TIDMAXI
RNS Number : 7274W
Axiom European Financial Debt Fd Ld
21 August 2020
21 August 2020
Axiom European Financial Debt Fund Limited
Half-Yearly Report and Unaudited Condensed Financial Statements
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
fund, today announces its Half-Yearly Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2020.
Highlights
30 June 30 June 31 December
2020 (unaudited) 2019 2019
(unaudited) (audited)
Net assets GBP81,366,000 GBP87,702,000 GBP91,284,000
Net asset value ("NAV") per Ordinary
Share 88.58p 95.48p 99.38p
Share price 88.00p 92.75p 94.00p
Discount to NAV 0.65% 2.86% 5.41%
(Loss)/profit for the period GBP(7,162,000) GBP7,545,000 GBP13,882,000
Dividend per share declared in
respect of the period 3.00p 3.00p 6.00p
Total return per Ordinary Share
(based on NAV) ([1]) -7.85% +9.33% +16.98%
Total return per Ordinary Share
(based on share price) ([1]) -3.19% +8.81% +13.64%
Ordinary Shares in issue 91,852,904 91,852,904 91,852,904
[1] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
period with the NAV or share price, as applicable, plus dividends
paid, at the period end.
William Scott, Chairman, commented:
"The Company's performance was impacted by the effect of COVID-19
on the financial sector in the six months ended 30 June 2020.
Taking into account dividends paid, the Company's total return
per share over the six months net of all expenses was -7.85%.
The Company has declared two dividends each of 1.50p per Ordinary
Share in relation to the half-year: one was paid on 29 May and
the other, declared after the period end, will be paid on 28 August
to Shareholders on the register at 7 August. Together, they total
3.00p per Ordinary Share and the Company is therefore well on
track against its target of at least 6.00p for the year. During
the period, actual payments of 3.00p were made, being the 29 May
dividend and the 1.50p dividend in respect of the year ended 31
December 2019, which was paid on 28 February 2020.
In the present situation of global uncertainty, our Investment
Manager has positioned the Company's portfolio for defensiveness
and liquidity, while continuing to search out new opportunities.
The effect of COVID-19 has been profound and its impact on some
sectors nothing short of a disaster; for others it has been a
bonanza. The full effects will take time to flow through fully
and manifest themselves in the balance sheets of banks. It is
pleasing to note that the recovery in the economy seems at present
to be quicker than might have been feared. We must, however, recognise
the possibility that there will be future "waves" of the pandemic
and it will be some time before the pandemic can be declared "over".
In the meantime, we also should bear in mind that the major themes
that concerned markets before the pandemic are still there, even
if they are not so prominent in the news as they would otherwise
have been: the US-China trade tensions, Brexit, and of course
the regulatory change in the financial sectors that the Company
was created to exploit.
In this context, more than ever, we look to benefit from the Investment
Manager's expertise in recognising and exploiting those opportunities
as they arise."
Gildas Surry, Investment Manager, said:
"As the COVID-affected countries come out of lockdown and try
to restart their economies and bring them back to a normal level,
the authorities continue to deploy the measures deemed necessary.
As for the banks, they continue to be part of the solution and
the authorities expect them to continue playing their role in
lending to the economy. For this, the banks are offered the funding
they can wish for at a negative cost from the ECB through the
TLTROs, and are granted a significant relief in their capital
requirements through the CRR Quick Fix and in their RWAs through
the state guarantees.
In this context, we can only express reservations on the near-term
outlook for the banking sector and its capacity to restart paying
out capital to equity investors. However, non-equity capital instruments
continue to offer a vast array of opportunities.
We take note of the historically tight valuations on a highly
uncertain backdrop, and keep our portfolio liquid and defensive.
Still we continue to search for value in the banking and insurance
sectors across the different categories of instruments: discounted
bonds, fixed-to-fixed, long calls, and other make-whole structures.
The end of the Basel III grandfathering period in December 2021
is getting closer and, over the next six months, we will watch
for the EBA guidance on legacy instruments as the next catalyst
to our bond selection."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou PO Box 650 James Bavister
Gildas Surry 1(st) Floor, Royal Chambers Charles Hirst
Jerome Legras St Julian's Avenue Pandora Yadgaroff
St Peter Port
www.axiom-ai.com Guernsey axiom@mhpc.com
Tel: +44 20 3807 0670 GY1 3JX Tel: +44 7595 461
231
axiom@elysiumfundman.com
Tel: +44 1481 810 100
A copy of the Company's Half-Yearly Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2020 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 Half-Yearly Report and
Unaudited Condensed Financial Statements of the Company for the
six months ended 30 June 2020:
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://axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
Chairman's Statement
I present our report for the half-year to 30 June 2020.
Results
The Company's performance was impacted by the effect of COVID-19
on the financial sector in the six months ended 30 June 2020.
Taking into account dividends paid, the Company's total return
per share over the six months net of all expenses was -7.85%.
Although in origin a public health crisis, the COVID-19 pandemic
has had significant economic impact on levels of economic and
social activity and, perhaps as significantly for the medium and
longer term, on the way that businesses and the public conduct
their activities. Current necessity has accelerated some changes
that would likely have happened anyway - more home working, internet
shopping, less travelling with obvious implications for the owners
and financiers of some types of real estate assets - good as well
as bad. The regulatory authorities have in general been supportive
of the financial sectors in their responses. An early, negative,
response was to "encourage" the suspension of equity dividends
and in some instances, the revocation of those already declared
but, that apart, liquidity and regulation have been accommodative
and the perception is that the banks are viewed (rightly) as part
of the solution to a problem they did not cause. There have been
no similar attacks on coupon payments on the non-equity regulatory
capital instruments such as those held by the Company. Although
the quality of some assets held on bank balance sheets has not
surprisingly declined and will inevitably continue to do so, there
have been no crises within the banking sector where liquidity
and capitalisation remains robust largely as a result of the changes
introduced over the past decade. Markets have therefore generally
recovered albeit not to the full extent of their pre-crisis levels.
The Company reported a net loss after tax for the period ended
30 June 2020 of GBP7.2 million (30 June 2019: profit of GBP7.5
million), representing a loss per Ordinary Share of 7.80p (30
June 2019: earnings per Ordinary Share of 8.32p).
The Company's NAV at 30 June 2020 was GBP81.4 million (88.58p
per Ordinary Share) (31 December 2019: GBP91.3 million, 99.38p
per Ordinary Share).
Dividends
The Company has declared two dividends each of 1.50p per Ordinary
Share in relation to the half-year: one was paid on 29 May and
the other, declared after the period end, will be paid on 28 August
to Shareholders on the register at 7 August. Together, they total
3.00p per Ordinary Share and the Company is therefore well on
track against its target of at least 6.00p for the year. During
the period, actual payments of 3.00p were made, being the 29 May
dividend and the 1.50p dividend in respect of the year ended 31
December 2019, which was paid on 28 February 2020.
Auditor
It was noted in the 31 December 2019 Annual Report and Financial
Statements that, for good corporate governance, the audit would
be put out to tender in the first half of 2020. In line with this
intention, the Company received proposals from a number of audit
firms. In making the decision regarding the appointment of the
auditor, the Board was cognisant of a number of aspects including
cost and expertise.
After due consideration of the proposals, the Board agreed to
appoint Grant Thornton Limited as the Company's auditor with effect
from 19 August 2020.
Outlook
In the present situation of global uncertainty, our Investment
Manager has positioned the Company's portfolio for defensiveness
and liquidity, while continuing to search out new opportunities.
The effect of COVID-19 has been profound and its impact on some
sectors nothing short of a disaster; for others it has been a
bonanza. The full effects will take time to flow through fully
and manifest themselves in the balance sheets of banks. It is
pleasing to note that the recovery in the economy seems at present
to be quicker than might have been feared. We must, however, recognise
the possibility that there will be future "waves" of the pandemic
and it will be some time before the pandemic can be declared "over".
In the meantime, we also should bear in mind that the major themes
that concerned markets before the pandemic are still there, even
if they are not so prominent in the news as they would otherwise
have been: the US-China trade tensions, Brexit, and of course
the regulatory change in the financial sectors that the Company
was created to exploit.
In this context, more than ever, we look to benefit from the Investment
Manager's expertise in recognising and exploiting those opportunities
as they arise.
