TIDMAXI
RNS Number : 4266J
Axiom European Financial Debt Fd Ld
09 April 2020
9 April 2020
Axiom European Financial Debt Fund Limited
("Axiom" or the "Company")
Annual Financial Report
For the year ended 31 December 2019
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
fund, today announces its Annual Financial Report for the year
ended 31 December 2019.
Highlights
31 December 31 December
2019 2018
Net assets GBP91,284,000 GBP76,976,000
Net asset value ("NAV") per Ordinary
Share 99.38p 90.08p
Share price 94.00p 88.00p
Discount to NAV (5.41)% (2.31)%
Profit/(loss) for the year GBP13,882,000 GBP(7,099,000)
Dividend per share declared in respect
of the year 6.00p 6.00p
Total return per Ordinary Share (based
on NAV) [1] 16.98% -8.00%
Total return per Ordinary Share (based
on share price) [1] 13.64% -10.69%
Ordinary Shares in issue at year end 91,852,904 85,452,024
[1] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
year with the NAV or share price, as applicable, plus dividends
paid, at the year end.
William Scott, Chairman, commented:
"I am pleased to say that the market recovery in the first half
of the year that unwound the declines of 2018 continued through
the second half of 2019. As a result, I am delighted to say that
Axiom had its best year to date if we take into account dividends
paid, the total NAV return per share was +16.98%, net of all
expenses. The Company's trailing three-year return to the end
of 2019 was therefore just under +25% or +7.72% p.a., again net
of all expenses.
"Looking ahead in the commercial world, there is likely to be
an increasing dispersion of outcomes, depending on the nature
of customer exposure, operational gearing and financing structures.
While this may very well lead to a rise in defaults by borrowers,
it should not have an existential impact on most banking and
other financial issuers. In general, the financial sectors are
much better capitalised and more resilient than they were going
into the last great market shock, the global financial crisis
of 2008 and 2009. That has been the core goal of the regulatory
capital changes since then; the very changes that the Company
was set up to exploit.
"Nonetheless, it is reasonable to expect that some issuers will
fare better than others in the year to come. There will be a
greater dispersion of returns on individual instruments over
the next couple of years than might otherwise have been the case
as a result of the continuing evolution of regulatory change
and other changes such as Brexit and the final form the future
relationship with Europe will take.
"The relative opportunities that this implies will present proactive
investment managers who have the appropriate specialist skills
to play to their competitive advantages. This is particularly
the case in a specialist asset class such as that in which we
invest. With our Investment Manager, Axiom, we therefore remain
positive and continue to believe the Company is well positioned
to capture such opportunities and we thank Shareholders for their
continued support."
Gildas Surry, Investment Manager, said:
" 2019 saw a sharp decline in long-term interest rates across
our three investment currencies in anticipation of another easing
round of monetary policies. The banking sector also benefited
from a shift in the regulatory climate between the ECB as Single
Supervisor and the European banks. The handovers of Mario Draghi
to Christine Lagarde and Danièle Nouy to Andrea Enria came
alongside new monetary tools and regulatory considerations including
deposit tiering and cross-border consolidation.
" 2020 started on a strong note. Emboldened by the strength of
its ever improving fundamentals (out of the 113 banks supervised
by the ECB, the average CET1 ratio stood at 14.37% as of Quarter
3 2019 and the average NPL ratio reduced to below 3.5%), the
banking sector saw a number of institutions formally announcing
returns of capital to shareholders by increasing cash dividends
and implementing share buybacks.
" Now, as of April 2020, the financial sector, together with
the world economy, is facing the threat of a global pandemic
triggered by the COVID-19 virus. The impact, and its immediate
consequences on sectors such as aviation, shipping or tourism,
remains difficult to assess in its magnitude as well as its timing.
While it could eliminate a significant share of banks' 2020 profits,
it does not, in our opinion, represent a significant risk to
banks' capital. In order to mitigate these risks, the unprecedented
measures announced by the ECB and the Bank of England put the
banks in the strongest solvency position possible to keep supporting
the economy. Still, were some institutions to face a coupon risk
on their hybrid bonds, we would expect opportunities to arise
for the Company's investment strategy. Finally, despite the uncertainty
arising from COVID-19, we continue to expect regulators to press
on banks in the recycling of their legacy instruments, as the
transition period to Basel III has only two years left before
the December 2021 deadline ."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou PO Box 650 Rachel Mann
Gildas Surry 1(st) Floor, Royal Chambers Charles Hirst
Jerome Legras St Julian's Avenue
St Peter Port
Guernsey
GY1 3JX
axiom@mhpc.com
www.axiom-ai.com axiom@elysiumfundman.com Tel: +44 20 3128
Tel: +44 20 3807 0670 Tel: +44 1481 810 100 8100
A copy of the Company's Annual Report and Financial Statements
for the year ended 31 December 2019 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.
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2019:
Strategic Report
Overview and Investment Strategy
General information
Axiom European Financial Debt Fund Limited (the "Company") is
an authorised closed-ended Guernsey investment company with registered
number 61003. Its Ordinary Shares were admitted to the premium
listing segment of the FCA's Official List and to trading on the
Premium Segment of the Main Market of the London Stock Exchange
(the "Premium Segment") on 15 October 2018 ("Admission"). Prior
to this, the Ordinary Shares traded on the Specialist Fund Segment
("SFS") of the London Stock Exchange.
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://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
Chairman's Statement
Results
I am pleased to say that the market recovery in the first half
of the year, unwinding the declines of 2018, continued through
the second half of 2019. On the back of this and some excellent
work by our Investment Manager, the Company had a very good year,
arithmetically our best so far: taking into account dividends
paid, the total NAV return per share was +16.98%(1) , net of all
expenses (2018: -8.00%). The Company's trailing three-year return
to the end of 2019 was therefore just under +25% or +7.27% p.a.,
again net of all expenses. Given the persistently and extraordinarily
low interest rate environment throughout the period, this is a
creditable result for a fixed-income based strategy.
Further details on the development of key market events and activity
in the portfolio are given in the Investment Manager's report.
In aggregate, the Company reported a net profit after tax for
the year ended 31 December 2019 of GBP13.9 million (2018: loss
of GBP7.1 million), representing earnings per Ordinary Share of
15.21p (2018: loss of 8.48p) and the Company's NAV at 31 December
2019 was GBP91.3 million (99.38p per Ordinary Share) (2018: GBP77.0
million, 90.08p per Ordinary Share).
Notwithstanding the excellent NAV performance during the year,
the increase in the Company's share price failed to keep pace
fully with the rise in NAV with the consequence that the share
price discount to NAV widened slightly over the year from 2.31%
at the end of the previous year to 5.41% at the year end.
Dividends
As in prior years, the Company declared four dividends each of
1.50p per Ordinary Share in relation to the year: one was declared
after the balance sheet date and was paid on 28 February 2020
to Shareholders on the register at 7 February 2020. During the
period, actual payments of 6.00p were made, being the May, August
and November dividends of 1.50p each and the 1.50p dividend in
respect of the period ended 31 December 2018, which was paid on
22 February 2019.
Placing programme and fundraising
Shareholders will recall that we completed an incremental placing
of shares on 4 February 2019 raising gross proceeds of GBP5.94
million from the placing of 6,400,880 new Ordinary Shares at 92.81p
per New Ordinary Share. We remain committed to expanding the size
of the Company to improve the return economics for Shareholders
by spreading the burden of the operational costs of the Company
over a larger asset base and also improving trading liquidity
in our shares as and when circumstances permit.
Outlook
At the time of writing, markets in general have begun to react
to the developing threat from COVID-19. In origin, it is a public
health crisis but it will also and inevitably have significant
economic and market consequences as a result of both the voluntary
choices exercised by individuals and those imposed by public authorities.
These behavioural changes have already been felt among those sectors
most exposed to the free circulation and congregation of people.
Hotel companies, eateries, cinemas, cruise companies and airlines
are all obvious candidates. Where such exposure is combined with
aggressive financing, some companies will not survive at least
in their current forms. It can come as no surprise that in the
UK, the regional airline Flybe was an early casualty. Already
fragile, the drop in passenger numbers, perhaps partly as a result
of changing consumer behaviour, may well have been the final straw
that broke that camel's back. Others may well follow if, as expected,
the virus changes public behavioural patterns for several months
to come.
In the commercial world, there is likely to be increasing dispersion
of outcomes depending on the nature of customer exposure, operational
gearing and financing structures. While this may very well lead
to a rise in defaults by borrowers, it should not have an existential
impact on most banking and other financial issuers. In general,
the financial sectors are much better capitalised and more resilient
than they were going into the last great market shock, the global
financial crisis of 2008 and 2009. That has been the core goal
of the regulatory capital changes since then, which changes the
Company was set up to exploit.
Nonetheless, it is reasonable to expect that some issuers will
fare better than others and that there will be a greater dispersion
of returns on individual instruments over the next couple of years
than might otherwise have been the case as a result of the continuing
evolution of regulatory change outlined by our Investment Manager
in the Investment Manager's Report and other changes such as Brexit
in its final form, whatever that form of future relationship may
eventually turn out to be. The relative opportunities that this
implies will present proactive investment managers who have the
appropriate specialist skills to play to their competitive advantages.
This is particularly the case in a specialist asset class such
as that in which we invest. With our Investment Manager, Axiom,
we therefore remain positive and continue to believe the Company
is well positioned to capture such opportunities and we thank
Shareholders for their continued support.
William Scott
Chairman
6 April 2020
(1) Net return has been calculated by comparing the NAV at the
start of the period with the NAV, plus dividends paid, at the
period end.
Investment Manager's Report
1- Market developments
January
Investors came back in January in a market which was struck by
a lack of liquidity at the end of 2018. Financials led the rise
at the beginning of the year despite the persisting economic concerns
(Brexit, the recession in Italy, the trade war between China and
the United States) offset by the relatively dovish tone of the
ECB.
In the ongoing Brexit negotiations, despite the House of Commons
voting down the proposed Withdrawal Agreement on 15 January 2019,
the amendments passed on 29 January 2019 gave Theresa May the
credibility to return to Brussels in a further attempt to find
a resolution to the backstop issue.
The quarter 4 results disappointed despite the solid fundamentals.
The lower earnings expectations for quarter 4 resulted in several
profit warnings. Société Générale was expecting
a 20% drop in its market activities and Metro Bank announced risks
were not correctly captured in the bank core capital ratios. Deutsche
Bank had benefited from the rumours of a possible merger with
Commerzbank, which could have been orchestrated by the German
authorities. On a more positive note, Bankia and KBC results were
in line with the consensus.
The 2018 Transparency Report published by the EBA showed significant
progress reducing non-performing exposures of EU banks, which
stood at only 3.58%. The ECB continued to maintain pressure on
non-performing loans ("NPL") provisioning, particularly targeting
Italian banks.
On the regulatory front, the latest updates in the banking regulations
with the Banking Package implemented by the EU and the Minimum
Requirement of Eligible Liabilities introduced by the Single Resolution
Board continued to provide an attractive set of investment opportunities
within the asset class. Interesting to note that a group of investors
was publicly challenging HSBC's approach towards the regulatory
treatment of their discounted perpetuals ("discos").
Regarding rating revisions, Ageas was upgraded by 2 notches at
Moody's (from Baa2 to A3) which led to the Ageas Fresh upgrade
to Investment Grade (Baa3) territory within the 3 rating agencies.
Finally, the primary market was focused on the new Senior Non-Preferred
format (Tier 3 ("T3") securities, eligible for TLAC / MREL ratios),
with only two new Additional Tier 1s ("AT1") from UBS and BCP.
The regulatory calls continued with KBC, BBVA and Santander.
February
Credit markets continued their positive trend in February driven
by central banks' dovish tone, the progress of the trade discussions
between the US and China and the latest economic figures in the
US. The SubFin tightened by 24bps ending the month at 149bps.
On Brexit, following the recent developments, markets seemed to
believe that the risk of a no-deal was more remote. The prospects
of a possible delay to avoid a sudden exit of the European Union
benefited the British Pound which returned to its July 2018 levels.
The latest round of bank earnings came out either above expectations
or in line with the consensus. Deutsche Bank announced its first
profit since 2014. UniCredit, Intesa, Erste and Bawag were among
the best performers. After underestimating its capital ratios
last month, Metro Bank reassured the market by announcing a capital
increase.
The ECB confirmed it was working on a new refinancing facility
program and that details of the new TLTRO 3 would be announced
in the coming months.
In respect of banking regulations, the latest updates of the CRR2
confirmed our analysis of the eligibility rules for bank capital,
in particular for specific instruments, either issued by SPVs
or by non-EU entities or entities under non-EU law, that do not
have contractual recognition of write-down powers by the resolution
authorities. We closely monitored and analysed these developments
as they were a source of opportunities within the asset class.
We continued to see regulatory calls of Legacy bonds with Caixa
Geral calling its two Legacy Tier 1 ("T1") bonds.
