derivative financial instruments
which, by their very nature, give rise to capital commitments
post 30 June 2018. These are as follows:
* At the period end, the Company had sold 19 credit
default swap agreements for a total of GBP1,846,000,
each receiving quarterly interest (31 December 2017:
16 agreements for GBP1,489,000). The exposure of the
Company in relation to these agreements at the period
end date was GBP1,846,000 (31 December 2017:
GBP1,489,000). Collateral of GBP6,938,000 for these
agreements was held at 30 June 2018 (31 December
2017: GBP3,034,000).
* At the period end the Company had committed to three
(31 December 2017: two) foreign currency forward
contracts dated 12 July 2018 to buy GBP76,109,000 (31
December 2017: buy GBP50,838,000). At 30 June 2018,
the Company could have effected the same trades and
purchased GBP77,820,000 (31 December 2017: buy
GBP51,228,000), giving rise to a loss of GBP1,711,000
(31 December 2017: loss of GBP390,000).
* At the period end the Company held nine open sale and
repurchase agreements committing the Company to make
a total repayment of GBP18,660,000 (31 December 2017:
GBP6,340,000).
24. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement,
as detailed in note 8a, should the Company's NAV reach a level
at which the TER reduced to less than 1.5% of the average NAV
in a future accounting period then the Quarterly Expenses Excess
and Annual Expenses Excess totalling GBP499,000 at 30 June 2018
(31 December 2017: GBP464,000) would become payable to the Investment
Manager, to the extent that the total expenses including any repayment
did not exceed 1.5% of the average NAV for that period.
For the GBP499,000 Expenses Excess to become payable, based on
the 2018 expense level to date, the Company's NAV would need to
increase by at least 24% from the 30 June 2018 NAV (31 December
2017: 34%). The Directors consider that it is possible, but not
probable, that this ratio will be achieved in the foreseeable
future. Accordingly, the possible payment to the Investment Manager
has been treated as a contingent liability in the financial statements.
There were no other contingent assets or contingent liabilities
in existence at the year end.
25. Events after the financial reporting date
On 18 July 2018, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 April 2018 to 30 June 2018,
out of the profits for the period ended 30 June 2018, which (in
accordance with IFRS) was not provided for at 30 June 2018 (see
note 6). This dividend will be paid on 24 August 2018.
On 15 August 2018, the Company completed an additional placing
of 1,223,499 new Ordinary Shares at a price of 98.50p per new
Ordinary Share, raising gross proceeds of GBP1.21 million. Following
this placing, the total number of Ordinary Shares in issue was
85,452,024.
-- ENDS --
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR LFLFLVVFBBBE
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