William Scott
Chairman
20 August 2020
Investment Manager's Report
1- Market Commentary
January
Financial bonds showed strong resilience at the start of the year,
ending the month up despite the renewed risk aversion. Market
concerns about the COVID-19 pandemic and its consequences for
global growth had a very limited impact on financial securities,
as did the UK's exit from the EU.
Banks that had released their annual results announced rising
capital ratios, perhaps in preparation for more difficult 2020
EBA stress tests. Even Deutsche Bank posted results that should
have reassured creditors more than shareholders: despite the consecutive
decline in its pre-tax earnings, the bank's capital ratio was
up 40bps to 13.6%. Capital strengthening, combined with easing
regulatory pressure, confirmed the upward trend in payout ratios,
as observed at the end of 2019 with the share buybacks of Bawag
and UniCredit and the dividend policy announced by Santander.
On the regulatory front, for this Supervisory Review and Evaluation
Process ("SREP") cycle, the ECB published key messages on business
models, governance, NPLs, operational risk, internal capital and
liquidity assessments. The overall SREP requirements for CET1
capital remained at the same level as in 2018, at 10.6%.
The primary market reached record levels. The Erste Bank 3.375%
EUR issue was 10 times oversubscribed. We saw a surprising secondary
market upward repricing along with the latest issues announced
including Credit Suisse 5.1% in USD, Phoenix 5.625% in EUR and
Banco BPM 6.125% in EUR. On the insurers' side, Phoenix issued
a USD750 million Restricted Tier 1 ("RT1") with a 5.625% coupon
in order to finance the acquisition of ReAssure.
February
The month of February showed some strong declines driven by concerns
about the spread of COVID-19, Bernie Sanders' increased popularity
as per the opinion polls and the Brexit negotiations (the UK was
warned of a possible no-deal if no agreement was reached before
June). The SubFin index ended the month at 160bps widening by
almost 50bps in the last week.
The high capitalisation level of the banks was reassuring, as
were the stress test scenarios used by the regulatory authorities,
which were much more extreme than the impact estimated by the
OECD in connection with the COVID-19 epidemic.
HSBC presented its restructuring plan, declaring in particular
its intention to address its specific Legacy bonds ahead of the
2021 transition period deadline, which was very positive for bondholders.
The bank also announced its intention to call its 5.682% Legacy
with a reset at 180bps. Standard Chartered announced the call
of an Additional Tier 1 ("AT1") with a backend at 489bps. Barclays,
on the other hand, did not call its Legacy bond at Libor at 0.71%.
In the primary market, ING's issue of a USD750 million AT1 bond
was postponed following the departure of its Chief Executive Officer,
Ralph Hamers, who left to succeed Sergio Ermotti as Chief Executive
Officer at UBS.
Finally, the consolidation continued in the financial sector,
with Intesa's offer for UBI and Covéa's offer for Partner
Re.
March
March saw the rapid spread of COVID-19, which put most European
countries into almost complete lockdown. In response to this unprecedented
health crisis, all asset classes fell sharply. After its strong
widening during the month (peak at 350bps, +100% compared to its
level at the end of February), the SubFin index ended the month
at 255bps.
However, never before had European banks approached a crisis so
well capitalised, and the measures announced by the various regulators
(SSM, ECB, PRA, etc.) considerably strengthened the capital available
to absorb the economic shock:
* capital related: (i) provisional suspension or
modification of several capital buffers (conservation
buffer, 2G pillar, 2R pillar, countercyclical buffer
and systematic buffer) allowed the decrease of CET1
requirements by circa 4%; (ii) the suspension of
dividends and any exceptional distribution until
October 2020, as requested by the regulators (ECB and
PRA), made it possible to strengthen the CET1 without
impacting AT1 coupon payments as specified by the
banks and the supervisor (EBA);
* liquidity related: the access conditions to the new
TLTRO (medium-term financing with the ECB) were
considerably eased on both the collateral and the
lending rate (lowered to -0.75%); and
* asset quality related: the rules, in particular on
NPL provisions and IFRS 9 (financial instrument
accounting rules), have been relaxed. The state
guarantees (EUR300 billion for France, EUR350 billion
for Germany, EUR300 billion for the UK, etc.) should
have supported banks in rolling over loans.
The European Commission explicitly stated that if, despite all
these measures, a bank was in difficulty because of the COVID-19
crisis and needed public aid, the guidelines on 'burden sharing'
that could penalise subordinated debt holders would not apply.
In spite of market volatility, issuers continued buying back their
bonds.
* ING announced on 15 March 2020, the call of its AT1
6% (USD1 billion) and its Legacy Tier 1 ("T1"), at
12%;
* SEB announced on 18 March 2020, the call of its AT1
(EUR1.1 billion);
* Crédit Agricole announced on 2 April 2020, a
tender offer on two of its Legacy T1 bonds, their
6.637% and their CMS; and
* Vivat announced on 2 April 2020, a tender offer on a
senior bond, their 2.375% with a maturity date in
2024.
Finally, the primary market quickly reopened despite high volatility.
Bond market conditions in the banking sector normalised towards
the end of the month, as confirmed by the increasing number of
issuances. Credit Suisse issued USD3 billion of senior debt maturing
in 2031 with a 4.194% coupon. Several UK banks also came to refinance:
Lloyds EUR1.5 billion senior 3.5% 2026, HSBC USD2.5 billion senior
4.95% 2030, RBS EUR1 billion senior 2.75% 2025, Barclays EUR2
billion senior 3.75% 2025 and Standard Chartered USD2 billion
senior 4.644% 2031.
April
April was another month of exceptional support measures for the
banks, helping to fight the impact of the pandemic on the economy.
These translated into a strong rally in subordinated debt (+9%
for the Solactive Liquid CoCo bonds index).
To defend the positioning of the banks as a solution to the crisis,
many regulatory and supervisory 'sweeteners' were offered to banks,
all with the same objective of keeping lending activity flowing:
temporary suspension of IFRS9 impact on CET1; acceleration of
the partial reintegration of software intangibles to CET1; and
exemption of central bank balances from the leverage ratio.
Our conviction remains unchanged. The banks have never approached
a crisis so well capitalised, as confirmed by S&P in their recent
analysis 'How COVID-19 Is Affecting Bank Ratings'. The agency
referred to three main reasons for the resilience of bank ratings:
the generally strong capital and liquidity position of banks globally,
supported by a material strengthening in bank regulations over
the past 10 years; the diversification in their loan books, that
continue to provide relative revenue stability; and the strong
fundamentals, not artificially tweaked by years of accommodative
monetary policy and abundant liquidity, the opposite of what happened
in the corporate sector which allowed weaker companies to access
the market.
The banking results season revealed a strong historic trading
performance at Investment Banks level, alongside the general pattern
of: (i) higher provisioning; (ii) CET1 levels generally in line
with consensus with higher RWAs offset by the 2019 dividends'
omission; and (iii) increased headroom to MDA.
Finally, issuers have continued calling their bonds: Principality
Building Society, BCP, Julius Baer and Rabobank all announced
the calls of their T1s.
May
The month of May was marked by the easing of the lockdown in many
European countries, including Italy. The battery of exceptional
measures put in place by regulators and governments to reduce
the economic shock of the pandemic continued to expand. This resulted
in a strong performance of subordinated debt with the SubFin index
closing at 180bps vs. 280bps at the end of April 2020.
As the first quarter earning season ended, we could see that European
banks were showing deteriorating profitability but resilient levels
of capital. Regulators continued to announce measures to support
the banking sector, including a planned Recovery Fund for investments
in Europe and amendments to the CRR reform concerning distributions
(dividends and coupons) to be voted on in June.
The Bank of England and the ECM tried to quantify the risk of
losses through desktop stress tests and by taking into account
public support plans. They believed that the crisis could seriously
deteriorate 2020 profits but that for the majority of European
banks capital cushions were sufficient. Liquidity was not a cause
for concern in the current environment. Despite strong corporate
demand for loans, banks continued to face excess liquidity, to
the extent that we saw several banks calling their senior bonds
in May 2020. Issuers continued to call their inefficient regulatory
instruments: StanChart 5.375% step-up, ABN 2.875% Tier 2 ("T2").
Finally, despite market volatility, the Bank of Ireland successfully
issued an AT1 bond. The secondary market remained very active
with many senior debt buybacks. It should be noted that the Intesa/UBI
merger was still under negotiation. The Monte dei Paschi restructuring
plan was validated, which had a very positive impact on the T2
of peripheral countries.