Finally, the primary market was active with six new AT1s. Santander's
decision not to call its 6.25% bond on its first call date was
the highlight of the month. This was the first time that a European
bank had taken such a decision (we published a note on this subject,
available on our website). The markets' reaction was moderate
without any contagion effects.
March
March ended on a positive note despite all the uncertainty around
Brexit and the wait-and-see attitude of central banks. On 29 March
2019, the UK Parliament rejected Theresa May's withdrawal agreement
for the third time by 58 votes and the deadline was extended to
31 October 2019. The risk premium of a "no-deal" however remained
limited and the SubFin continued to tighten (-10bps over the month).
On the monetary policy front, the Fed reinforced its easing stance
during the latest FOMC. The US central bank put interest rate
rises on hold with only one rise expected in 2020. In Europe,
the ECB also remained cautious and left its rates unchanged. As
expected, a new reduced rate loan scheme for banks (TLTRO 3) would
be introduced next September for a period of two years. Several
press articles suggested the ECB was studying options to reduce
the fees that banks pay on a portion of their cash surplus to
offset the side effects of its easing policy and thus improve
their profitability.
Deutsche Bank and Commerzbank finally confirmed that they were
starting discussions for a merger, but we believed that a significant
capital increase seemed necessary to complete this project.
After Danske Bank, money laundering problems affected Nordea and
Swedbank.
In regard to banking regulations, the latest updates of the CRR2
confirmed the subordination requirements of the MREL requested
by the single resolution board to the banks.
Finally, due to the sharp tightening of spreads since the beginning
of the year, the primary market was very active during the month
with 11 issues representing more than EUR8 billion. Of particular
note were the issues by KBC, UniCredit, Nordea, BBVA and Barclays.
On the Legacy market, three UK issuers made tender offers: Lloyds,
Coventry and Standard Life Aberdeen.
April
Financials ended the month on a positive note and spreads continued
tightening (SubFin -20bps) on the back of the positive macro data
in China, in the USA and in Italy, as well as the extension of
Brexit until the end of October 2019.
The banking results stood above expectations. The already high
level of capital (14.7% in quarter 4 2018) increased slightly.
Deutsche Bank officially announced abandoning the merger with
Commerzbank, however, the consolidation in the sector continued
with Cr é dit Agricole and Santander combining their custody
and asset-servicing operations. UniCredit agreed to pay a USD1.3
billion fine to settle US sanctions. This came just after Standard
Chartered Plc paid USD1.1 billion for similar misconduct.
On the regulatory side, the adoption of the Banking Package on
16 April established the definitive MREL rules: this was a source
of catalysts for our Legacy strategies. During the month, three
legacy instruments were called: the Santander 6.222%, the UniCredit
3.125% and the Eurobank 6%. In the UK, the regulatory frame was
being strengthened with the systemic risk buffer being confirmed
for ringfenced entities.
Finally, the primary market remained active. Among the issuers
who benefited from the positive market conditions were: Société
Générale (AT1), Coventry (AT1), BPM (AT1), Van Lanschot
(AT1), Aegon (Restricted T1 ("RT1")), ASR (Tier 2 ("T2")) and
Ageas (T2).
May
The European elections did not have a major impact on markets,
but risks identified at the end of last year, including the escalation
in the Trade War between the US and China, Italy's failure to
rein in debt and the increasing probability of a no-deal Brexit,
drove investor sentiment. In addition, the SubFin index widened
by 46bps over the month and, after the U-turn of the Fed in February
2019, the 10-year US and German rates reached historical lows.
These important recessive signals made the ECB's June 2019 meeting
even more important.
The first quarter earnings were positively surprising, especially
from insurers. UniCredit and Intesa Sanpaolo benefited from better
than expected market activities, improving asset quality and a
stable capital position.
Among credit ratings, RBS was upgraded by one notch by S&P to
BBB resulting in an upgrade of its subordinated bonds. Moody's
also changed its outlook on Barclays from stable to positive,
reflecting improved profitability prospects and reduced litigation
risk.
During the month, rumours about sector consolidation marked a
pause. Following the announcement of the end of talks between
Deutsche Bank and Commerzbank the previous month, the press reported
that negotiations between Deutsche Bank and UBS about a merger
of their asset management subsidiaries would also be halted. UniCredit
and ING were said to be interested in Commerzbank still. Finally,
Liberbank and Unicaja announced the end of their merger talks.
The primary market continued to offer good premia - the Finnish
insurer Sampo issued a T2 with a 30 year maturity (first call
in 10 years) for EUR500 million with a coupon of 3.375%. Amongst
the calls announced this month we would highlight Aegon 6.5% Perp
in USD, Barclays 14% Perp in GBP, RABOBK 11% in USD and Lloyds
7% AT1 in GBP.
June
Central banks confirmed their accommodative stance and Mario Draghi
announced another potential quantitative easing. These announcements
had a polarising impact on bond assets: a strongly positive effect
on fixed-rate assets and a strongly negative impact on floating-rate
assets. The Euro 5-year mid-swap rate hit a historical low at
-0.23%. The French government's 10-year borrowing rate temporarily
moved into negative territory for the first time ever.
On the political front, concerns were dissipating. The market
welcomed the resumption of Sino-American negotiations at the G20.
In the UK, the campaigns for prime minister took centre stage
with less tension around Brexit.
On the regulatory front, CRR2 was officially implemented on 27
June 2019 and endorsed the final rules of MREL, expanding our
investment scope to new Legacy instruments. Management at CNP
and RBS confirmed our analysis of the issuers' policies towards
a clean-up of their Legacy debt by 2022 for banks and 2026 for
insurers. As an example, Santander announced the call of its 5.75%
in July 2019.
Restructuring of the sector continued. Athora funds joined NN
to acquire Dutch insurer Vivat, while insurers Caser Seguros and
Seguradoras Unidas (Tranquilidade) launched their sale processes.
Following the fallout of the merger talks between Commerzbank
and Deutsche Bank, the latter announced plans to create a EUR50
billion "Bad Bank" and focus on traditional banking activities.
Furthermore, the bank passed the qualitative test in the Fed's
CCAR stress test, after having failed the previous years.
Finally, the primary market continued to offer great opportunities
for issuers. New AT1 issuances continued: Barclays 7.125% in GBP
and Lloyds 6.75% in USD, but also Commerzbank's long awaited inaugural
AT1. The coupon was only 7% in USD, with the German issuer benefiting
from a favourable accounting change in the amount of distributable
reserves.
July
Facing the deteriorating economic outlook, central banks proved
prepared to act, which triggered a new rally on the markets. Mario
Draghi said he was considering a tiering of deposits to offset
the negative effects of his policy on banks' profitability. The
Fed lowered its funds rate by a quarter of a point to 2-2.25%,
a largely anticipated move not as dovish as the market had hoped
for. In Europe, the 5-year mid-swap rate continued to fall, reaching
a new historical low of -0.32%. Persistent political uncertainty
in the UK, combined with deteriorating corporate data, heightened
fears of an economic slowdown, despite Boris Johnson's confidence
in his capacity to sign a Brexit agreement with Brussels. On the
more positive side, the commercial tensions eased between China
and the US as the negotiations restarted.
With 42% of the results above expectations, the banking sector
had a strong earnings season. The French and Irish banks came
out on top, and Bank of Ireland posted a sharp reduction of its
NPL ratio to 5%. Soci é t é G é n é rale surprised
with a 50bps increase in its CET1 ratio, reaching its target ahead
of schedule alongside some significant progress in its cost cutting
programme. BNP also released a strong set of results across all
its divisions.
Deutsche Bank announced its strategic plan: a new "Bad Bank" to
reduce trading of RWAs by 40%, exit equities and add a new ambitious
target of return on equity of 8% towards 2022. UniCredit announced
significant job cuts for 10% of the bank's total workforce. The
ongoing restructuring and continuous risk reduction by the Italian
bank resulted in the upward revision of its Moody's rating from
Ba1 to Baa3.
Banking consolidation continued in the sector with excess liquidity
reaching EUR 2 trillion. The main announcement of the month was
the proposed acquisition of Refinitiv by the London Stock Exchange
for a total of USD27 billion.
Ahead of the results season, the primary market remained active,
with some Italian issuers such as Fineco in AT1, Banca Popolare
Sondrio and Monte Di Paschi in T2. The latter also issued a Senior
Preferred in EUR with a 4% coupon.
August
August was dominated by political developments, with the escalation
of tariffs between China and the US, progress (or lack thereof)
towards Brexit, accelerated by news of a possible suspension of
parliament, and the fall of the coalition in Italy followed by
the set-up of a new M5S/PD alliance. Interest rates also fell
sharply, driven by monetary policy expectations in a context of
adverse economic prospects. The SubFin tightened by about 30bps
from its peak at 160bps to end the month at 130bps.
Second quarter results were supported by low levels of provisions.
Consensus beats came from Credit Suisse, StanChart and SocGen,
while UniCredit and Commerzbank disappointed.
After the implementation of CRR2, HSBC and Barclays updated the
capital recognition of certain perpetual Legacy bonds: the "discos"
in particular would no longer be eligible as capital after June
2025. Deutsche Bank confirmed that its legacy securities would
no longer qualify as capital after 2022. Santander announced the
call of its T1 legacy issued in 2004, paying a coupon of 3m EUR
+160, which quoted 92 before the announcement.
The primary market remained quiet. The total volume of issues
at the end of August 2019 stood flat compared to last year. In
the AT1 universe, Credit Suisse, Swedbank and BBVA issued in USD,
as well as UBS in AUD. Barclays, Cr é dit Agricole and Nordea
called their AT1s issued in 2014. Interestingly the Nordea 5.5%
bond had a must pay clause in the event of disqualification. Crédit
Agricole, like BPCE and Société Générale,
also announced the calls of their legacy T1 step-ups.
September
September saw the announcement of further accommodative measures
by the ECB, well anticipated by the market, in a context of uncertainties
around the Brexit process, China-US trade tariffs and impeachment
proceedings in the US. A collateral bottleneck unsettled the US
repo markets, before the intervention of the Fed. The SubFin index
tightened by 10bps.
Among the ECB's measures, bank deposit tiering would reduce the
amount of cash charged at a negative rate. The portion of banks'
excess reserves below 6 times the requirement would be charged
at the main refinancing rate (MRO), currently 0%. The relief was
expected to improve the banks' interest margins and support their
profitability.
On the regulatory front, the EBA announced that in mid-2020 it
would publish a clarification of the treatment of Legacy instruments
at the end of the transition period in December 2021. This announcement
coupled with the call announcements of Santander CMS, Achmea 6%
and BNP 4.875%, once again demonstrated that banks were incentivised
to call instruments that lose their eligibility as capital. After
the implementation of CRR2 on 27 June 2019, issuers were reviewing
the eligibility of their capital stock. We noted that BBVA disqualified
three of its legacy instruments.
Ratings continued to improve. Crédit Agricole saw their senior
rating move from A1 to Aa3 at Moody's, triggering an upgrade of
their capital instruments: their AT1 was Investment Grade at the
three rating agencies.
October
October was a positive month for financials, driven by the progress
on Brexit, postponed to 31 January 2020, and the easing tensions
between China and the US.
On the monetary policy front, beyond Mario Draghi's departure,
the minutes of the ECB meetings revealed dissenting views on the
package announced in September 2019. The 10-year Euro swap rate
moved into positive territory (from -0.20% to +0.02%). As anticipated,
the Fed cut its main rate by 25bps. The SubFin index tightened
15bps to 124bps over the month.
October was also busy with quarter 3 results' publications. Thirty
banks released their quarter 3 results which were in line or above
expectations overall. Among the "best in class" we can mention
Sabadell, Barclays, DNB and Standard Chartered. Deutsche Bank,
for its part, continued to disappoint.
The cleaning up of bank balance sheets continued, particularly
in Italy, where UniCredit was preparing to sell a portfolio of
NPLs with a nominal value of EUR6 billion, thus accelerating its
new strategic plan. In Greece, the establishment of the "Hercules"
plan was approved by the European Commission, on similar terms
to the GACS guarantee on securitisations of NPLs implemented in
2017 in Italy.
On the regulatory side, some banks continued to update their Pillar
3 disclosures with further legacy instruments being confirmed
as disqualified. After the Santander call, the tender on State
Street legacies, added to the rebound of CMS10, had a very positive
impact on CMS and discos.
The primary market was active, especially on AT1/RT1 with La Mondiale,
My Money Bank and AIB, and with Landesbank BadenWürttemberg
launching its inaugural AT1 deal to refinance its legacy instruments.
November
November was another positive month for financial stocks, driven
by the prospects for a US-China agreement in early 2020 and the
absence of further developments on the British side, whose fate
depended on the elections on 12 December 2019. Reassuring macroeconomic
publications (lower unemployment in Germany, higher Consumer Price
Index and better growth in the US) and a slight rise in interest
rates have comforted investors. The spread of financial subordinated
debt tightened slightly ending the month at 118bps - close to
its level at the end of October 2019 (124bps).