June
The month of June was marked by further easing of lock-down in
most European countries. The SubFin index tightened further closing
the month at 166bps vs. 180bps at the end of May 2020 and 280bps
at the end of April 2020. The CoCo Solaxicc index ended the month
at +1.5%.
The measures put in place by the central banks were the drivers
of this rebound: the TLTRO3 by the ECB with its generous pricing
which could reach -1%, or the increase of the BOE's bond purchase
programme by GBP100 billion. Meanwhile discussions on Brexit stalled
on disagreements about regulatory equivalence of financial services.
In Italy, NPL disposals continued with EUR8.5 billion sold by
Monte Paschi and more disposals were due from UniCredit and Banca
Popolare di Sondrio. The merger between Intesa Sanpaolo and UBI
was cleared by the regulator, and the insurer Generali acquired
24% in Cattolica. In Spain, Helvetia Assurances acquired 69.4%
in the insurer Caser for a price of EUR800 million, two-thirds
of which was financed by the issue of a T2 bond. The ECB launched
a consultation on consolidation suggesting that regulatory impediments
would reduce.
Finally, the primary market was very active on the CoCos side
(AT1 and RT1). The main issues to mention were RBS (USD1 billion
at 6%), Commerzbank (EUR1.25 billion at 6.135%), ABN Amro (EUR1
billion at 4.375%), Nationwide (GBP750 million at 5.75%) and Legal
& General (GBP500 million at 5.625%). Issuers continued to call
their ineffective regulatory securities. RBS confirmed the call
of its USD2 billion 7.5% AT1 and UniCredit exercised the call
on its Euro Legacy 9 3/8%.
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
To monetise the strong momentum on the primary market, the Company
took part in three new issues in Spain and Italy, two AT1s and
one T2, within Liquid Relative Value, while at the same time added
on a position in a Greek T2.
In Restructuring, the Company brought its position on Hamburg
Commercial Bank to the tender. It also initiated new positions
in a small building society and a specialist lender in the UK.
In Midcap Origination, the Company sold its position in the Spanish
insurer Caser following the announcement of its acquisition by
Helvetia and bought Saxo Bank T2 ahead of the call of its AT1
coming on 26 February 2020 (bought at the inception of the Company
at 94.00).
The Company kept a moderate gearing at 107%, with 6% cash.
February
Prior to the week of 24 February 2020, the Company had reduced
its exposure in Liquid Relative Value (Santander and Fineco Bank
AT1, ASR RT1) and in Restructuring (IPF and Deutsche Bank).
Since the start of the correction on 24 February 2020, the Company
realised gains on DB and Intesa hedges.
The Company marginally redeployed on seniors (Intrum), T2s (ICG)
and, following the correction, which showed no signs of abating,
selectively within the Restructuring bucket on UniCredit and Deutsche
Bank. Finally, in anticipation of Central Bank reaction, the Company
added to its positions in Fixed Perpetuals issued by UK banks.
The Company was well positioned ahead of rate cuts with 19% T1
instruments with Long Calls, hence significant duration.
As the correction continued, the NAV decreased 4.16% on 9 March
2020 on the back of the unprecedented moves across the sector
(the iBoxx CoCo Liquid Developed Market AT1 decreased 3.68%).
The Company remained liquid with more than 5% cash and 14% Liquid
Relative Value instruments. The Company's holding in AT1 was limited
to 35%, of which 17% were liquid instruments. Amongst these AT1s,
the Company held issuers that were expected to remain resilient
in the context of the COVID-19 crisis, such as Saxo Bank and Fineco
Bank, or benefit from the support measures announced by the BOE,
such as Virgin Money, OSB and Shawbrook. The Company also held
a significant pocket of liquidity in the form of Senior bonds,
Fixed-to-Fixed, as well as other Legacy T1 instruments with no
extension risk, amounting to 18% and short bond positions as credit
hedges amounting to 3%.
March
In the context of record drops in valuations across T2 and AT1
instruments, our legacy strategies saw similar moves but on a
smaller scale. This resilience, in relative terms, was supported
by the specific, sometimes esoteric, language built into legacy
bonds. These features resulted in a more defensive credit profile
at the instrument level through shorter credit duration, a limited
extension risk and restrictive rule-based coupon paying mechanisms.
The largest position in the portfolio (Lloyds 13%) lost circa
4.5%, at the low end of the monthly valuations observed in sub
financials, while still offering more than 600bps for two-year
risk on a cumulative coupon.
As the sell-off started at the end of February 2020, the Company
reduced some discounted bonds and redeployed partly on liquid
AT1s, short dated 'callables' and high-coupon legacy bonds. The
Company held the SEB 5.25% at the time of their calls (bought
at 91 the very morning of the announcement).
As the volatility took hold, the Company focused on sourcing high
coupon bonds that had fallen around par (Lloyds 12% before its
tender), or below par for the Fixed-to-Fixed bonds (BNP 6.5% and
Lloyds 6.85%).
At the time of the tender announced by Crédit Agricole, the
Company also held 10% of similar CMS/disco bonds.
The Company closed the month with 6% cash, alongside a 16% allocation
to highly liquid instruments.
April
As market valuations stabilised, the Company proceeded to some
defensive adjustments to the portfolio. The Company captured the
new issue premia on two insurance T2s in Liquid Relative Value,
while it reduced its UK exposure in Less Liquid Relative Value.
The Company held some small positions in the two illiquid Principality
Building Society and BCP bonds that got called.
In the Restructuring bucket, the Company added on a defensive
T2 issued by a Spanish Caja and invested back into a short dated
senior bond issued by a consumer lender at a significant discount.
In Special Situations, the Company added on Fortis Cashes whose
disqualification post 2021 had been confirmed by the issuer's
disclosure.
Finally, in Midcap Origination, the Company took part in a new
T2 issued by the asset manager Jupiter, as part of an acquisition
it committed to in February 2020.
The Company remained lightly levered with its investments representing
104% of NAV, and with 7% of cash ready to deploy on further opportunities.
May
In the favourable environment, the Company took part in the new
issue of the Bank of Ireland AT1, as well as the two new issues
of insurance T2s by Direct Line and Phoenix, all in the Liquid
Relative Value bucket. The Company also bought a Virgin Money
AT1 at an attractive entry level of 76.50% of nominal value.
In Less Liquid Relative Value, the Company realised some gains
on Ecclesiastical and NatWest preference shares, as well as on
some HSBC Long Calls.
In the Restructuring and Midcap Origination buckets, the Company
held small positions in BCP legacy instruments and Principality
Building Society PIBS that got called at par. They were purchased
respectively in 2018 at 54 and during March 2020 between 91 and
96.
The Company closed the month slightly levered with its investments
representing 103% of NAV and 8% of cash.
June
In this conducive market, the Company limited its appetite on
new issues to a Commerzbank AT1. It financed this in the Liquid
Relative Value bucket by realising its gains on the UK insurance
T2s issued in April 2020.
The Company benefitted from the call of Banco BPM 9%, one of its
top ten positions, within Less Liquid Relative Value. It reinvested
some of the proceeds into UK bank prefs, which together with legacy
PIBS represent slightly more than 10% of the portfolio. In Legacy
CMS, it switched out of BACA and Aegon into an illiquid French
mutual instrument whose language signalled a potential call by
2021.
In Restructuring, the Company realised some gains on International
Personal Finance and increased its holdings in a Deutsche Bank
AT1, following their investor update about loan exposures, and
an IKB T2, which was lagging the rebound. In Special Situations,
it added on a UBI AT1 as Intesa's bid started its last phase.
Finally, in Midcap Origination the Company increased its holdings
in a Saxobank AT1 and Jupiter T2 at levels that remained, in our
view, defensive.
The Company continued to operate with a moderate cash gearing
of 108%, which included 7% in cash.
4 - Portfolio (as at 30 June
2020)
Strategy allocation (as a %
of total net assets)*
Liquid Relative Value 16.8%
Less Liquid Relative
Value 20.1%
Restructuring 23.1%
Special Situations 11.8%
Midcap Origination 27.7%
Denomination (as a % of total
net assets)*
EUR 59.6%
GBP 32.4%
USD 7.4%
Portfolio Breakdown (as a % of total net assets)*
By securities external By country
rating
A 0.0% UK 35.7%
BBB 18.8% Italy 12.2%
BB 30.9% Portugal 10.4%
B 18.3% Spain 7.3%
Below B 9.3% France 6.8%
NR 20.3% Ireland 5.7%
Netherlands 5.7%
By maturity Germany 4.8%
<1 year 5.1% Austria 4.2%
1-3 27.5% Denmark 3.1%
3-5 41.2% Belgium 2.0%
5-7 11.6% Greece 1.1%
7-10 5.4% Sweden 1.0%
>10 15.2%
By subordination
Additional Tier 1 37.1%
Legacy Tier 1 34.8%
Tier 2 20.5%
Senior 7.0%
Equity 0.3%
* Splits adjusted for single assets
5 - Company metrics (as at 30 June 2020)
Share price and NAV information
Share price (mid) (GB pence) 88.00
NAV per share (daily) (GB pence) 88.58
Dividends paid over last 12 months
(GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP mn) 80.831
Total net assets (GBP mn) 81.366
Premium/(Discount) (0.65)%
Portfolio information 30 June 2020 31 December 30 June
2019 2019
Modified duration 4.20 4.53 3.42
Sensitivity to credit 6.00 5.51 4.48
Positions 89 93 85
Average price 98.84 105.63 101.45
Running yield 6.50% 5.36% 5.70%
Yield to perpetuity(1) 7.69% 6.51% 6.82%
Yield to call(2) 10.81% 6.26% 6.89%
Gross Assets 120.0% 117.0% 115.5%
Net gearing = (Gross assets -
Collateral) / Net assets 108.0% 112.4% 107.2%
Investments / Net Assets 101.0% 105.8% 96.0%
Cash 7.0% 6.7% 11.3%
Collateral 12.0% 4.6% 8.3%
Net Repo / Net Assets -2.1% 4.9% 13.5%
CDS / Net Assets 56.2% 64.6% 79.0%
Net Return(3)
1 month 3 months 6 months 1 year 3 years(4) Since launch(4)
4.27% 13.69% -7.85% -0.94% 2.53% 3.32%
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
2020 1.99 -0.87 -19.95 5.24 3.68 4.27 -7.85
(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- Outlook
As the COVID-affected countries come out of lockdown and try to
restart their economies and bring them back to a normal level,
the authorities continue to deploy the measures deemed necessary.
The EU just struck a historic agreement around a EUR750 billion
European Recovery Fund and the ECB recently suggested that the
authorities must stand ready to implement further measures.
As for the banks, they continue to be part of the solution and
the authorities expect them to continue playing their role in
lending to the economy. For this, the banks are offered the funding
they can wish for at a negative cost from the ECB through the
TLTROs, and are granted a significant relief in their capital
requirements through the CRR Quick Fix and in their RWAs through
the state guarantees. As a result, the quarter 2 earnings season
reveals record levels of liquidity, exacerbated by strong deposit
inflows, and increasing capital ratios on lower requirements.
Revenues remained resilient and profitability is maintained with
some remarkable performance from universal banks that benefit
from the strong rebound of their Investment Bank. However, the
asset quality has started to migrate. In the context of historic
levels of provisioning, the new IFRS9 category of stage 2 loans
saw a very strong increase, in particular UK banks. The focus
is on loans under moratoria and how defaults will materialise
when - and if - these are lifted. Managements are clear that more
provisions will have to be taken in the second half of the year.
In this context, we can only express reservations on the near-term
outlook for the banking sector and its capacity to restart paying
out capital to equity investors. However, non-equity capital instruments
continue to offer a vast array of opportunities. The mechanism
dictating their distribution continue to be defined by automatic
- albeit complex - formulaic rules and the banks will continue
to manage their capital path in a disciplined and conservative
manner, avoiding at all costs the stigma of having to raise capital
at challenging equity discounts, even if this goes against the
will of the states and monetary authorities.
We take note of the historically tight valuations on a highly
uncertain backdrop, and keep our portfolio liquid and defensive.
Still we continue to search for value in the banking and insurance
sectors across the different categories of instruments: discounted
bonds, fixed-to-fixed, long calls, and other make-whole structures.
The end of the Basel III grandfathering period in December 2021
is getting closer and, over the next six months, we will watch
for the EBA guidance on legacy instruments as the next catalyst
to our bond selection.
Gildas Surry
Axiom Alternative Investments SARL
20 August 2020
Principal Risks
Risk is inherent in the Company's activities, but it is managed
through an ongoing process of identifying and assessing risks
and ensuring that appropriate controls are in place. The key risks
faced by the Company, are set out below:
* macroeconomic risk;
* investment risk;
* counterparty risk;
* credit risk;
* share price risk;
* regulatory risk; and
* reputational risk.
Further details of each of these risks and how they are mitigated
are discussed in the Principal Risks section of the Strategic
Report within the Company's Annual Report for the year ended 31
December 2019. The Board believes that these risks are applicable
to the six month period ended 30 June 2020 and the remaining six
months of the current financial year.
The COVID-19 outbreak was a new emerging risk to the global economy
when the 31 December 2019 Strategic Report was considered. The
outbreak is impacting virtually all businesses and the Board expects
that it will continue to impact economies over the coming months.
The Investment Manager and Administrator invoked their business
continuity plans to help ensure the safety and well-being of their
staff thereby retaining the ability to maintain business operations
successfully. The Investment Manager continues to monitor the
effect on issuers of investment instruments to ensure that the
Company is as well-placed as it can be to maintain its objective
and to exploit the opportunities that the evolving situation will
continue to present. As a result, the operations of the Company
are and will be kept under constant review to ensure the Company's
liquid resources will be sufficient to cover any working capital
requirements.
On behalf of the Board.
William Scott
Chairman
20 August 2020
Statement of Directors' Responsibilities
The Directors are responsible for preparing the unaudited half-yearly
report and condensed financial statements, which have not been
audited or reviewed by an independent auditor, and are required
to:
* prepare the unaudited half-yearly financial
statements in accordance with Disclosure and
Transparency Rules ("DTR") 4.2.4R and International
Accounting Standard 34, Interim Financial Reporting,
as adopted by the European Union;
* include a fair review of the information required by
DTR 4.2.7R, being important events that have occurred
during the period and their impact on the unaudited
half-yearly report and condensed financial statements
and a description of the principal risks and
uncertainties for the remaining six months of the
financial year; and
* include a fair review of information required by DTR
4.2.8R, being related party transactions that have
taken place during the period which have had a
material effect on the financial position or
performance of the Company.
The Directors confirm that the unaudited half-yearly report and
condensed financial statements comply with the above requirements.
On behalf of the Board.