The quarterly publication season was good with 19 out of 37 banks'
releases above expectations. Among the "best in class" were UBS,
Barclays, Sabadell and Santander, whose income had increased significantly.
In terms of restructuring, Deutsche Bank was continuing its efforts.
The German bank was the only one to have its G-SIB capital requirement
reduced by the Financial Stability Board. Unicaja and Liberbank
confirmed with the Spanish regulator (CNMV) that they were looking
into a merger project. Money laundering investigations were continuing
with new revelations at SEB, whose share price fell by 12% in
one day on 15 November 2019
On the regulatory side, banks continued to clean up their stocks
of legacy securities. After the Santander call and State Street's
tender offer last month, Commerzbank announced the call of a hybrid
instrument issued by a Dresdner legacy entity, and Ageas offered
to buy back its perpetual bonds at a premium of 11% to the listed
price. Ageas was among the important positions in our portfolio.
These various tenders and call actions had a very positive impact
on legacy securities as a whole and in particular on CMS and discos.
The primary market for AT1 bonds remained active. Issuers such
as DNB ASA (4.875%), Lloyds (5.125%), Saxobank (8.125%), La Banque
Postale (3.875%) and BIL (5.25%) benefited from this buoyant market.
December
The financial bonds market registered a solid performance at the
end of the year, with the SubFin index ending the month at 114bps.
The very good US employment figures, the decreased uncertainty
around Brexit post the UK elections, the slight rise in sovereign
rates (-0.20% in Germany and +0.12% in France) and the confirmation
of a first agreement between China and the US provided a very
supportive market environment.
On the regulatory front, in his speech to the European Parliament,
Andrea Enria, Chairman of the ECB's prudential Supervisory board,
confirmed the possibility of using AT1 and T2 securities to satisfy
the Pillar 2 capital requirements. This was in line with UniCredit's
announcements made earlier in the month (until then only CET1
was allowed). This new break down of Pillar 2 (56.25% CET1, 18.75%
AT1 and 25% T2) as per Article 104a, was an important change and
was expected to result in an average reduction of CET1 requirements
of 90bps. Regulation was also being made more flexible for French
insurers, with the inclusion of the PPE (provision for surplus
participations) in the Solvency Margin.
At its Investor Day, Deutsche Bank reaffirmed its strategic plan
objectives but reduced its revenue growth target for 2022. UniCredit
confirmed its "Single Point of Entry" resolution plan and announced
a share buyback program. NordLB strengthened its capital by avoiding
the constraints linked to State support and Banca Popolare di
Bari received an injection of EUR900 million to urgently meet
its capital requirements at the end of December 2019. Hamburg
Commercial Bank, ex-HSH Nordbank, announced a tender on its legacy
instruments.
The tender announced last month by the Belgian insurer Ageas on
its perpetual bonds was accepted by 65% of the holders, which
continued to support legacy instruments securities as a whole
and in particular CMS and discos.
In response to this success, Ageas issued a new RT1 for EUR750
million with a coupon of 3.875%.
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- Company activity
January
The Company took the opportunity of the January rebound to reduce
its risk. Most of the capital raised at the end of the month (7.5%
of the Company pre-placing) was used to invest in early February.
Only two small purchases were made in January which came at attractive
premia: Abanca T2 in the Liquid Relative Value bucket and BCP
AT1 in the Restructuring bucket. Overall, the exposure to the
UK was mitigated as the Brexit negotiation met further complications
in an ever-tightening timeline. Within the Less Liquid Relative
Value bucket, the Company reduced its exposure to perpetual instruments
issued by operating entities of UK banks
February
Following the call on CXGD (+24.2% on the price) the Company's
gain was circa 70bps on NAV. The Company continued to reduce risk
as market conditions improved. It increased its AT1 exposure but
reduced significantly its beta via CDS and its exposure to less
liquid T2s.
In Liquid Relative Value, the only primary deal it participated
in was KBC AT1. In Less Liquid Relative Value, it initiated a
position on a rare make-whole bond. In Restructuring, the Company
took profits on BCP in Portugal and a regional bank in Italy.
In Special Situations, the Company realised its gain on the CXGD
position by selling at 100.00 after the call announcement. The
Company also switched its exposure to a directly-issued discounted
bond into a bank SPV and added some Santander AT1s.
Finally, in Midcap Origination, the Company sold its position
on OakNorth Bank, following the capital injection by Softbank
and reduced its exposure to CASERS in Spain, after Mapfre confirmed
its interest.
March
The Company continued to reduce risk while participating selectively
in some new issues.
In Liquid Relative Value, it participated in the new AT1 issued
by BBVA, Nordea and CYBG, as well as the new RT1 issued by Aegon.
In Restructuring, the Company sold its Deutsche Bank AT1s after
the official confirmation of the merger discussions and realised
its gain on the T3 issued by Just Group Plc. The Company added
on some Italian and German T2s as well as the new UniCredit AT1s.
In Special Situations, the Company reduced its exposure to UK
discounted bonds.
Finally, in Midcap Origination, the Company continued to reduce
its position in Caser Seguros in Spain and participated in the
two new deals, by Montepio in Portugal and Van Lanschot in the
Netherlands.
April
The Company used the positive momentum to continue reducing its
risk. In Liquid Relative Value, the Company realised some gains
on the recent issues from Nordea, KBC, Clydesdale and Aegon. It
also sold its holding in BNP USD AT1s and Rothesay RT1s, in anticipation
of a potential acquisition that would weaken the credit metrics.
The Company also reduced its holdings in Spanish AT1s ahead of
negative headlines about the IRPH mortgage benchmark, as well
as its holding in Liberbank in the Restructuring bucket. In Restructuring,
the Company also sold the recent AT1 deal done by UniCredit.
In Special Situations, the Company managed to source some legacy
SPV-issued instruments by Greek banks ahead of the call by Eurobank.
In Less Liquid Relative Value, the Company benefited marginally
from the Santander 6.222% call, a position purchased in April
2017 at 94.
Finally, in Midcap Origination, the Company reduced a position
in a UK AT1. The Company ended the month with more than 8% in
cash.
May
The Company kept the same amount of liquidity with 8% cash throughout
the month. In Liquid Relative Value, it bought some CDS protection
on a UK Holdco and took a position on Commerzbank towards a consolidation
scenario.
In Less Liquid Relative Value, it reduced its holding of Ecclesiastical
preference shares to increase its holding of Achmea fixed-to-fixed
at the same yield but in Euros. In Restructuring, it sold its
holdings in International Personal Finance and Credito Valtellinese
after their rebound. It also reduced its holding in Metro Bank
T2s after the capital increase. The size of the position remained
less than 1%.
In Special Situations, it purchased some discounted SPV bonds
from Austria. Finally, in Midcap Origination, it took a position
in eSure after the issuer confirmed the strengthening of its solvency
on the back of a reinsurance agreement.
June
The Company reduced its exposure during the strong tightening.
In Liquid Relative Value, it took profit on BBVA and Santander
AT1s, while, in Less Liquid Relative Value, it reduced its exposure
to Ecclesiastical Insurance in the UK.
In Restructuring, it reduced its exposure to the Italian insurer
Cattolica and sold its position in German lender IKB. It took
part in the new T2 issue by Piraeus Bank in Greece, whose progress
on NPL reduction should address the regulatory pressure. Finally,
the Company protected part of its portfolio at these tight spreads
with CDSs on subordinated financials.
July
In Liquid Relative Value, the Company took its profit in Abanca
AT1 to take part in the new issue by Fineco. In Less Liquid Relative
Value, the Company added a rare instrument issued by RBS, ringfenced
entity, with an attractive make-whole provision.
The Company further reduced its holdings by taking its profit
on Cattolica and Piraeus in Restructuring, and reduced its holding
of Fortis perpetual floater, whose catalyst was not likely to
come in the near future.
Finally, in Midcap Origination, the Company added on its holding
of Permanent TSB and took part in the new T2 issued by BPSOIM.
August
The Company held 1.4% within the Liquid Relative Value bucket
of the Santander legacy T1 whose call was announced in August
2019.
The Company benefited from the rebound to take profits on Italy:
* in the Restructuring bucket, the holding in Italian
insurers Cattolica, at a yield to 2027 call of 4%;
and
* in the Midcap Origination bucket, the holding in
Italian bank Popolare Sondrio (4% increase in less
than a month).
Finally, in Restructuring, the Company initiated a position on
a 2021 bond issued by International Personal Finance, whose price
reached a 2-year low. We believe the short-term nature of their
loans, with an 88% ratio of borrowings to short-term receivables,
will allow them to refinance the upcoming maturities.
September
The Company benefited from the rally in CMS and discos on the
back of the Santander call: the portfolio had circa 9.6% of CMS/discos,
of which 1.4% was in the BBVA that got disqualified.
In Less Liquid Relative Value, the Company's holdings in Achmea
6% and BNP 4.875% converged to par after their call announcements.
The Company redeployed the proceeds on Lloyds 13% long dated callable,
whose record high make-whole margin made the early repayment option
compelling for the issuer by 2021, and smaller line items in UK
prefs.
In Liquid Relative Value, the Company captured the issue premium
in the new Nationwide 5.875% AT1 and bought some ABN AT1s on a
dip following general Anti-Money Laundering headlines.
In Special Situations, the Company realised its gains on the dated
bonds issued by Novo Banco's life insurer and redeployed on an
SPV-issued legacy T1 that BNP confirmed as ineligible.
In Restructuring, the Company added to its holdings on IPF and
Novo Banco while taking part in the new issue by Just Retirement.
Lastly, in Midcap Origination, the Company sold its holding in
Metro Bank as it failed to launch its senior issue at 7.5% and
added on its position on eSure Group insurer.
The Company closed the month with a cash gearing contained at
104.7%.
October
The Company continued to benefit from the rally in CMS and discos.
It added marginally on some CMS disqualified in the Pillar 3 reports,
in the Less Liquid Relative Value bucket. It sold the Fixed-to-Fixed
Achmea 6% and redeployed in the Liquid Relative Value on the new
La Mondiale RT1 and added on Van Lanschot AT1.
In Restructuring, the Company re-entered into its new senior issue
with Metro Bank and benefited from the press speculations on a
possible take-over by Lloyds. The Company trimmed down its exposure
as the latter refrained from confirming its intention.
Lastly, in Midcap Origination, the Company invested in My Money
Bank's new subordinated bond offering 8% return in EUR. The bank,
which was acquired from General Electric by the private equity
firm Cerberus, was active in mortgages and car loans. The bank's
fundamentals were stable, and the level of capitalisation was
high (CET1 ratio of 16.6%).
The Company closed the month with a cash gearing slightly down
at 104.2%.
November
The Company continued to benefit from the rally in legacy instruments,
with approximately 10% allocated to CMS/discos. It held 1.4% of
Ageas perpetual bonds in the Special Situations bucket. During
the month, in the same bucket, it marginally added some SPV-issued
discounted bonds.
In the Restructuring bucket, the Company realised part of its
gains on Metro Bank T2s and added a T2 recently issued by a Greek
bank whose NPL exposures were being drastically reduced. It took
part in the new AT1 issue by La Banque Postale in Liquid Relative
Value.
Finally, in Midcap Origination, the Company took part in the new
Saxobank AT1 and added on eSure insurance while realising its
gains on a small Danish savings bank.
December
The Company trimmed its risk across its different buckets. In
Liquid Relative Value, it realised its gains on La Mondiale RT1
and Nationwide AT1. In Less Liquid Relative Value, it reduced
its exposure to Lloyds 6.85%. In Special Situations, it switched
out of BBVA floaters into Lloyds Bank discos.
Finally, the Company held out from the tender by Ageas to capture
the upside in the untendered bonds, despite the smaller liquidity
in the reduced amount: the bonds which were not repurchased were
then trading at 64.00 for a tender price of 59.00.
4- Portfolio (as at 31 December 2019)
Strategy allocation (as a % of total net assets)(1)
Liquid Relative
Value 11.2%
Less Liquid Relative
Value 28.1%
Restructuring 22.8%
Special Situations 13.7%
Midcap Origination 26.9%
Denomination (as a % of total net assets)(1)
EUR 57.0%
GBP 38.3%
USD 7.4%
Portfolio Breakdown (as a % of total net assets)
By Securities External Rating(1) By country(1)
BBB 19.7% UK 43.0%
BB 39.3% Italy 10.7%
B 9.4% Portugal 8.0%
below B 8.4% Netherlands 7.4%
NR 25.8% Spain 6.9%
France 6.0%
By maturity(1) Germany 5.0%
<1 year 5.0% Austria 4.0%
1-3 years 37.4% Ireland 3.5%
3-5 years 28.5% Denmark 2.8%
5-7 years 8.0% Belgium 1.7%
7-10 years 6.7% Greece 1.2%
>10 years 17.0%
By subordination(1)
Additional Tier
1 41.0%
Legacy Tier 1 38.6%
Tier 2 15.5%
Senior 5.0%
(1) Splits adjusted for single assets
5- Company metrics (as at 31 December 2019)
Share price and NAV Portfolio information
Share price (mid) (GB pence) 94.00 Modified duration 4.53
NAV per share (daily) (GB Sensitivity
pence) 99.38 to credit 5.51
Dividends paid over last
12 months (GB pence) 6.00 Positions 93
Shares in issue 91,852,904 Average price 105.63
Market capitalisation (GBP
mn) 86.342 Running yield 5.36%
Yield to perpetuity
Total net assets (GBP mn) 91.284 (1) 6.51%
Yield to call
Premium / (Discount) (5.41)% (2) 6.26%
Net Return(3)
1 month 3 months 6 months 1 year 3 years(4) Since launch(4)
1.12% 5.18% 7.23% 16.98% 7.27% 5.39%
Monthly performance
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 2.92 16.14
2018 3.12 -0.70 -1.95 1.14 -5.84 -1.14 1.60 -1.26 2.43 -1.54 -2.68 -1.44 -8.00
2019 3.36 2.30 0.29 2.53 -1.59 2.29 0.30 0.75 0.97 2.22 1.77 1.12 16.98
(1) The yield to perpetuity is the yield of the portfolio with
the hypothesis that securities are not reimbursed and kept to
perpetuity.