William Scott
Chairman
20 August 2020
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 30 June 2020
Period from Period from
1 January 1 January
2020 to 30 2019 to 30
June 2020 June 2019
Note (unaudited) (unaudited)
GBP'000 GBP'000
Income
Capital instrument income 2,520 2,188
Credit default swap income 343 312
Bank interest receivable 13 43
------------ ------------
Total income 2,876 2,543
------------ ------------
Investment gains and losses on investments
held at fair value through profit or loss
Realised (losses)/gains on disposal of
capital instruments and other investments 13 (775) 269
Movement in unrealised (losses)/gains on
capital instruments and other investments 13 (3,968) 3,897
Realised (losses)/gains on derivative financial
instruments 16 (655) 387
Movement in unrealised (losses)/gains on
derivative financial instruments 16 (3,064) 1,367
------------ ------------
Total investment gains and losses (8,462) 5,920
------------ ------------
Expenses
Investment management fee 8a (377) (398)
Administration fee 8b (65) (63)
Directors' fees 8f (47) (47)
Other expenses 10 (126) (126)
Interest payable and similar charges 9 (75) (21)
------------ ------------
Total expenses (690) (655)
------------ ------------
(Loss)/profit from operating activities
before gains and losses on foreign currency
transactions (6,276) 7,808
Loss on foreign currency (886) (263)
------------ ------------
(Loss)/profit for the period attributable
to the Owners of the Company (7,162) 7,545
------------ ------------
(Loss)/earnings per Ordinary Share - basic
and diluted 12 (7.80)p 8.32p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 June 2020
Period from Period from
1 January 1 January
2020 to 30 2019 to 30
June 2020 June 2019
Note (unaudited) (unaudited)
GBP'000 GBP'000
Distributable reserves and total:
At 1 January 2020 91,284 76,976
(Loss)/profit for the period (7,162) 7,545
Contributions by and distributions to Owners
Ordinary Shares issued 19 - 5,941
Share issue costs - (100)
Dividends paid 6 (2,756) (2,660)
------------ ------------
At 30 June 2020 81,366 87,702
------------ ------------
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Financial Position
as at 30 June 2020
As at As at
30 June 31 December
2020 2019 (audited)
Note (unaudited)
GBP'000 GBP'000
Assets
Investments in capital instruments 13,
at fair value through profit or loss 17 75,869 85,924
Other investments at fair value through 13,
profit or loss 17 4,999 7,764
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 9,552 4,999
Derivative financial assets at fair
value through profit or loss 16 2,212 3,909
Other receivables and prepayments 15 1,507 1,625
Cash and cash equivalents 8,407 6,102
------------ ------------
Total assets 102,546 110,323
------------ ------------
Current liabilities
Derivative financial liabilities at
fair value through profit or loss 16 (16,289) (16,434)
Short position(s) covered by reverse
sale and repurchase agreements 13 (1,399) (1,336)
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 - (803)
Other payables and accruals 18 (873) (466)
Bank overdrafts (2,619) -
------------ ------------
Total liabilities (21,180) (19,039)
------------ ------------
Net assets 81,366 91,284
------------ ------------
Share capital and reserves
Share capital 19 - -
Distributable reserves 81,366 91,284
------------ ------------
Total equity holders' funds 81,366 91,284
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 20 88.58p 99.38p
These unaudited condensed half-yearly financial statements were
approved by the Board of Directors on 20 August 2020 and were
signed on its behalf by:
William Scott John Renouf
Chairman Director
20 August 2020 20 August 2020
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Cash Flows
for the six months ended 30 June 2020
Period from Period from
1 January 1 January
2020 to 30 2019 to 30
June 2020 June 2019
Note (unaudited) (unaudited)
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit before taxation (7,162) 7,545
Adjustments for:
Foreign exchange movements 886 263
Total investment losses/(gains) at fair
value through profit or loss 8,462 (5,920)
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts for
derivative financial instruments 14 (5,357) 1,631
Purchase of investments at fair value through
profit or loss 13 (26,431) (28,957)
Sale of investments at fair value through
profit or loss 13 33,529 35,298
Premiums received from selling credit default
swap agreements 16 3,871 617
Premiums paid on buying credit default
swap agreements 16 (3,715) (1,853)
Purchase of foreign currency derivatives 16 (109,100) (94,747)
Close-out of foreign currency derivatives 16 108,614 95,679
Purchase of bond futures 16 (1,320) (2,176)
Sale of bond futures 16 1,314 1,400
Proceeds from sale and repurchase agreements 16 26,056 45,365
Payments to open reverse sale and repurchase
agreements 16 (4,763) -
Payments for closure of sale and repurchase
agreements 16 (27,600) (50,131)
Proceeds from closure of reverse sale and
repurchase agreements 16 4,782 1,576
Opening of short positions 13 2,752 760
Closure of short positions 13 (2,315) (1,622)
------------ ------------
Net cash inflow from operating activities
before working capital changes 2,503 4,728
Decrease in other receivables and prepayments 724 162
Increase/(decrease) in other payables and
accruals 101 (320)
------------ ------------
Net cash inflow from operating activities 3,328 4,570
Cash flows from financing activities
Proceeds from issue of Ordinary Shares 21 - 5,941
Share issue costs paid 21 - (164)
Dividends paid 6 (2,756) (2,660)
------------ ------------
Net cash (outflow)/inflow from financing
activities (2,756) 3,117
------------ ------------
Increase in cash and cash equivalents * 572 7,687
Cash and cash equivalents brought forward 6,102 2,446
Effect of foreign exchange on cash and
cash equivalents (886) (263)
------------ ------------
Cash and cash equivalents carried forward
* 5,788 9,870
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest (797) (172)
Cash received during the period for interest 4,215 2,752
Cash received during the period for dividends 135 71
* Cash and cash equivalents at the start of the period and at the
period 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 unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Notes to the Unaudited Condensed Half-Yearly Financial Statements
for the six months ended 30 June 2020
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Law on 7 October 2015 with registered number
61003. Its Ordinary Shares were admitted to trading on the 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 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 may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present
the results of the Company for the six months ended 30 June 2020.
These unaudited condensed half-yearly financial statements have
been prepared in accordance with the Disclosure and Transparency
Rules of the FCA and International Accounting Standard 34, Interim
Financial Reporting, as adopted by the European Union.
The unaudited condensed half-yearly financial statements for the
period ended 30 June 2020 have not been audited or reviewed by
the Company's auditors and do not constitute statutory financial
statements. They have been prepared on the same basis as the Company's
annual financial statements.
These unaudited condensed half-yearly financial statements were
authorised for issuance by the Board of Directors on 20 August
2020.
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. Therefore, the unaudited condensed half-yearly financial
statements have been prepared on a going concern basis.
c) Basis of measurement
These unaudited condensed half-yearly financial statements have
been prepared on a historical cost basis, except for 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 unaudited condensed half-yearly
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, bond income and credit default swap income is recognised
on a time-proportionate basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 30 June 2020 were
GBP1/EUR1.1040, GBP1/US$1.2401, GBP1/DKK8.2266, GBP1/CA$1.6835
and GBP1/SGD1.7282 (31 December 2019: GBP1/EUR1.1825, GBP1/US$1.3257,
GBP1/DKK8.8323, GBP1/CA$1.7226 and GBP1/SGD1.7841).
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 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
outstanding amount; 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 dividend earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities
at fair value through profit or loss
The Company records its transactions in 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 the 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 comprises cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
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 period 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
realised 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 period end.
Earnings per share is calculated by dividing the earnings for
the period by the weighted average number of Ordinary Shares in
issue during the period.
l) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the
previous financial year. The Company adopted the following new
and amended relevant IFRS in the period:
IFRS Financial Instruments: Disclosures - amendments regarding
7 pre-placement issues in the context of IBOR reform
IFRS Financial Instruments - amendments regarding pre-placement
9 issues in the context of IBOR reform
IAS 1 Presentation of Financial Statements - amendments regarding
the definition of material
IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors - amendments regarding the definition of material
The adoption of the above standards did not have an impact on
the financial position or performance of the Company.
m) 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 expect that they would not have a material
impact on the Company's financial statements in the period of
initial application.
Effective date
IFRS Financial Instruments - amendments resulting 1 January 2022
9 from Annual Improvements to IFRS Standards
2018-2020
IAS 1 Presentation of Financial Statements - amendments 1 January 2022
regarding the classification of liabilities
IAS 37 Provisions, Contingent Liabilities and Contingent 1 January 2022
Assets - amendments regarding the costs to
include when assessing whether a contract is
onerous
4. Use of judgements and estimates
The preparation of the Company's unaudited condensed half-yearly
financial statements requires the Directors to make judgements,
estimates and assumptions that affect the reported amounts recognised
in the unaudited condensed half-yearly financial statements and
disclosure of contingent liabilities. 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 unaudited condensed half-yearly
financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although the majority of the Company's underlying
assets are held in currencies other than Sterling, because the
Company's capital is raised in Sterling, expenses are paid in
Sterling and the Company hedges substantially all of its foreign
currency risk back to Sterling the Directors consider Sterling
to be the Company's functional currency.
The Directors do not consider there to be any other judgements
which have had a significant impact on the unaudited condensed
half-yearly financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the unaudited condensed half-yearly financial statements
were approved. However, existing circumstances and assumptions
about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such
changes are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 17.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes. The financial
results of this segment are equivalent to the results of the Company
as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company declared the following dividends during the period
ended 30 June 2020:
Total dividend declared
in respect of earnings Amount per Ordinary
in the period Share
Period from Period from Period Period from
1 January 1 January from 1 1 January
2020 to 2019 to January 2019 to
30 June 30 June 2020 to 30 June
2020 (unaudited) 2019 (unaudited) 30 June 2019 (unaudited)
2020 (unaudited)
GBP'000 GBP'000 pence Pence
Dividends declared and paid
in the period 2,756 2,660 3.00 3.00
Less, dividend declared in
respect of the prior period
that was paid in the period (1,378) (1,282) (1.50) (1.50)
Add, dividend declared out
of the profits for the period
but paid after the period
end: 1,378 1,378 1.50 1.50
------------ ------------ ------------ ------------
Dividends declared in respect
of the period 2,756 2,756 3.00 3.00
------------ ------------ ------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the period a total of GBP2,756,000 (30 June 2019: GBP2,660,000)
was recognised in respect of dividends, none of which was outstanding
at the reporting date. The second dividend of GBP1,378,000 in
respect of the earnings during the period had not been provided
for at 30 June 2020 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
advisers and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 30 June 2020, the Company had holdings in the following
investments which were managed by the Investment Manager:
30 June 2020 31 December 2019
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Global CoCo UCIT ETF
USD-hedged 35 2,984 3,016 35 2,984 2,898
Axiom Global CoCo UCIT ETF
GBP-hedged 20 2,000 1,983 20 2,000 2,092
Axiom Contingent Capital -
Class E - - - 2,450 2,462 2,774
During the period, the Company sold 2,450 units in Axiom Contingent
Capital - Class E for GBP2,150,000, realising a loss of GBP312,000.
During the period ended 30 June 2019, the Company:
* sold 669 units in Axiom Contingent Capital - Class E
for GBP700,000, realising a gain of GBP28,000;
* purchased 70 units in UC AXI Global CoCo Bonds UCITS
ETF for GBP6,040,000; and
* purchased 5 units in Axiom Global CoCo UCIT ETF for
GBP394,000.
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 period, a total of GBP377,000 (30 June 2019: GBP398,000)
was incurred in respect of Investment Management fees, of which
GBP377,000 (31 December 2019: GBP189,000) was payable at the reporting
date.
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall Payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
During the period, GBP16,000 of the Expenses Excess was paid to
the Investment Manager (30 June 2019: GBP13,000 Expenses Excess
was paid to the Investment Manager). At 30 June 2020, the Quarterly
Expenses Excess and Annual Expenses Excess which would be payable
to the Investment Manager in future periods was GBP709,000 (31
December 2019: GBP725,000) (see note 25).
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 number of shares
in issue during the period from 5 November 2015 to the end of
the relevant accounting period
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited annual
accounts.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
During the period, no performance fee was payable by the Company
(30 June 2019: GBPnil). As at 30 June 2020, GBP68,000 was due
to the Investment Manager in settlement of 50% of the 2019 performance
fee. This amount will be used to purchase shares in the Company.
The other 50% was settled in cash in the period.
b) Administrator and Company Secretary
Elysium Fund Management Limited has been appointed by the Company
to provide day to day administration services to the Company,
to calculate the NAV per share as at the end of each calendar
month and to provide company secretarial functions required under
the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of 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 any work
undertaken in connection with the daily NAV, subject to a maximum
aggregate amount of GBP10,000 per annum.
During the period, a total of GBP65,000 (30 June 2019: GBP63,000)
was incurred in respect of Administration fees and GBP32,000 (31
December 2019: GBP32,000) was payable to the Administrator at
the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") has been appointed
to act as Corporate Broker ("Broker") for the Company, for which
the Company pays Winterflood an annual retainer fee of GBP35,000
per annum.
For the period ended 30 June 2020, the Company incurred Broker
fees of GBP18,000 (30 June 2019: GBP18,000) of which GBP6,000
was payable at the period end date (31 December 2019: GBP6,000).
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 period, a total of GBP10,000 (30 June 2019: GBP10,000)
was incurred in respect of Registrar fees, of which GBP3,000 was
payable at 30 June 2020 (31 December 2019: GBP1,000).
e) Depositary
CACEIS Bank France has been appointed by the Company to provide
depositary, settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum
annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis point fee charge
based on the country of settlement and the value of the assets;
and
iii. an administration fee on each transaction, together with
various other payment/wire charges on outgoing payments.
During the period, a total of GBP21,000 (30 June 2019: GBP18,000)
was incurred in respect of depositary fees, and GBP6,000 (31 December
2019: GBP13,000) was payable to the Depositary at the reporting
date.
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 GBP20,000 (30 June 2019: GBP21,000)
was incurred in respect of fees paid to CACEIS Bank Luxembourg,
of which GBP10,000 was payable at 30 June 2020 (31 December 2019:
GBP14,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum, John Renouf
(Chairman of the Audit Committee) is paid GBP32,500 per annum,
and Max Hilton is paid GBP27,500 per annum.
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the period, a total of GBP47,000 (30 June 2019: GBP47,000)
was incurred in respect of Directors' fees, of which GBP8,000
(31 December 2019: GBPnil) was payable at the reporting date.
No bonus or pension contributions were paid or payable on behalf
of the Directors.
9. Interest payable and similar charges
Period from Period from
1 January 1 January
2020 to 30 2019 to 30
June 2020 June 2019
(unaudited) (unaudited)
GBP'000 GBP'000
Interest payable on sale and repurchase
agreements 52 5
Bank interest 23 15
Commission - 1
------------ ------------
75 21
------------ ------------
10. Other expenses
Period from Period from
1 January 1 January
2020 to 30 2019 to 30
June 2020 June 2019
(unaudited) (unaudited)
GBP'000 GBP'000
Depositary fees (note 8e) 21 18
Audit fees 21 18
Valuation agent fees (note 8e) 20 21
PR expenses 20 21
Broker fees (note 8c) 18 18
Registrar fees (note 8d) 10 10
Other expenses 16 20
------------ ------------
126 126
------------ ------------
11. 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.
12. Loss per Ordinary Share
The loss per Ordinary Share of 7.80p (30 June 2019: earnings of
8.32p) is based on a loss attributable to owners of the Company
of GBP7,162,000 (30 June 2019: profit of GBP7,545,000) and on
a weighted average number of 91,852,904 (30 June 2019: 90,650,529)
Ordinary Shares in issue since 1 January 2020. There is no difference
between the basic and diluted loss per share.
13. Investments at fair value through profit or loss
Movements in gains/(losses) in the period
30 June 2020 (unaudited) 30 June 2019 (unaudited)
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in capital
instruments (3,691) (811) (4,502) 3,151 267 3,418
Other investments (303) (312) (615) 743 31 774
Short position(s) covered
by reverse sale and
repurchase agreements 26 348 374 3 (29) (26)
------------ ------------ ------------ ------------ ------------ ------------
(3,968) (775) (4,743) 3,897 269 4,166
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December
2019
30 June 2020
(unaudited) (audited)
GBP'000 GBP'000
Investments in capital instruments 75,869 85,924
Other investments 4,999 7,764
Short position covered by reverse sale
and repurchase agreements (1,399) (1,336)
------------ ------------
Investments at fair value through profit
or loss 79,469 92,352
------------ ------------
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 30 June 2020, the Company had fifteen (31 December 2019:
ten) open sale and repurchase agreements, including one (31 December
2019: one) reverse sale and repurchase agreement (see note 16).
The reverse sale and repurchase agreement is 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 30 June
2020 was GBP24,250,000 (31 December 2019: GBP19,596,000). The
fair value net of the short position was GBP22,851,000 (31 December
2019: GBP18,260,000).
14. Collateral accounts for derivative financial instruments
at fair value through profit or loss
30 June 2020 31 December
(unaudited) 2019
(audited)
GBP'000 GBP'000
JP Morgan 6,753 3,660
CACEIS Bank France 1,286 -
Goldman Sachs International 887 754
Credit Suisse 626 585
------------ ------------
9,552 4,999
CACEIS Bank France - negative balance - (803)
------------ ------------
Net balance on collateral accounts held
by brokers 9,552 4,196
------------ ------------
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 derivative
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation in respect of the derivatives.
15. Other receivables and prepayments
30 June 31 December
2020 (unaudited) 2019
(audited)
GBP'000 GBP'000
Accrued capital instrument income receivable 864 1,591
Due from sale of capital instrument 610 -
Prepayments 19 15
Interest due on credit default swaps 13 15
Interest due on collateral held by brokers 1 4
------------ ------------
1,507 1,625
------------ ------------
16. 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
31 December
2019
Period Period
from 1 from 1
January January
2020 to 2019 to
30 June 30 June
2020 (unaudited) 2019 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance 1,016 (2,419) (2,419)
Premiums received from selling credit
default swap agreements (3,871) (617) (1,658)
Premiums paid on buying credit default
swap agreements 4,021 1,853 2,982
Movement in unrealised (losses)/gains
in the period (861) 1,879 1,972
Realised (losses)/gains in the period (28) 323 139
------------ ------------ ------------
Outstanding assets due on credit default
swaps 277 1,019 1,016
------------ ------------ ------------
Credit default swap assets at fair
value through profit or loss 639 1,413 1,398
Credit default swap liabilities at
fair value through profit or loss (362) (394) (382)
------------ ------------ ------------
Outstanding assets due on credit default
swaps 277 1,019 1,016
------------ ------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Unaudited Condensed Statement of
Comprehensive Income as it has been incurred or received. At the
period end, GBP13,000 (31 December 2019: GBP15,000) of interest
on credit default swap agreements was due to the Company.