(2) The yield to call is the yield of the portfolio at the anticipated
reimbursement date of the bonds.
(3) Net return has been calculated by comparing the NAV at the
start of the period with the NAV, plus dividends paid, at the
period end. Past performance does not guarantee future results.
(4) Annualised performance.
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
29/03/2018 103.38 106.00 115.38 118.00
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
31/07/2018 97.37 102.00 110.87 115.50
31/08/2018 94.64 98.75 109.64 113.75
28/09/2018 96.94 97.00 111.94 112.00
31/10/2018 95.45 94.00 110.45 109.00
30/11/2018 91.39 93.00 107.89 109.50
31/12/2018 90.08 88.00 106.58 104.50
31/01/2019 93.11 90.00 109.61 106.50
28/02/2019 93.72 89.50 111.72 107.50
29/03/2019 93.99 86.50 111.99 104.50
30/04/2019 96.37 90.50 114.37 108.50
31/05/2019 93.34 92.50 112.84 112.00
30/06/2019 95.48 92.75 114.98 112.25
31/07/2019 95.77 87.50 115.27 107.00
30/08/2019 94.99 84.00 115.99 105.00
30/09/2019 95.91 84.25 116.91 105.25
31/10/2019 98.04 89.50 119.04 110.50
30/11/2019 98.28 90.50 120.78 115.00
31/12/2019 99.38 94.00 121.88 116.50
7- Outlook
2019 saw a sharp decline in long-term interest rates across our
three investment currencies in anticipation of another easing
round of monetary policies. The banking sector also benefited
from a shift in the regulatory climate between the ECB as Single
Supervisor and the European banks. The handovers of Mario Draghi
to Christine Lagarde and Danièle Nouy to Andrea Enria came
alongside new monetary tools and regulatory considerations such
as deposit tiering and cross-border consolidation. All these developments
provided a favourable environment for our investment strategy.
The major milestone on the legislative front was the EU Banking
Package implemented in June 2019. This publication clarified the
rules for capital and MREL eligibility. In the last six months
of 2019, institutions announced the redemption of legacy instruments
either through calls at par or through tender offers (Santander,
Commerzbank, HSH but also Ageas) as new bonds were being disqualified
from regulatory capital and a significant proportion of T1 bonds
issued since 2014 lost their eligibility.
2020 started on a strong note. Emboldened by the strength of its
ever improving fundamentals (out of the 113 banks supervised by
the ECB, the average CET1 ratio stood at 14.37% as of Quarter
3 2019 and the average NPL ratio reduced to below 3.5%), the banking
sector saw a number of institutions formally announcing returns
of capital to shareholders by increasing cash dividends and implementing
share buybacks.
Now, as of April 2020, the financial sector, together with the
world economy, is facing the threat of a global pandemic triggered
by the COVID-19 virus. The impact, and its immediate consequences
on sectors such as aviation, shipping or tourism, remains difficult
to assess in its magnitude as well as its timing. While it could
eliminate a significant share of banks' 2020 profits, it does
not, in our opinion, represent a significant risk to banks' capital.
In order to mitigate these risks, the unprecedented measures announced
by the ECB and the Bank of England put the banks in the strongest
solvency position possible to keep supporting the economy. Still,
were some institutions to face a coupon risk on their hybrid bonds,
we would expect opportunities to arise for the Company's investment
strategy. Finally, despite the uncertainty arising from COVID-19,
we continue to expect regulators to press on banks in the recycling
of their legacy instruments, as the transition period to Basel
III has only two years left before the December 2021 deadline
.
Gildas Surry
Axiom Alternative Investments SARL
6 April 2020
Investment Portfolio as at 31 December 2019
GBP'000 % of NAV
Investments in capital instruments at fair value
through profit or loss
Bonds
Lloyds Bank PLC 13.000% Perp 4,535 4.97
Shawbrook Group PLC 7.875% Perp 4,514 4.94
Van Lanschot NV 6.750% Perp 2,757 3.02
eSure Group PLC 6.750% 12/19/24 2,517 2.76
Just Group PLC 8.125% 10/26/29 2,114 2.32
OneSavings Bank PLC 9.125% 05/25/22 2,101 2.30
Banco BPM SPA 9.000% Perp 1,973 2.16
CYBG PLC 8.750% Perp 1,956 2.14
Volksbank Wien AG 7.750% Perp 1,862 2.04
Banca Monte dei Paschi SPA 5.375% 01/18/28 1,731 1.90
Promontia MMB SASu 8.000% Perp 1,721 1.89
National Westminster Bank PLC 2.063% Perp 1,660 1.82
Caixa Economica Montepio Geral Caixa Economica Bancaria
SA 10.500% 04/03/29 1,654 1.81
NIBC Bank NV 6.000% Perp 1,648 1.81
Saxo Bank 9.750% Perp 1,549 1.70
Permanent TSB PLC 8.625% Perp 1,545 1.69
Unicredit SPA 6.625% Perp 1,514 1.66
International Personal Finance PLC 5.750% 07/04/21 1,504 1.65
Metro Bank PLC 9.500% 10/08/25 1,431 1.57
Ageasfinlux SA 0.947% Perp 1,431 1.57
BNP Paribas Fortis SA 1.602% Perp 1,379 1.51
Bank of Scotland PLC 13.625% Perp 1,362 1.49
Ibercaja Banco, SA 7.000% Perp 1,256 1.38
Cofinga Funding Two LP 1.180% Perp 1,228 1.35
FinecoBank Banca Fineco SPA 5.875% Perp 1,206 1.32
Novo Banco SA 3.500% 02/19/43 1,100 1.21
Bawag Group AG 5.000% Perp 1,089 1.19
Caixa Terrassa Societat de Participacions Preferents
SA 0.000% Perp 1,045 1.14
ASR Nederland NV 4.625% Perp 1,040 1.14
Skipton Building Society 12.875% Perp 1,036 1.13
HBOS Capital Funding LP 6.850% Perp 999 1.09
Banco Comercial Portugues SA 9.250% Perp 942 1.03
Caixa Sabadell Preferentes SA 1.532% Perp 942 1.03
BA-CA Finance Cayman Ltd 0.112% Perp 936 1.03
Banco Santander SA 1.000% Perp 900 0.99
Caixabank SA 5.250% Perp 866 0.95
Louvre Bidco SAS 5.375% 09/30/24 865 0.95
La Banque Postale SA 3.875% Perp 861 0.94
Saxo Bank A/S 8.125% Perp 849 0.93
Deutsche Postbank Funding Trust I 0.059% Perp 845 0.93
Unicredit SPA 8.000% Perp 825 0.90
Piraeus Bank SA 9.750% 06/26/24 817 0.90
HSH N Funding II via Banque de Luxembourg 7.250%
Perp 779 0.85
IKB Deutsche Industriebank AG 4.000% 01/31/28 760 0.83
Deutsche Bank Capital Finance Trust I 1.750% Perp 737 0.81
Novo Banco SA 8.500% 07/06/28 718 0.79
Bank of Ireland 13.375% Perp 701 0.77
ABN Amro Bank NV 5.750% Perp 701 0.77
UniCredit SPA 7.500% Perp 694 0.76
HSBC Capital Funding LP 5.844% Perp 683 0.75
Caixa Economica Montepio Geral 5.000% Perp 681 0.75
HSB Group Inc 2.911% 07/15/27 675 0.74
Novo Banco SA Luxembourg 0.000% 04/16/46 645 0.71
Novo Banco SA 02/12/49 616 0.67
Banco de Credito Social Cooperativo SA 7.750% 06/07/22 602 0.66
Metro Bank PLC 5.500% 06/26/28 532 0.58
Sainsburys Bank PLC 6.000% 11/23/27 519 0.57
Lloyds Bank PLC 2.135% Perp 511 0.56
RZB Finance Jersey III Ltd 0.181% Perp 497 0.54
Lloyds Bank PLC 2.188% Perp 467 0.51
GNB Cia de Securos de Vida SA 3.100% Perp 467 0.51
Newcastle Building Society 12.625% Perp 426 0.47
Newcastle Building Society 10.750% Perp 388 0.42
Bank of Scotland PLC 9.375% Perp 358 0.39
Coventry Building Society 12.125% Perp 354 0.39
Leeds Building Society 13.375% Perp 276 0.30
Caja de Seguras Reunidos Cia de Seguros y Reaseguros
SA 8.000% 02/17/26 268 0.29
BA-CA Fin Cayman 2 Ltd 0.735% Perp 267 0.29
HSBC Bank PLC 2.500% Perp 264 0.29
DZ Bank Perpetual Funding Issuer Jersey Ltd 0.084%
Perp 216 0.24
Aegon NV 1.506% Perp 178 0.19
Alpha Group Jersey Ltd 3.280% Perp 178 0.19
Deutsche Postbank Funding Trust III 0.427% Perp 170 0.19
National Westminster Bank PLC 11.500% Perp 127 0.14
Bank of Scotland PLC 12.000% Perp 115 0.13
National Westminster Bank PLC 11.500% Perp 113 0.12
IKB Funding Trust I 1.110% Perp 109 0.12
Ulster Bank Ireland DAC 11.750% Perp 65 0.07
Banco Popular Espanol SA 8.000% 07/29/21 48 0.05
Banco Pinto & Sotto Mayor, SA 1.055% Perp 42 0.05
Banco Popular Espanol SA 8.250% 10/19/21 10 0.01
Popular Capital SA 6.000% Perp - -
Popular Capital SA Perp - -
------------ ------------
80,062 87.72
Other capital instruments
National Westminster Bank PLC 9.000% Perp 1,967 2.15
Lloyds Banking Group PLC 9.250% Perp 1,228 1.34
Lloyds Banking Group PLC 9.750% Perp 738 0.81
Bank of Ireland 12.625% Perp 722 0.79
Ecclesiastical Insurance Group PLC 8.625% Perp 564 0.62
Standard Chartered PLC 7.375% Perp 484 0.53
Standard Chartered PLC 8.250% Perp 159 0.17
------------ ------------
5,862 6.41
------------ ------------
Total investments in capital instruments at fair
value through profit or loss 85,924 94.13
Derivative financial assets at fair value through
profit or loss
Sale and repurchase agreement in respect of Banque
Federative du Credit Mutuel SA 0.181% Perp 1,292 1.42
Markit iTraxx Europe Subordinated Financial Index
06/20/22 204 0.22
Markit iTraxx Europe Subordinated Financial Index
12/20/21 193 0.21
Intesa Sanpaolo SpA Subordinated CDS 12/20/24 188 0.21
BNP Paribas SA Senior CDS 12/20/26 155 0.17
Markit iTraxx Europe Subordinated Financial Index
06/20/22 102 0.11
Markit iTraxx Europe Subordinated Financial Index
12/20/21 96 0.11
Markit iTraxx Europe Subordinated Financial Index
12/20/22 89 0.10
Lloyds Bank PLC Senior CDS 06/20/22 84 0.09
Markit iTraxx Europe Subordinated Financial Index
12/20/24 82 0.09
Standard Chartered Bank Senior CDS 12/20/21 74 0.08
ING Bank NV Subordinated CDS 12/20/21 41 0.04
Lloyds Bank PLC Subordinated CDS 12/20/21 34 0.04
Intesa Sanpaola SpA Senior CDS 12/20/21 30 0.03
Deutsche Bank AG Other CDS 12/20/24 11 0.01
Intesa Sanpaolo SpA Subordinated CDS 12/20/21 10 0.01
Royal Bank of Scotland Group PLC Subordinated CDS
12/20/24 5 0.01
GBP/EUR foreign currency forward 863 0.95
GBP/USD foreign currency forward 250 0.27
GBP/EUR foreign currency forward 82 0.09
GBP/DKK foreign currency forward 17 0.02
GBP/USD foreign currency forward 7 0.01
------------ ------------
Derivative financial assets at fair value through
profit or loss 3,909 4.29
Derivative financial liabilities at fair value through
profit or loss
Sale and repurchase agreement in respect of Lloyds
Bank PLC 13.000% Perp (3,883) (4.25)
Sale and repurchase agreement in respect of Shawbrook
Group PLC 7.875% Perp (3,713) (4.07)
Sale and repurchase agreement in respect of Volksbank
Wien AG 7.750% Perp (1,543) (1.69)
Sale and repurchase agreement in respect of Banco
BPM SPA 9.000% Perp (1,506) (1.65)
Sale and repurchase agreement in respect of UniCredit
SPA 6.625% Perp (1,359) (1.49)
Sale and repurchase agreement in respect of National
Westminster Bank 2.063% Perp (1,227) (1.34)
Sale and repurchase agreement in respect of BNP
Paribas Fortis SA 2.063% Perp (993) (1.09)
Sale and repurchase agreement in respect of Cofinga
Funding Two LP 1.180% Perp (918) (1.01)
Sale and repurchase agreement in respect of ASR
Nederland NV 4.625% Perp (910) (1.00)
Markit iTraxx Europe Senior Financial Index 12/20/24 (162) (0.18)
United Kingdom of Great Britain and Northern Ireland
Senior CDS 06/20/23 (86) (0.09)
Lloyds Banking Group PLC Senior CDS 06/20/22 (74) (0.08)
Lloyds Banking Group PLC Senior CDS 06/20/22 (44) (0.05)
UniCredit SpA Subordinated CDS 12/20/22 (16) (0.02)
Danske Bank A/S Subordinated CDS 12/20/23 - (0.00)
------------ ------------
Derivative financial liabilities at fair value through
profit or loss (16,434) (18.01)
Related party fund investments
Axiom Global CoCo UCIT ETF USD-hedged 2,898 3.17
Axiom Capital Contingent - Class E 2,774 3.04
Axiom Global CoCo UCIT ETF GBP-hedged 2,092 2.29
------------ ------------
Related party fund investments 7,764 8.50
Other assets and liabilities
Short position in respect of Banque Federative du
Credit Mutuel SA 0.181% Perp covered by sale and
repurchase agreement (1,336) (1.46)
Cash and cash equivalents 6,102 6.68
Collateral accounts for derivative financial instruments
at fair value through profit or loss 4,999 5.48
Other receivables and prepayments 1,625 1.78
Collateral accounts for derivative financial instruments
at fair value through profit or loss (803) (0.88)
Other payables and accruals (466) (0.51)
------------ ------------
Other assets and liabilities 10,121 11.09
------------ ------------
Net assets 91,284 100.00
------------ ------------
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, along with controls employed to mitigate
those risks, are set out below.