Collateral totalling GBP8,266,000 (31 December 2019: GBP4,999,000)
was held in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for trading purposes
and are used to hedge the Company's exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings. A foreign
currency forward contract is a commitment to purchase or sell
a foreign currency on a future date and at a negotiated forward
exchange rate.
Period Period
from 1 from 1
January January
2020 to 2019 to
30 June 30 June
2020 (unaudited) 2019 (unaudited)
Year ended
31 December
2019
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 1,219 (1,329) (1,329)
Purchase of foreign currency derivatives 109,100 94,747 324,487
Closing-out of foreign currency derivatives (108,614) (95,679) (325,345)
Movement in unrealised (losses)/gains
in the period (1,951) (540) 2,548
Realised (losses)/gains in the period (486) 932 858
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (732) (1,869) 1,219
------------ ------------ ------------
Foreign currency forward assets at
fair value through profit or loss 126 1,860 1,219
Foreign currency forward liabilities
at fair value through profit or loss (858) (3,729) -
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (732) (1,869) 1,219
------------ ------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to
purchase or sell bond futures for a predetermined price, with
payment and delivery of the bond future at a predetermined future
date.
Period Period
from 1 from 1
January January
2020 to 2019 to
30 June 30 June
2020 (unaudited) 2019 (unaudited)
Year ended
31 December
2019
(audited)
GBP'000 GBP'000 GBP'000
Opening balance - (7) (7)
Purchase of bond futures 1,320 2,176 2,336
Sale of bond futures (1,314) (1,400) (1,384)
Movement in unrealised gains/(losses)
in the period - (123) 88
Realised losses in the period (6) (647) (1,033)
------------ ------------ ------------
Balance payable on bond futures - (1) -
------------ ------------ ------------
Bond future assets at fair value through
profit or loss - 5 -
Bond future liabilities at fair value
through profit or loss - (6) -
------------ ------------ ------------
Balance payable on bond futures - (1) -
------------ ------------ ------------
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
31 December
2019
Period Period
from 1 from 1
January January
2020 to 2019 to
30 June 30 June
2020 (unaudited) 2019 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance (14,760) (14,955) (14,955)
Opening of sale and repurchase agreements (26,056) (45,365) (63,360)
Opening of reverse sale and repurchase
agreements 4,763 - 2,678
Closing-out of sale and repurchase
agreements 27,600 50,131 64,283
Closing-out of reverse sale and repurchase
agreements (4,782) (1,576) (3,694)
Movement in unrealised (losses) in
the period (252) 151 691
Realised losses in the period (135) (221) (403)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (13,622) (11,835) (14,760)
------------ ------------ ------------
Sale and repurchase assets at fair
value through profit or loss 1,447 787 1,292
Sale and repurchase liabilities at
fair value through profit or loss (15,069) (12,622) (16,052)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (13,622) (11,835) (14,760)
------------ ------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Unaudited Condensed Statement of Comprehensive Income
as it has been incurred. At 30 June 2020 GBPnil (31 December 2019:
GBPnil) 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 Unaudited Condensed Statement of Financial
Position. Certain derivative financial instruments are subject
to enforceable master netting arrangements, such as ISDA master
netting agreements, or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised 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
Net amount meet the criteria
presented for offsetting
in Unaudited in the Unaudited
Gross carrying Amounts offset Condensed Condensed Statement
amount in accordance Statement of Financial
before with offsetting of Financial Position - Cash
offsetting criteria Position held as collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2020 (unaudited)
Financial assets
Derivatives 2,212 - 2,212 (1,399) 813
Collateral accounts
for derivative
financial instruments
(note 14) 9,552 - 9,552 (1,220) 8,332
------------ ------------ ------------ ------------ ------------
Total assets 11,764 - 11,764 (2,619) 9,145
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (16,289) - (16,289) 16,289 -
Collateral accounts
for derivative
financial instruments
(note 14) - - - - -
------------ ------------ ------------ ------------ ------------
Total liabilities (16,289) - (16,289) 16,289 -
------------ ------------ ------------ ------------ ------------
31 December 2019 (audited)
Financial assets
Derivatives 3,909 - 3,909 (1,292) 2,617
Collateral accounts
for derivative
financial instruments
(note 14) 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 14) (803) - (803) - (803)
------------ ------------ ------------ ------------ ------------
Total liabilities (17,237) - (17,237) 16,404 (833)
------------ ------------ ------------ ------------ ------------
17. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At the period end, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level 2 Level Total
1 3
GBP'000 GBP'000 GBP'000 GBP'000
30 June 2020 (unaudited)
Listed capital instruments at fair
value through profit or loss 75,728 141 - 75,869
Other investments at fair value through
profit or loss (note 7) 4,999 - - 4,999
Credit default swap assets - 639 - 639
Credit default swap liabilities - (362) - (362)
Derivative financial assets - 1,573 - 1,573
Derivative financial liabilities - (15,927) - (15,927)
Short position covered by sale and
repurchase agreements - (1,399) - (1,399)
------------ ------------ ------------ ------------
80,727 (15,335) - 65,392
------------ ------------ ------------ ------------
31 December 2019 (audited)
Listed capital instruments at fair
value through profit or loss 83,460 2,464 - 85,294
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
------------ ------------ ------------ ------------
Level 1 financial instruments include listed capital instruments
at fair value through profit or loss, unlisted open ended funds
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 period are determined and
deemed to have occurred at each financial reporting date. There
were no investments classified as Level 3 during the period, and
no transfers between levels in the period. See notes 13, 14 and
16 for movements in instruments held at fair value through profit
or loss.
18. Other payables and accruals
30 June 31 December
2020 (unaudited) 2019
(audited)
GBP'000 GBP'000
Investment management fee (note 8a) 377 189
Due on purchase of credit default swap agreement 304 -
Performance fee (note 8a) 68 136
Administration fee (note 8b) 32 32
Audit fees 21 30
Other accruals 19 31
Share issue costs 14 14
Valuation agent fees (note 8e) 10 14
Directors' remuneration (note 8f) 8 -
Depositary fees (note 8e) 6 13
Broker fee (note 8c) 6 6
Accrued interest payable on capital instrument
short position 5 -
Registrar fee (note 8d) 3 1
------------ ------------
873 466
------------ ------------
19. Share capital
30 June 2020 (unaudited) 31 December 2019 (audited)
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of no par
value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and fully
paid:
Ordinary Shares of no par
value 91,852,904 - 91,852,904 -
------------ ------------ ------------ ------------
Issued share capital
Number of Price per Gross proceeds
shares share GBP'000
Shares in issue as at 31 December
2018 85,452,024
Shares issued on 4 February 2019 6,400,880 92.81p 5,941
------------
Shares in issue as at 30 June
2019, 31 December 2019, 30 June
2020 and 20 August 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.
20. 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 GBP81,366,000 (31 December
2019: GBP91,284,000), and on 91,852,904 (31 December 2019: 91,852,904)
Ordinary Shares in issue at the period end.
21. Changes in liabilities arising from financing activities
During the period ended 30 June 2019, the Company raised GBP5,941,000
through the placing of 6,400,880 new Ordinary Shares of no par
value. Share issue costs of GBP100,000 were incurred in relation
to the placing, and at the period end GBP14,000 (31 December 2019:
GBP14,000) of these costs were outstanding, resulting in cash
flows in relation to share issue costs in the period of GBPnil
(30 June 2019: GBP164,000).
22. 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 position in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investments,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, unlisted
open ended funds and bond futures at fair value through profit
or loss (see notes 13, 16 and 17) are exposed to price risk and
it is not the intention to mitigate the price risk.