Macroeconomic risk
Adverse changes affecting the global financial markets and economy
as a whole, and in particular European financial debt markets,
may have a material negative impact on the performance of the
Company's investments. In addition, the Company's non-Pounds Sterling
investments may be affected by fluctuations in currency exchange
rates. Prices of financial and derivative instruments in which
the Company invests are subject to significant volatility due
to market risk.
The Company may use derivatives, including options, short market
indices, credit default swaps ("CDS"), and others, to mitigate
market-related downside risk, but the Company is not committed
to maintaining market hedges at any time.
The Company has a systematic hedging policy with respect to currency
risk. Subject only to the availability of suitable arrangements,
the assets denominated in currencies other than Pounds Sterling
are hedged by the Company (to a certain extent) by using currency
forward agreements to buy or sell a specified amount of Pounds
Sterling on a particular date in the future.
Historically, foreign exchange hedging has undermined many closed-ended
investment funds, as a result of sharp movements in the foreign
exchange rates leaving large hedging losses which could not be
met as assets were illiquid and banks were under severe balance
sheet strain and could not offer forbearance on facilities in
breach. The Company is exposed to foreign exchange hedging risks
(see note 24) but this risk is mitigated by the following: - Based
on the worst case scenario observed in monthly spot movements
in the past 10 years, our worst case expected hedging loss on
expiry would be 2.64% of NAV; - Our portfolio trading liquidity
is such that it would take one day, in normal circumstances, to
liquidate sufficient assets to meet such an anticipated worst
case loss; and - In "stressed" markets, we estimate it would take
four days to raise such liquidity.
While our economic scenarios were used to calculate a range of
outcomes, the potential economic impact of the COVID-19 was not
explicitly considered at the year end due to the limited information
and emergent nature of the outbreak.
Following the UK's exit from the EU on 31 January 2020, and until
trade agreements are signed, there may be some uncertainty in
UK and European markets as they adjust to the new relationship
between the UK and the EU and the rest of the world. Although
the exact impact of Brexit is not known, the Board believes that
the Company is well placed to deal with future impacts from it.
The COVID-19 outbreak is a new emerging risk to the global economy.
The Investment Manager and Administrator have invoked their business
continuity plans to help ensure the safety and well-being of their
staff thereby retaining the ability to maintain business operations.
These actions help to ensure business resilience. The situation
is changing so rapidly that the full impact cannot yet be understood,
but the Company will continue to monitor the situation closely.
Investment risk
There are certain risks associated with the Company's investment
activities that are largely a result of the Company's investment
policy (e.g. a portfolio concentrated on European financial debt)
and certain investment techniques which are inherently risky (e.g.
short selling).
There are numerous risks associated with having a concentrated
portfolio and the primary risk management tool used by the Company
is the extensive research performed by the Investment Manager
prior to investment, along with the ongoing monitoring of a position
once held in the Company's portfolio. The Board reviews portfolio
concentration and receives a detailed overview of the portfolio
positions quarterly, and more frequently if necessary.
Counterparty risk
The Company has credit and operational risk exposure to its counterparties
which will require it to post collateral to support its obligations
in connection with forwards and other derivative instruments.
Cash pending investment or held on deposit will also be held with
counterparties. The insolvency of a counterparty would result
in a loss to the Company which could be material.
In order to mitigate this risk the Company seeks to trade only
with reputable counterparties that the Investment Manager believes
to be creditworthy. The Investment Manager negotiates its International
Swaps and Derivatives Association ("ISDA") agreements to include
bilateral collateral agreements. In addition, cash held is only
with financial institutions with short term credit ratings of
A-1 (Standard & Poor's) or P-1 (Moody's) or better.
Exposure to counterparties is monitored by the Investment Manager
and reported to the Board each quarter.
Credit risk
The Company may use leverage to meet its investment objectives.
The Company will also use forward contracts to hedge its non-Pounds
Sterling assets. In order to do this, it will need to have in
place credit lines with one or more financial institutions. Due
to market conditions or other factors, credit lines may be withdrawn
and it might not be possible to put in place alternative arrangements.
As such, the ability to meet the Company's investment objective
and/or hedging strategy may not be met. The Investment Manager
monitors the use of credit lines and reports to the Board each
quarter.
Share price risk
The Company is exposed to the risk that its shares may trade at
a significant discount to NAV or that the market in the shares
will be illiquid. To mitigate this risk the Company increased
the frequency of the publication of its NAV to daily and has retained
the Broker to maintain regular contact with existing and potential
shareholders. In addition, the Company may instigate a share buyback
programme in an attempt to reduce the discount. The Board monitors
the trading activity of the shares on a regular basis and addresses
the premium/discount to NAV at its regular quarterly meetings.
From 1 January 2019 to 31 December 2019, the Company's shares
traded at an average discount to NAV of 6.26% (2018: 1.73% premium).
The discount rose to 12.66% on 12 September 2019 as the NAV increased
as a result of corporate bond markets delivering positive returns.
The discount decreased to 0.50% on 3 June 2019 as trade tensions
influenced market returns. At the year end the shares traded at
a 5.41% discount to NAV (2018: 2.31% discount).
Regulatory risk
Brexit may, in time, lead to divergence in regulatory regimes
between the UK and the EU and may create additional investment
and trading opportunities. However, in a process which is yet
to be determined, it is too early to fully appreciate what these
opportunities will be or when they will present themselves.
Changes in laws or regulations, or a failure to comply with these,
could have a detrimental impact on the Company's operations. Prior
to initiating a position, the Investment Manager considers any
possible legal and regulatory issues that could impact the investment
and the Company. The Company's advisers and service providers
monitor regulatory changes on an ongoing basis, and the Board
is apprised of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Reputational risk
Reputational damage to the Company or the Investment Manager as
a result of negative publicity could adversely affect the Company.
To address this risk, the Company has engaged a public relations
firm to monitor media coverage and actively engage with media
sources as necessary. The Board also receives updates from the
Broker and the Investment Manager on a quarterly basis and considers
measures to address concerns as they arise.
Environmental, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed
by other organisations. Therefore, the Company does not combust
fuel and does not have any greenhouse gas emissions to report
from its operations, nor does it have direct responsibility for
any other emission producing sources.
When making investment decisions, the Investment Manager does
not consider the impact that an entity in which the Company invests
may have on the community. However, the Board believes that all
companies have a duty to consider their impact on the community
and the environment. The Directors, Administrator, Company Secretary
and external auditor are all based in Guernsey and Board meetings
are held in Guernsey, thus negating the need for long commutes
or flights to/from Board meetings, and thereby minimising the
negative environmental impact of travel to/from Board meetings.
Gender Diversity
The Board of Directors of the Company currently comprises three
male Directors. Further information in relation to the Board's
policy on diversity can be found in the Directors' Remuneration
Report.
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs")
to help assess the Company's performance against its objectives.
Further information regarding the Company's performance is provided
in the Chairman's Statement and the Investment Manager's Report.
Dividends per Ordinary Share
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 in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company announced dividends of GBP5,511,000 (6.00p per Ordinary
Share) for the year ended 31 December 2019 (2018: 6.00p per Ordinary
Share) (see note 6 for further details). The Company has met the
6.00p dividend per share target each year since inception and
expects to continue to be able to pay out dividends of this level
in the future.
NAV and total return
In line with the Prospectus, the Company is targeting a net total
return on invested capital of approximately 10% p.a. over a seven
year period.
The Company achieved a total return of 16.98% in the year ended
31 December 2019 (2018: -8.00%). The total return from inception
to 31 December 2019 was 5.39% p.a., which is below the long term
target return of 10% p.a. net of operating expenses. Although,
the future rate of return and dividends cannot be guaranteed,
together with the Investment Manager, the Board believes that
the Company's long-term target return will be achievable in the
future.
The Board regularly monitors the premium/discount of the price
of the Ordinary Shares to the NAV per share. Should the discount
of share price to NAV become unacceptable to the Board, the Company
may buy back some of its shares. Accordingly, the Board puts forward
a proposal to Shareholders at the Annual General Meeting to renew
the authority to buy back shares.
At 31 December 2019 the share price was 94.00p (2018: 88.00p),
a 5.41% discount to NAV (2018: 2.31% discount).
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard
to the matters set out in Section 172(1)(a) to (f) of the Companies
Act 2006. Although, as a Guernsey company, the Company is not
required to directly comply with the Companies Act 2006, Section
172 is considered as a requirement of the AIC Code of Corporate
Governance with which the Company complies (see the Corporate
Governance Report for further details).
The Board considers the needs of a number of stakeholders when
considering the long-term future of the Company. The key stakeholders
with which the Board has liaised during the year ended 31 December
2019 were:
* Shareholders; and
* Key service providers..
Shareholders
The Company's significant Shareholders at the year end can be
found in the Directors' Report.
When making principal decisions it is considered imperative to
analyse the views of the Company's investors, to ensure that there
may continue to be a supply of capital enabling the Company to
continue to expand its shareholder base, realise its potential
for growth and achieve its long-term Investment Objective (as
disclosed in the Overview and Investment Strategy). The key performance
indicators, detailed above, have been considered on an ongoing
basis as part of the Board's decision making process.
Details of how the Director's communicate with Shareholders can
be found in the Corporate Governance Report.
Other than the routine engagement with investors regarding strategy
and performance, Board composition and absence of a nomination
committee were discussed with investors. Following these discussions,
the Board considered its current size and structure in detail
and concluded that it was not currently appropriate to expand
the Board or establish additional committees although this would
be kept under review.
Key service providers
Details of the Company's key service providers can be found in
the Directors' Report.
The key service providers are fundamental to the Company's ability
to continue in the same state as any changes could disrupt the
expected timeliness of information provided to the markets. In
turn this would be likely to have a detrimental impact on the
Company's reputation. Reputational risk is discussed further in
the Principal Risks.
The Board has continuous access to the Company's key service providers
and has open two-way communication with them. Key aspects of discussion
with these service providers, other than those regarding Company
performance and strategy, were in respect of fees payable to these
providers.
Following these discussions, no fee arrangements were amended
in the year ended 31 December 2019.
William Scott
Chairman
6 April 2020
Statement of Comprehensive Income
for the year ended 31 December 2019
Year ended Year ended
31 December 31 December
Note 2019 2018
GBP'000 GBP'000
Income
Capital instrument income 4,445 4,493
Credit default swap income 600 882
Bank interest receivable 71 80
------------ ------------
Total income 5,116 5,455
------------ ------------
Investment gains and losses on investments
held at fair value through profit
or loss
Realised gains on disposal of capital
instruments and other investments 15 1,179 851
Movement in unrealised gains/(losses)
on capital instruments and other investments 15 4,815 (7,860)
Realised losses on derivative financial
instruments 18 (439) (887)
Movement in unrealised gains/(losses)
on derivative financial instruments 18 5,299 (4,123)
------------ ------------
Total investment gains and losses 10,854 (12,019)
------------ ------------
Expenses
Investment management fee 8a (796) (549)
Other expenses 12 (279) (269)
Performance fee 8a (136) -
Administration fee 8b (128) (125)
Directors' fees 8f (95) (95)
Interest payable and similar charges 11 (51) (180)
Transfer of listing fees - (192)
------------ ------------
Total expenses (1,485) (1,410)
------------ ------------
Profit/(loss) from operating activities
before gains and losses on foreign
currency transactions 14,485 (7,974)
(Loss)/gain on foreign currency (603) 875
------------ ------------
Profit/(loss) for the year attributable
to the Owners of the Company 13,882 (7,099)
------------ ------------
Earnings/(loss) per Ordinary Share:
basic and diluted 14 15.21p (8.48)p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
There were no other comprehensive income items in the year.
The accompanying notes form an integral part of these financial
statements.
Statement of Changes in Equity
for the year ended 31 December 2019
Distributable
reserves and
Note total
GBP'000
Opening balance at 1 January 2018 79,364
Loss for the year ended 31 December
2018 (7,099)
Contributions by and distributions to
Owners
Ordinary Shares issued 21 10,051
Share issue costs (391)
Dividends paid 6 (4,949)
------------
At 31 December 2018 76,976
Profit for the year ended 31 December
2019 13,882
Contributions by and distributions to
Owners
Ordinary Shares issued 21 5,941
Share issue costs (100)
Dividends paid 6 (5,415)
------------
At 31 December 2019 91,284
------------
The accompanying notes form an integral part of these financial
statements.
Statement of Financial Position
as at 31 December 2019
As at As at
Note 31 December 31 December
2019 2018
GBP'000 GBP'000
Assets
Investments in capital instruments
at fair value through profit or 15,
loss 19 85,924 81,341
Other investments at fair value 15,
through profit or loss 19 7,764 3,050
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 4,999 8,922
Derivative financial assets at fair
value through profit or loss 18 3,909 2,574
Other receivables and prepayments 17 1,625 2,088
Cash and cash equivalents 6,102 2,612
------------ ------------
Total assets 110,323 100,587
------------ ------------
Current liabilities
Derivative financial liabilities
at fair value through profit or
loss 18 (16,434) (21,284)
Short positions covered by reverse
sale and repurchase agreements 15 (1,336) (1,451)
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 (803) -
Other payables and accruals 20 (466) (710)
Bank overdrafts - (166)
------------ ------------
Total liabilities (19,039) (23,611)
------------ ------------
Net assets 91,284 76,976
------------ ------------
Share capital and reserves
Share capital 21 - -
Distributable reserves 91,284 76,976
------------ ------------
Total equity holders' funds 91,284 76,976
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 22 99.38p 90.08p
These financial statements were approved by the Board of Directors
on 6 April 2020 and were signed on its behalf by:
William Scott John Renouf
Chairman Director
6 April 2020 6 April 2020
The accompanying notes form an integral part of these financial
statements.
Statement of Cash Flows
for the year ended 31 December 2019
Year ended Year ended
31 December 31 December
Note 2019 2018
GBP'000 GBP'000
Cash flows from operating activities
Net profit/(loss) before taxation 13,882 (7,099)
Adjustments for:
Foreign exchange movements 603 (875)
Total investment (gains)/losses at fair
value through profit or loss (10,854) 12,019
Cash flows relating to financial instruments:
Payment from/(to) collateral accounts
for derivative financial instruments 16 4,727 (5,780)
Purchase of investments at fair value
through profit or loss 15 (65,848) (73,722)
Sale of investments at fair value through
profit or loss 15 63,417 55,752
Premiums received from selling credit
default swap agreements 18 1,658 1,332
Premiums paid on buying credit default
swap agreements 18 (2,982) (476)
Purchase of foreign currency derivatives 18 (324,487) (287,992)
Close-out of foreign currency derivatives 18 325,345 287,555
Purchase of bond futures 18 (2,336) (5,390)
Sale of bond futures 18 1,384 4,656
Proceeds from sale and repurchase agreements 18 63,360 102,999
Payments to open reverse sale and repurchase
agreements 18 (2,678) (10,035)
Payments for closure of sale and repurchase
agreements 18 (64,283) (92,398)
Proceeds from closure of reverse sale
and repurchase agreements 18 3,694 8,537
Opening of short positions 15 3,374 5,912
Closure of short positions 15 (3,609) (5,023)
------------ ------------
Net cash outflow from operating activities
before working capital changes 4,367 (10,028)
Increase in other receivables and prepayments (290) (664)
Decrease in other payables and accruals (179) (31)
------------ ------------
Net cash inflow/(outflow) from operating
activities 3,898 (10,723)
Cash flows from financing activities
Proceeds from issue of Ordinary Shares 5,941 10,051
Share issue costs paid 23 (165) (368)
Dividends paid 6 (5,415) (4,948)
------------ ------------
Net cash inflow from financing activities 361 4,735
------------ ------------
Increase/(decrease) in cash and cash
equivalents 4,259 (5,988)
Cash and cash equivalents brought forward 2,446 7,559
Effect of foreign exchange on cash and
cash equivalents (603) 875
------------ ------------
Cash and cash equivalents carried forward
* 6,102 2,446
------------ ------------
Supplemental disclosure of cash flow
information
Cash paid during the year for interest (819) (930)
Cash received during the year for interest 5,290 5,319
Cash received during the year for dividends 228 289
* Cash and cash equivalents at the year end includes bank overdrafts
that are repayable on demand and form an integral part of the
Company's cash management.
The accompanying notes form an integral part of these financial
statements.
Notes to the Financial Statements
for the year ended 31 December 2019
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Companies (Guernsey) Law, 2008 on 7 October
2015 with registered number 61003. Its Ordinary Shares were admitted
to trading on the Premium Segment of the main market of the London
Stock Exchange and to the premium listing segment of the FCA's
Official List on 15 October 2018 (prior to this, the Ordinary
Shares traded on the Specialist Fund Segment ("SFS") of the London
Stock Exchange).
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 will focus 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 will invest its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company
for the year ended 31 December 2019. The comparative figures stated
were for the year ended 31 December 2018. These financial statements
have been prepared in accordance with International Financial
Reporting Standards ("IFRS"), as adopted by the European Union.
These financial statements are presented in Sterling, which is
also the Company's functional currency (please see notes 3b and
4i for further details). All amounts are rounded to the nearest
thousand.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its cash resources, 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 (see the going concern section and viability statement
in the Director's Report for further information). Therefore,
the financial statements have been prepared on a going concern
basis.
c) Basis of measurement
The financial statements have been prepared on a historical cost
basis, except for certain financial instruments, which are measured
at fair value through profit or loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
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.
Judgements made by management in the application of IFRS that
have a significant effect on the financial statements and estimates
with a significant risk of material adjustment are discussed in
note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, capital instrument income and credit default swap
income is recognised on an accruals 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) 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 31 December 2019
were GBP1/EUR1.1825, GBP1/US$1.3257, GBP1/DKK8.8323, GBP1/CA$1.7226
and GBP1/SGD1.7841 (2018: GBP1/EUR1.1122, GBP1/US$1.2754, GBP1/DKK8.3033,
GBP1/CA$1.7403 and GBP1/SGD1.7383).
c) Taxation
Investment income is recorded gross of applicable taxes and any
tax expenses are recognised through the Statement of Comprehensive
Income as incurred.
d) Financial assets and liabilities
The financial assets and liabilities of the Company are investments
in capital instruments at fair value through profit or loss, other
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.
In accordance with IFRS 9, the Company classifies its financial
assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities as discussed
below.
In applying that classification, a financial asset or financial
liability is considered to be held for trading if:
* It is acquired or incurred principally for the
purpose of selling or repurchasing it in the near
term; or
* On initial recognition, it is part of a portfolio of
identified financial instruments that are managed
together and for which, there is evidence of a recent
actual pattern of short-term profit-taking; or
* It is a derivative (except for a derivative that is a
financial guarantee contract or a designated and
effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured
at amortised cost or measured at fair value through profit or
loss on the basis of both:
* The business model for managing the financial assets;
and
* The contractual cash flow characteristics of the
financial asset.
A financial asset is measured at fair value through profit or
loss if:
* Its contractual terms do not give rise to cash flows
on specified dates that are solely payments of
principal interest ("SPPI") on the principal amount
outstanding; or
* It is not held within a business model whose
objective is either to collect contractual cash flows,
or to both collect contractual cash flows and sell;
or
* At initial recognition, it is irrevocably designated
as measured at fair value through profit or loss when
doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would
otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on
different bases.
The Company includes in this category:
* Instruments held for trading. This category includes
equity instruments and debt instruments which are
acquired principally for the purpose of generating a
profit from short-term fluctuations in price. This
category also includes derivative financial assets at
fair value through profit or loss.
* Debt instruments. These include investments that are
held under a business model to manage them on a fair
value basis for investment income and fair value
gains.
Financial liabilities
A financial liability is measured at fair value through profit
or loss if it meets the definition of held for trading.
The Company includes in this category, derivative contracts in
a liability position and equity and debt instruments sold short
since they are classified as held for trading.
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. Sale and repurchase
agreements are recognised at fair value through profit or loss
as they are generally not held to maturity and so are held for
trading. 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.
These financial instruments are classified 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 dividends 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 investments 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 a legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
e) 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 comprise 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.
f) Receivables and prepayments
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category other short-term receivables.
g) 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.
h) Payables and accruals
Trade and other payables are carried at payment or settlement
amounts. When payables are received in currencies other than the
reporting currency, they are carried forward, translated at the
rate prevailing at the year end date.
i) 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.
j) Distributable reserves
All income and expenses, foreign exchange gains and losses and
investment gains and losses of the Company are allocated to the
distributable reserve.
k) 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 year end.
Earnings per share is calculated by dividing the earnings for
the year by the weighted average number of Ordinary Shares in
issue during the year.
l) Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the
previous financial period. The Company adopted the amendments
to IAS 12, Income Taxes, IAS 23, Borrowing Costs and IFRIC 23,
Uncertainty over Income Tax Treatments. The adoption of these
accounting standards did not have any effect on the Company's
Statement of Financial Position or equity.
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: Disclosures (amendments 1 January 2020
7 regarding pre-replacement issues in the
context of the IBOR reform)
IFRS Financial Instruments (amendments regarding 1 January 2020
9 pre-replacement issues in the context
of the IBOR reform)
IAS 1 Presentation of Financial Statements (amendments 1 January 2020
regarding the definition of material)
IAS 8 Accounting Policies, Changes in Accounting 1 January 2020
Estimates and Errors (amendments regarding
the definition of material)
4. Use of judgements and estimates
The preparation of the Company's financial statements requires
the Directors to make judgements, estimates and assumptions that
affect the reported amounts recognised in the financial statements
and disclosure of contingent liabilities. 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. 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.
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
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 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
that have had a significant impact on the financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the 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 19.
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 in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company has declared the following dividends during the year
ended 31 December 2019:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 5,415 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2019 (1,282) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,378 1.50p
------------ ------------
Dividends declared in respect
of the year 5,511 6.00p
The Company declared the following dividends during the year ended
31 December 2018:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 4,949 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2018 (1,140) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,282 1.50p
------------ ------------
Dividends declared in respect
of the year 5,090 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the year a total of GBP5,415,000 (2018: GBP4,949,000) was
incurred in respect of dividends, none of which was outstanding
at the reporting date. The fourth dividend declared out of the
profits for the year of GBP1,378,000 had not been provided for
at 31 December 2019 as, in accordance with IFRS, it was not 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
advisors and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 31 December 2019, the Company had holdings in the following
investments which were managed by the Investment Manager:
31 December 2019 31 December 2018
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Global CoCo UCIT ETF USD-hedged 35 2,984 2,898 - - -
Axiom Contingent Capital - Class
E 2,450 2,462 2,774 3,119 3,134 3,050
Axiom Global CoCo UCIT ETF GBP-hedged 20 2,000 2,092 - - -
During the year, the Company purchased:
* 70 units in UC AXI Global CoCo Bonds UCITS for
GBP6,040,000;
* 35 units in Axiom Global CoCo UCIT ETF USD-hedged for
GBP2,984,000; and
* 20 units in Axiom Global CoCo UCIT ETF GBP-hedged for
GBP2,000,000.
During the year, the Company sold:
* 669 units in Axiom Contingent Capital - Class E for
GBP703,000, realising a gain of GBP31,000; and
* 70 units in UC AXI Global CoCo Bonds UCITS for
GBP6,679,000, realising a gain of GBP639,000.