At 30 June 2020, 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
+/- GBP3,973,000 (31 December 2019: GBP4,618,000). The fair value
of financial instruments exposed to price risk at 30 June 2020
was GBP79,468,000 (31 December 2019: GBP92,352,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the period. At the period
end, the Company held the following foreign currency forward contracts:
30 June 2020
Maturity date Amount to be Amount to be purchased
sold
31 July 2020 EUR37,000,000 GBP32,702,000
31 July 2020 US$16,000,000 GBP13,028,000
31 July 2020 EUR2,000,000 GBP1,788,000
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
As at the period end a proportion of the net financial assets
of the Company were denominated in currencies other than Sterling,
as follows:
Investments
at fair Foreign
value through currency
profit or Cash and forward
loss Receivables cash equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2020 (unaudited)
Euro 40,379 605 (2,619) 38,365 (35,349) 3,016
US Dollar 8,157 462 4,806 13,425 (12,902) 523
Danish Krone - - - - - -
Canadian Dollar - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
48,536 1,067 2,187 51,790 (48,251) 3,539
------------ ------------ ------------ ------------ ------------ ------------
31 December 2019 (audited)
Euro 41,044 1,024 1,156 43,224 (41,060) 2,164
US Dollar 8,746 34 1,118 9,898 (9,200) 698
Danish Krone - - 832 832 (827) 5
Canadian Dollar - - - - - -
Singaporean
Dollar - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
49,790 1,058 3,106 53,954 (51,087) 2,867
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 30 June 2020, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 30 June 2020 would have decreased/increased by GBP177,000
(31 December 2019: GBP143,000).
iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP53,753,000 (31 December
2019: GBP61,945,000), cash and cash equivalents, net of overdrafts,
of GBP5,788,000 (31 December 2019: GBP6,102,000), collateral account
balances of GBP9,552,000 (31 December 2019: GBP4,196,000) and
short positions of GBP1,399,000 (31 December 2019: GBP1,336,000)
were the only interest bearing financial instruments subject to
variable interest rates at 30 June 2020. Therefore, if interest
rates had increased/decreased by 50 basis points, with all other
variables remaining constant, the change in the value of interest
cash flows of these assets in the period would have been GBP384,000
(31 December 2019: +/- GBP352,000).
Fixed Variable Non-interest
interest interest bearing Total
30 June 2020 (unaudited) GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 15,045 53,753 12,070 80,868
Cash and cash equivalents - 8,407 - 8,407
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 9,552 - 9,552
Derivative financial assets at fair
value through profit or loss 2,086 - 126 2,212
Other receivables - - 1,506 1,506
------------ ------------ ------------ ------------
Total financial assets 17,131 71,712 13,702 102,545
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (2,619) - (2,619)
Derivative financial liabilities
at fair value through profit or loss (15,431) - (858) (16,289)
Short positions covered by sale and
repurchase agreements - (1,399) - (1,399)
Other payables and accruals - - (873) (873)
------------ ------------ ------------ ------------
Total financial liabilities (15,431) (4,018) (1,731) (21,180)
------------ ------------ ------------ ------------
Total interest sensitivity gap 1,700 67,694 11,971 81,365
------------ ------------ ------------ ------------
31 December 2019 (audited)
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
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
------------ ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and
non-interest bearing capital instruments of GBP27,115,000 (31
December 2019: GBP31,742,000) at 30 June 2020 would increase/decrease
by +/-GBP569,000 (0.70%) (31 December 2019: +/-GBP721,000 (0.77%))
if interest rates were to change by 50 basis points.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic
conditions, market expectations and its own views as to likely
movements in interest rates.
Although it has not done so to date, the Company may implement
hedging and derivative strategies designed to protect investment
performance against material movements in interest rates. Such
strategies may include (but are not limited to) interest rate
swaps and will only be entered into when they are available in
a timely manner and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy
of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has
entered into with the Company, resulting in a financial loss to
the Company.
At 30 June 2020, credit risk arose principally from investment
in capital instruments of GBP75,869,000 (31 December 2019: GBP85,924,000),
cash and cash equivalents of GBP8,407,000 (31 December 2019: GBP6,102,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP9,552,000 (31 December
2019: GBP4,999,000) and investments in sale and repurchase assets
of GBP1,447,000 (31 December 2019: GBP1,292,000). The Company
seeks to trade only with reputable counterparties that the Investment
Manager believes to be creditworthy.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 30 June 2020, the capital instrument rating profile
of the portfolio was as follows:
31 December
30 June 2020 2019
Percentage Percentage
A - -
BBB 18.78 19.22
BB 30.91 38.33
B 18.29 9.15
Below B 9.34 8.21
No rating 20.28 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 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 30 June 2020, the overall net exposure to these counterparties
was 10.94% of NAV (31 December 2019: 7.01%). The collateral held
at each counterparty is disclosed in note 14.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 30 June 2020 was
very low since the ratio of cash and cash equivalents (net of
overdrafts) to unmatched liabilities was 7:1 (31 December 2019:
13:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December
30 June 2020 2019
Percentage Percentage
Less than 1 year 5.07 4.91
1 to 3 years 27.53 36.37
3 to 5 years 41.25 27.85
5 to 7 years 11.63 7.80
7 to 10 years 5.37 6.47
More than 10 years 15.21 16.60
------------ ------------
100.00 100.00
------------ ------------
As at 30 June 2020, the Company's liquidity profile was such that
61.1% of investments were realisable within one day (31 December
2019: 66.5%), 36.0% was realisable between two days and one week
(31 December 2019: 33.5%) and 2.9% was realisable between eight
days and one month (31 December 2019: 0.0%).
As at 30 June 2020, the Company's liabilities fell due as follows:
31 December
30 June 2020 2019
Percentage Percentage
0 to 3 months 82.73 54.99
3 to 6 months - -
6 to 12 months - -
1 to 3 years 15.18 15.73
3 to 5 years 2.09 29.28
------------ ------------
100.00 100.00
------------ ------------
23. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 30 June 2020 the Company had fifteen
(31 December 2019: ten) open sale and repurchase agreements, one
(31 December 2019: one) being a reverse sale and repurchase agreement,
committing the Company to make a total repayment of GBP15,069,000
post the period end (31 December 2019: GBP16,052,000). As a result
of the reverse sale and repurchase agreement the Company was due
to receive GBP1,447,000 after the period end (31 December 2019:
GBP1,292,000).
The raising of capital through the ongoing placing programme forms
part of the capital management policy. See note 19 for details
of the Ordinary Shares issued since incorporation.
As disclosed in the Unaudited Condensed Statement of Financial
Position, at 30 June 2020, the total equity holders' funds were
GBP81,366,000 (31 December 2019: GBP91,284,000).
24. Capital commitments
The Company holds a number of derivative financial instruments
which, by their very nature, give rise to capital commitments
post 30 June 2020. These are as follows:
* At the period end, the Company had sold twelve credit
default swap agreements for a total of GBP633,000,
each receiving quarterly interest (31 December 2019:
fourteen agreements for GBP931,000). The exposure of
the Company in relation to these agreements at the
period end date was GBP150,000 (31 December 2019:
GBP1,096,000). Collateral of GBP8,266,000 for these
agreements was held at 30 June 2020 (31 December
2019: GBP4,999,000).
* At the period end the Company had committed to three
(31 December 2019: five) foreign currency forward
contracts dated 31 July 2020 (see note 22), giving
rise to a total loss of GBP732,000 (31 December 2019:
gain of GBP1,219,000).
* At the period end, the Company held fourteen (31
December 2019: nine) open sale and repurchase
agreements (this excludes the one (31 December 2019:
one) open reverse sale and repurchase agreement)
committing the Company to make a total repayment of
GBP15,107,000 (31 December 2019: GBP16,405,000).
25. 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 GBP709,000 at 30 June 2020
(31 December 2019: GBP725,000) 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.
Although GBP33,000 (30 June 2019: GBP13,000) of the Expenses Excess
was paid in the period, this related solely to the first quarter
of 2020 and the Expenses Excess increased by GBP17,000 in the
second quarter. For a significant amount of the GBP709,000 (31
December 2019: GBP725,000) Expenses Excess to become payable within
the foreseeable future, the Company's NAV would need to increase
considerably from the 30 June 2020 NAV. 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 unaudited condensed half-yearly financial statements.
There were no other contingent assets or contingent liabilities
in existence at the year end.
26. Events after the financial reporting date
On 22 July 2020, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 April 2020 to 30 June 2020,
out of the profits for the period ended 30 June 2020, which (in
accordance with IFRS) was not provided for at 30 June 2020 (see
note 6). This dividend will be paid on 28 August 2020.
It was noted in the 31 December 2019 Annual Report and Financial
Statements that, for good corporate governance, the audit would
be put out to tender in the first half of 2020. In line with this
intention, the Company received proposals from a number of audit
firms. In making the decision regarding the appointment of the
auditor, the Board was cognisant of a number of aspects including
cost and expertise.
After due consideration of the proposals, the Board agreed to
appoint Grant Thornton Limited as the Company's auditor with effect
from 19 August 2020.
-- 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
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