During the year ended 31 December 2018, the Company:
* purchased 3,110 units in Long Short - Class C for
GBP2,880,000;
* purchased 1,000 units in Axiom Equity - Class C for
GBP758,000;
* purchased 3,119 units in Axiom Contingent Capital -
Class E for GBP3,134,000;
* sold 1,739 units in Axiom Premium Multi Strategies
for GBP2,315,000, realising a gain of GBP168,000;
* sold 3,110 units in Axiom Long Short - Class C for
GBP2,562,000 realising a loss of GBP318,000; and
* sold 1,000 units in Axiom Equity - Class C for
GBP560,000 realising a loss of GBP198,000.
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.
In respect of the management fee calculation above, any related
party holdings are deducted from the NAV.
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 year, a total of GBP796,000 (2018: GBP549,000) was
incurred in respect of Investment Management fees, of which GBP189,000
was payable at the reporting date (2018: GBP186,000).
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
year was GBP2,000 (2018: GBP259,000), and at 31 December 2019
the Quarterly Expenses Excess and Annual Expenses Excess which
could be payable to the Investment Manager in future periods was
GBP725,000 (2018: GBP723,000) (see note 27).
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 the 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 average 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 accounts
of the Company.
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.
At 31 December 2019, a performance fee of GBP136,000 (2018: GBPnil)
was payable by the Company in respect of the year then ended.
On 21 February 2019, the Company paid the Investment Manager GBP234,000,
in settlement of the 2017 performance fee, which was subsequently
used to purchase 261,970 shares in the Company.
b) Administrator and Company Secretary
Elysium 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 GBP110,000 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 work undertaken
in connection with the daily NAV, subject to a maximum aggregate
amount of GBP10,000 per annum. In 2018, the Administrator was
also paid GBP5,000 in respect of the work undertaken on the transfer
of listing and GBP33,000 in respect of the new Prospectus. The
new Prospectus fees are included in share issue costs in the Statement
of Changes in Equity.
During the year, a total of GBP128,000 (2018: GBP125,000) was
incurred in respect of Administration fees of which GBP32,000
(2018: GBP31,000) was payable at the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") has been appointed
to act as Corporate Broker ("Broker") for the Company, in consideration
for which the Company pays Winterflood an annual retainer fee
of GBP35,000 per annum.
For the year to 31 December 2019, the Company incurred Broker
fees of GBP37,000 (2018: GBP35,000) of which GBP6,000 was payable
at the year end date (2018: GBP6,000).
In the year ended 2018, Winterflood was paid GBP50,000 for its
work on the transfer of listing and GBP191,000 for its work on
the placings and new Prospectus. The Prospectus and placing fees
are included in share issue costs in the Statement of Changes
in Equity.
d) Registrar
Link Market Services (Guernsey) Limited is 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 year, a total of GBP19,000 (2018: GBP19,000) was incurred
in respect of Registrar fees, of which GBP1,000 was payable at
31 December 2019 (2018: GBP3,000).
In the year ended 31 December 2018, Link was also paid GBP4,000
for its work on the General Meeting required to effect the changes
to enable the Company to be listed on the Premium Segment.
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 year, a total of GBP34,000 (2018: GBP38,000) was incurred
in respect of depositary fees, of which GBP13,000 was payable
at the reporting date (2018: GBP6,000).
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent 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 GBP42,000 (2018: GBP39,000) was
incurred in respect of valuation agent fees paid to CACEIS Bank
Luxembourg, of which GBP14,000 was payable at 31 December 2019
(2018: 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 year, a total of GBP95,000 (2018: GBP95,000) was incurred
in respect of Directors' fees, none of which was payable at the
reporting date (2018: GBPnil). No bonus or pension contributions
were paid or payable on behalf of the Directors.
9. Key management and employees
Other than the Non-Executive Directors, the Company has had no
employees since its incorporation.
10. Auditor's remuneration
For the year ended 31 December 2019, total fees charged by EY,
together with amounts accrued at 31 December 2019, amounted to
GBP43,000 (2018: GBP53,000), all of which related to audit services
(2018 fee: GBP36,000, less 2017 over accrual: GBP12,000, and GBP29,000
reporting accountant work on the transfer of listing and the issue
of the new Prospectus in October 2018). As at 31 December 2019,
GBP30,000 (2018: GBP36,000) was due to EY.
11. Interest payable and similar charges
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Bank interest 48 100
Interest payable on sale and repurchase
agreements 2 77
Commission 1 3
------------ ------------
51 180
------------ ------------
12. Other expenses
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Other expenses 53 54
Audit fees (note 10) 43 24
PR expenses 43 39
Valuation agent fees 42 39
Broker fees (note 8c) 37 35
Depositary fees (note 8e) 34 38
Registrar fees (note 8d) 19 19
Legal fees 8 21
------------ ------------
279 269
------------ ------------
13. 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.
14. Earnings per Ordinary Share
The earnings per Ordinary Share of 15.21p (2018: loss of 8.48p)
is based on a profit attributable to owners of the Company of
GBP13,882,000 (2018: loss of GBP7,099,000) and on a weighted average
number of 91,256,658 (2018: 83,724,996) Ordinary Shares in issue
since 1 January 2019. There is no difference between the basic
and diluted earnings/(loss) per share.
15. Investments at fair value through profit or loss
Movements in gains/(losses) in the year
31 December 2019 31 December 2018
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in capital
instruments 4,575 467 5,042 (7,686) 1,031 (6,655)
Other investments 402 670 1,072 (283) (347) (630)
Short positions covered
by reverse sale and
repurchase agreements (162) 42 (120) 109 167 276
------------ ------------ ------------ ------------ ------------ ------------
4,815 1,179 5,994 (7,860) 851 (7,009)
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December 31 December
2019 2018
GBP'000 GBP'000
Investments in capital instruments 85,924 81,341
Other investments 7,764 3,050
Short positions covered by reverse sale
and repurchase agreements (1,336) (1,451)
------------ ------------
Investments at fair value through profit
or loss 92,352 82,940
------------ ------------
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 consist of investments in open ended
funds managed by the Investment Manager (see note 7) to obtain
diversified exposure on bank equities.
As at 31 December 2019, the Company had ten (2018: ten) open sale
and repurchase agreements, including one (2018: two) reverse sale
and repurchase agreement (see note 18). The reverse sale and repurchase
agreement was open ended and was used to cover the sale of a capital
instrument (the short position noted above).
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short position) at 31 December
2019 was GBP19,596,000 (2018: GBP18,628,000). The fair value net
of the short position was GBP18,260,000 (2018: GBP17,177,000).
16. Collateral accounts for derivative financial instruments at
fair value through profit or loss
31 December 31 December
2019 2018
GBP'000 GBP'000
JP Morgan 3,660 6,290
Goldman Sachs International 754 1,819
Credit Suisse 585 616
CACEIS Bank France - 197
------------ ------------
4,999 8,922
CACEIS Bank France - negative balance (803) -
------------ ------------
Net balance on collateral accounts held
by brokers 4,196 8,922
------------ ------------
With respect to derivatives, the Company pledges cash and/or other
liquid securities ("Collateral") to third parties 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 derivatives
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 under the derivatives.
17. Other receivables and prepayments
31 December 31 December
2019 2018
GBP'000 GBP'000
Accrued capital instrument income receivable 1,591 1,286
Interest due on credit default swaps 15 24
Prepayments 15 13
Interest due on collateral held by brokers 4 7
Due from sale of capital instrument - 758
------------ ------------
1,625 2,088
------------ ------------
18. 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.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Opening balance (2,419) 915
Premiums received from selling credit
default swap agreements (1,658) (1,332)
Premiums paid on buying credit default
swap agreements 2,982 476
Movement in unrealised gains/(losses)
in the year 1,972 (2,693)
Realised gains in the year 139 215
------------ ------------
Outstanding asset/(liability) due on credit
default swaps 1,016 (2,419)
------------ ------------
Credit default swap assets at fair value
through profit or loss 1,398 184
Credit default swap liabilities at fair
value through profit or loss (382) (2,603)
------------ ------------
Outstanding asset/(liability) due on credit
default swaps 1,016 (2,419)
------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Statement of Comprehensive Income
as it has been incurred or received. At the year end, GBP15,000
(2018: GBP24,000) of interest on credit default swap agreements
was due to the Company.
Collateral totalling GBP4,999,000 (2018: GBP8,205,000) 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.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Opening balance (1,329) (390)
Purchase of foreign currency derivatives 324,487 287,992
Closing-out of foreign currency derivatives (325,345) (287,555)
Movement in unrealised gains/(losses)
in the year 2,548 (939)
Realised gains/(losses) in the year 858 (437)
------------ ------------
Net assets/(liabilities) on foreign currency
forwards 1,219 (1,329)
------------ ------------
Foreign currency forward assets at fair
value through profit or loss 1,219 -
Foreign currency forward liabilities at
fair value through profit or loss - (1,329)
------------ ------------
Net assets/(liabilities) on foreign currency
forwards 1,219 (1,329)
------------ ------------
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.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Opening balance (7) 5
Purchase of bond futures 2,336 5,390
Sale of bond futures (1,384) (4,656)
Movement in unrealised gains/(losses)
in the year 88 (138)
Realised losses in the year (1,033) (608)
------------ ------------
Balance payable on bond futures - (7)
------------ ------------
Bond future assets at fair value through
profit or loss - 4
Bond future liabilities at fair value
through profit or loss - (11)
------------ ------------
Balance payable on bond futures - (7)
------------ ------------
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.
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
Opening balance (14,955) (5,442)
Opening of sale and repurchase agreements (63,360) (102,999)
Opening of reverse sale and repurchase
agreements 2,678 10,035
Closing-out of sale and repurchase agreements 64,283 92,398
Closing-out of reverse sale and repurchase
agreements (3,694) (8,537)
Movement in unrealised gains in the year 691 (353)
Realised losses in the year (403) (57)
------------ ------------
Total liabilities on sale and repurchase
agreements (14,760) (14,955)
------------ ------------
Sale and repurchase assets at fair value
through profit or loss 1,292 2,386
Sale and repurchase liabilities at fair
value through profit or loss (16,052) (17,341)
------------ ------------
Total liabilities on sale and repurchase
agreements (14,760) (14,955)
------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Statement of Comprehensive Income as it has been incurred.
At 31 December 2019 GBPnil (2018: GBP6,000) interest on sale and
repurchase agreements was payable by the Company.
Offsetting of derivative financial instruments
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 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 capital
instruments and short position(s) which could be offset under
the applicable derivative agreements (as described above):
Effect of remaining
rights of offset
that do not meet
the criteria for
Gross Amounts Net amount offsetting in
carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December
2019
Financial assets
Derivatives 3,909 - 3,909 (1,292) 2,617
Collateral accounts
for derivative
financial instruments
(note 16) 4,999 - 4,999 (352) 4,647
------------ ------------ ------------ ------------ ------------
Total assets 8,908 - 8,908 (1,644) 7,264
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (16,434) - (16,434) 16,404 (30)
Collateral accounts
for derivative
financial instruments
(note 16) (803) - (803) - (803)
------------ ------------ ------------ ------------ ------------
Total liabilities (17,237) - (17,237) 16,404 (833)
------------ ------------ ------------ ------------ ------------
31 December
2018
Financial assets
Derivatives 2,574 - 2,574 (1,451) 1,123
Collateral accounts
for derivative
financial instruments
(note 16) 8,922 - 8,922 (2,799) 6,123
------------ ------------ ------------ ------------ ------------
Total assets 11,496 - 11,496 (4,250) 7,246
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (21,284) - (21,284) 20,003 (1,281)
------------ ------------ ------------ ------------ ------------
Total liabilities (21,284) - (21,284) 20,003 (1,281)
------------ ------------ ------------ ------------ ------------
19. 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 31 December 2019, 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
31 December 2019
Traded/listed capital instruments at
fair value through profit or loss 83,460 2,464 - 85,924
Other investments at fair value through
profit or loss (note 7) 2,092 5,672 - 7,764
Credit default swap assets - 1,398 - 1,398
Credit default swap liabilities - (382) - (382)
Other derivative financial assets - 2,511 - 2,511
Other derivative financial liabilities - (16,052) - (16,052)
Short positions covered by sale and
repurchase agreements - (1,336) - (1,336)
------------ ------------ ------------ ------------
85,552 (5,725) - 79,827
------------ ------------ ------------ ------------
31 December 2018
Traded/listed capital instruments at
fair value through profit or loss 74,001 7,340 - 81,341
Other investments at fair value through
profit or loss (note 7) 3,050 - - 3,050
Credit default swap assets - 184 - 184
Credit default swap liabilities - (2,603) - (2,603)
Other derivative financial assets 4 2,386 - 2,390
Other derivative financial liabilities (11) (18,670) - (18,681)
Short position covered by sale and repurchase
agreement - (1,451) - (1,451)
------------ ------------ ------------ ------------
77,044 (12,814) - 64,230
------------ ------------ ------------ ------------
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 broker quoted bonds, 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 the other investments are based on the market
price of the underlying securities.
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.
The sale and repurchase agreements have been valued by reference
to the notional amount, expiration dates and rates prevailing
at the valuation date.
Transfers between levels
Transfers between levels during the year are determined and deemed
to have occurred at each financial reporting date. There were
no investments classified as Level 3 during the year, and no transfers
between levels in the year. See notes 15, 16 and 18 for movements
in instruments held at fair value through profit or loss.
20. Other payables and accruals
31 December 31 December
2019 2018
GBP'000 GBP'000
Investment management fee (note 8a) 189 186
Performance fee (note 8a) 136 234
Audit fees (note 10) 30 36
Administration fee (note 8b) 32 31
Other accruals 31 14
Share issue costs 14 79
Valuation agent fees (note 8e) 14 6
Depositary fees (note 8e) 13 6
Broker fee (note 8c) 6 6
Registrar fees (note 8d) 1 3
Transfer of listing fees - 60
Accrued interest payable on capital instrument
short positions - 43
Interest payable on sale and repurchase
agreements (note 18) - 6
------------ ------------
466 710
------------ ------------
21. Share capital
31 December 2019 31 December 2018
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 91,852,904 - 85,452,024 -
------------ ------------ ------------ ------------
Issued share capital
Number of Price per Gross proceeds
shares share GBP'000
Shares in issue as at 31 December
2017 75,999,351
13 February 2018 8,229,174 107.50p 8,846
15 August 2018 1,223,499 98.50p 1,205
------------
Shares in issue as at 31 December
2018 85,452,024
4 February 2019 6,400,880 92.81p 5,941
------------
Shares in issue as at 31 December
2019 and 6 April 2020 91,852,904
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
Ordinary Share held.
22. 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 GBP91,284,000 (2018:
GBP76,976,000), and on 91,852,904 (2018: 85,452,024) Ordinary
Shares in issue at the year end.
23. Changes in liabilities arising from financing activities
During the year the Company raised GBP5,941,000 (2018: GBP10,052,000)
through the placing of 6,400,880 (2018: 9,452,673) new Ordinary
Shares of no par value. Share issue costs of GBP100,000 (2018:
GBP391,000) were incurred in relation to the placings, and at
the year end GBP14,000 (2018: GBP79,000) of the issue costs were
outstanding, resulting in cash flows in relation to share issue
costs in the year of GBP165,000 (2018: GBP368,000).
24. Financial instruments and risk management
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. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
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 positions 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 investment,
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, unlisted
open ended funds, and bond futures at fair value through profit
or loss (notes 15, 18 and 19) are exposed to price risk and it
is not the intention to mitigate the price risk.
At 31 December 2019, 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 +/- GBP4,618,000 (2018: +/- GBP4,147,000). The
fair value of financial instruments exposed to price risk at 31
December 2019 was GBP92,352,000 (2018: GBP82,940,000).
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 year. At the year end,
the Company held the following foreign currency forward contracts:
31 December 2019
Maturity date Amount to be Amount to be purchased
sold
16 January 2020 EUR40,470,000 GBP35,146,000
16 January 2020 US$11,175,000 GBP8,686,000
16 January 2020 EUR8,000,000 GBP6,859,000
16 January 2020 DKK7,297,000 GBP845,000
16 January 2020 US$1,012,000 GBP771,000
31 December 2018
Maturity date Amount to be Amount to be purchased
sold
16 January 2019 EUR43,812,000 GBP38,405,000
16 January 2019 US$9,523,000 GBP7,197,000
16 January 2019 DKK7,275,000 GBP855,000
At the year end a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as
follows:
Investments
at fair
value Foreign
through currency
profit Cash and forward
or loss Receivables cash equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2019
Euro 41,044 1,024 1,156 43,224 (41,060) 2,164
US Dollars 8,746 34 1,118 9,898 (9,200) 698
Danish Krone - - 832 832 (827) 5
Canadian Dollars - - - - - -
Singaporean Dollars - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
49,790 1,058 3,106 53,954 (51,087) 2,867
------------ ------------ ------------ ------------ ------------ ------------
31 December 2018
Euro 34,408 951 2,185 37,544 (39,438) (1,894)
US Dollars 9,044 865 (166) 9,743 (7,470) 2,273
Danish Krone 856 20 - 876 (878) (2)
Canadian Dollars - - - - - -
Singaporean Dollars - - 4 4 - 4
------------ ------------ ------------ ------------ ------------ ------------
44,308 1,836 2,023 48,167 (47,786) 381
------------ ------------ ------------ ------------ ------------ ------------
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 31 December 2019, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 31 December 2019 would have decreased/increased
by GBP143,000 (2018: GBP19,000).
ii) 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 GBP61,945,000 (2018: GBP50,553,000),
cash and cash equivalents, net of overdrafts, of GBP6,102,000
(2018: GBP2,446,000), collateral account balances of GBP4,196,000
(2018: GBP8,922,000) and short positions of GBP1,336,000 (2018:
GBP1,451,000) were the only interest bearing financial instruments
subject to variable interest rates at 31 December 2019. 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 year would
have been +/-GBP352,000 (2018: +/-GBP351,000).
Variable Non-interest
Fixed interest interest bearing Total
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 13,822 61,945 17,920 93,687
Cash and cash equivalents - 6,102 - 6,102
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 4,999 - 4,999
Derivative financial assets
at fair value through profit
or loss 2,690 - 1,219 3,909
Other receivables - - 1,621 1,621
------------ ------------ ------------ ------------
Total financial assets 16,512 73,046 20,760 110,318
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - - - -
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - (803) - (803)
Derivative financial liabilities
at fair value through profit
or loss (16,434) - - (16,434)
Short positions covered by sale
and repurchase agreements - (1,336) - (1,336)
Other payables and accruals - - (466) (466)
------------ ------------ ------------ ------------
Total financial liabilities (16,434) (2,139) (466) (19,039)
------------ ------------ ------------ ------------
Total interest sensitivity gap 78 70,907 20,294 91,279
------------ ------------ ------------ ------------
31 December 2018
Financial assets
Investments at fair value through
profit or loss 22,145 50,553 11,693 84,391
Cash and cash equivalents - 2,612 - 2,612
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 8,922 - 8,922
Derivative financial assets
at fair value through profit
or loss 2,574 - - 2,574
Other receivables - - 1,293 1,293
------------ ------------ ------------ ------------
Total financial assets 24,719 62,087 12,986 99,792
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (166) - (166)
Derivative financial liabilities
at fair value through profit
or loss (19,955) - (1,329) (21,284)
Short positions covered by sale
and repurchase agreements - (1,451) - (1,451)
Other payables and accruals - - (704) (704)
------------ ------------ ------------ ------------
Total financial liabilities (19,955) (1,617) (2,033) (23,605)
------------ ------------ ------------ ------------
Total interest sensitivity gap 4,764 60,470 10,953 76,187
------------ ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and
non-interest bearing capital instruments of GBP31,742,000 (2018:
GBP33,838,000) at 31 December 2019 would increase/decrease by
+/-GBP721,000 (0.77%) (2018: +/-GBP277,000 (0.33%)) 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 31 December 2019, credit risk arose principally from investment
in capital instruments of GBP85,924,000 (2018: GBP81,341,000),
cash and cash equivalents of GBP6,102,000 (2018: GBP2,612,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP4,999,000 (2018: GBP8,922,000),
foreign currency forward assets of GBP1,219,000 (2018: GBPnil)
and investment in sale and repurchase assets of GBP1,292,000 (2018:
GBP2,386,000). The Company seeks to trade only with reputable
counterparties that the Investment Manager believes to be creditworthy.
The credit rating of cash and collateral counterparties is sufficient
that no expected credit loss or provision for impairment is considered
necessary.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 31 December 2019, the capital instrument rating
profile of the portfolio was as follows:
31 December 31 December
2019 2018
Percentage Percentage
A - 5.69
BBB 19.22 34.14
BB 38.33 39.14
B 9.15 14.65
Below B 8.21 6.38
No rating 25.09 -
------------ ------------
100.00 100.00
------------ ------------
The investments without a credit rating correspond to issuers
that are not rated by an external rating agency. Although no external
rating is available, the Investment Manager considers and internally
rates the credit risk of these investments, along with all other
investments. The internal risk score is based on the Investment
Manager's fundamental view (stress test, macro outlook, solvency,
liquidity risk, business mix, and other relevant factors) and
is determined by the Investment Manager's risk committee. The
risk grades are mapped to an external Baseline Credit Assessment,
and any discrepancy of more than two notches is monitored closely.
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 as 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, all
rated A+. At 31 December 2019, the overall net exposure to these
counterparties was 7.01% (2018: 11.57%) of NAV. The collateral
held at each counterparty is disclosed in note 16.
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 31 December 2019
was low since the ratio of cash and cash equivalents (net of overdrafts)
to unmatched liabilities was 13:1 (2018: 3:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December 31 December
2019 2018
Percentage Percentage
Less than 1 year 4.91 4.00
1 to 3 years 36.37 24.30
3 to 5 years 27.85 38.56
5 to 7 years 7.80 15.15
7 to 10 years 6.47 8.80
More than 10 years 16.60 9.19
------------ ------------
100.00 100.00
------------ ------------
As at 31 December 2019, the Company's liquidity profile was such
that 66.5% of investments were realisable within one day (2018:
75.1%). The remaining 33.5% was realisable within one week (2018:
24.9%). As at the year end, the Company's liabilities fell due
as follows:
31 December 31 December
2019 2018
Percentage Percentage
1 to 3 months 54.99 43.93
3 to 6 months - -
6 to 12 months - 0.61
1 to 3 years 15.73 10.42
3 to 5 years 29.28 45.04
------------ ------------
100.00 100.00
------------ ------------
25. 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 31 December 2019 the Company had
ten (2018: ten) open sale and repurchase agreements, one (2018:
two) being a reverse sale and repurchase agreement, committing
the Company to make a total repayment of GBP16,052,000 post the
year end (2018: GBP17,341,000). As a result of the reverse sale
and repurchase agreement the Company was due to receive GBP1,292,000
after the year end (2018: GBP2,386,000).
The raising of capital through the ongoing placing programme forms
part of the capital management policy. See note 21 for details
of the Ordinary Shares issued since incorporation.
As disclosed in the Statement of Financial Position, at 31 December
2019 the total equity holders' funds were GBP91,284,000 (2018:
GBP76,976,000).
26. Capital commitments
The Company holds a number of derivative financial instruments,
which, by their very nature, give rise to capital commitments
post 31 December 2019. These are as follows:
* At 31 December 2019, the Company had sold 14 (2018:
16) credit default swap agreements for a total of
GBP931,000 (2018: GBP2,023,000), each receiving
quarterly interest. The exposure of the Company in
relation to these agreements at the year end date was
GBP1,096,000 (2018: GBP2,339,000). Collateral of
GBP4,999,000 for these agreements was held at 31
December 2019 (2018: GBP8,205,000).
* At the year end the Company had committed to five
(2018: three) foreign currency forward contracts
dated 16 January 2020 to buy GBP52,306,000 (2018:
GBP46,457,000). At 31 December 2019, the Company
could have affected the same trades and purchased
GBP51,087,000 (2018: GBP47,786,000), giving rise to a
gain of GBP1,219,000 (2018: loss of GBP1,329,000).
* At the year end, the Company held nine (2018: eight)
open sale and repurchase agreements (this excludes
the one open reverse sale and repurchase agreement
(2018: two)) committing the Company to make a total
repayment of GBP16,405,000 (2018: GBP17,006,000).
27. 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 GBP725,000 at 31 December
2019 (2018: GBP723,000) 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 GBP725,000 (2018: GBP723,000) Expenses Excess to start
becoming payable, the Company's NAV would need to increase substantially
from the 31 December 2019 NAV. For a significant amount to become
payable within the foreseeable future, the NAV would have to increase
considerably. The Directors consider that it is possible, but
not probable, that an increase in the NAV leading to a significant
payment of the Expenses Excess 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.
28. Events after the financial reporting date
On 28 January 2020, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 October 2019 to 31 December
2019, which (in accordance with IFRS) was not provided for at
31 December 2019, out of the profits for the year ended 31 December
2019 (note 6). This dividend was paid on 28 February 2020.
As described in the Chairman's Statement and Principal Risks,
the COVID-19 outbreak is a new emerging risk to the global economy.
The Company's net asset value has been materially impacted by
the volatility in the investment markets. At 31 March 2020, the
NAV of the Company was 79.23p per Ordinary Share, a decline of
20.28% from 31 December 2019. The Investment Manager and Administrator
have invoked their business continuity plans to help ensure the
safety and well-being of their staff thereby retaining the ability
to maintain business operations. These actions help to ensure
business resilience. The situation is changing so rapidly that
the full impact cannot yet be understood, but the Company will
continue to monitor the situation closely.
-- 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
FR SSWFLUESSELL
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