TIDMAXI
RNS Number : 0847T
Axiom European Financial Debt Fd Ld
23 March 2021
23 March 2021
Axiom European Financial Debt Fund Limited
("Axiom" or the "Company")
Annual Financial Report
For the year ended 31 December 2020
Positive total returns and a maintained dividend in a challenging
year
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
fund, today announces its Annual Financial Report for the year
ended 31 December 2020.
Highlights
31 December 31 December
2020 2019
Net assets GBP87,350,000 GBP91,284,000
Net asset value ("NAV") per Ordinary
Share [1] 95.10p 99.38p
Share price 88.00p 94.00p
Discount to NAV (7.47)% (5.41)%
Profit/(loss) for the year GBP1,577,000 GBP13,882,000
Dividend per share declared in respect
of the year 6.00p 6.00p
Total return per Ordinary Share (based
on NAV) [1] 1.73% 16.98%
Total return per Ordinary Share (based
on share price) [2] 0.00% 13.64%
Ordinary Shares in issue at year end 91,852,904 91,852,904
[1] Please see note 22 for a reconciliation of the NAV per Ordinary
Share of 95.10p to the originally announced NAV per Ordinary
Share of 95.26p.
[2] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
year with the NAV or share price, as applicable, plus dividends
paid, at the year end.
* Total returns for the year were positive at +1.73%,
recovering from a low in March of -19.95%.
* Performance was driven by strong H2 (+10.75% versus
-7.85% in H1).
* Positive returns in eight of the nine months in the
latter three quarters.
* The strong performance of the last three quarters has
extended into 2021.
* Maintained dividend of 6.00p per share despite the
uncertainty during the year.
* The Company expects to be able to continue to meet
its dividend target in 2021.
* Asset class remains attractive as market conditions
improve through 2021 and the Company is ideally
placed to capture these opportunities.
* Board committed to restarting the Company's Placing
Programme and improving the liquidity of the shares.
William Scott, Chairman, commented:
"Against the backdrop of an extraordinary year that saw widespread
market uncertainty and declines, the Company's total return for
the period was positive, a considerable achievement, based on
a strong second half and positive returns in eight of the nine
months over the last three quarters.
"Looking ahead, it is reasonable to expect the pandemic related
uncertainty to continue this year and we will also see the evolution
of the regulatory framework in Europe continue and the terms
under which Britain, along with its financial services sector,
will trade with Europe finalised. This means that returns on
individual instruments may be more greatly dispersed in the years
to come.
" Our portfolio remains well-positioned, despite these uncertainties,
to deliver on our core investment objective and the strong performance
of the last three quarters has extended into 2021. Under the
highly experienced management of Axiom AI, we remain positive
and continue to believe that the Company is well positioned to
capitalise on the opportunities of a recovering market and changing
regulatory framework in Europe and, once again, we thank Shareholders
for their continued support. "
Gildas Surry, Investment Manager, said:
"Despite the constraints of the pandemic, it has created a constructive
backdrop for bonds issued by financial institutions as central
banks provided significant support measures including cheap funding
and capital relief.
"Notwithstanding European banks' profitability suffering from
the continuing low interest rate environment, they are very attractive
in the current market context for bond investors; corporate bonds
with a BB+ rating currently offer c.2% income whereas a BB+ bank
bond offers a far more attractive c.4%.
"The Company continues to be ideally placed, with its closed-ended
format and its range of investment sub-strategies, to capture
the opportunities arising in the sector, from liquid to less
liquid instruments, from small to large issuers, from legacy
to new formats, and from senior to equity capital instruments.
"
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
Antonio Roman St Julian's Avenue Charlotte Anstey
Jerome Legras St Peter Port
Guernsey
GY1 3JX
axiom@mhpc.com
axiom@elysiumfundman.com Tel: +44 20 3128
www.axiom-ai.com Tel: +44 1481 810 100 8193
Tel: +44 20 3807 0670
A copy of the Company's Annual Report and Financial Statements
for the year ended 31 December 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.
About Axiom European Financial Debt Fund Limited
General information
Axiom European Financial Debt Fund Limited (the "Company") is
an authorised closed-ended Guernsey investment company with registered
number 61003. Its Ordinary Shares were admitted to the premium
listing segment of the FCA's Official List and to trading on the
Premium Segment of the Main Market of the London Stock Exchange
(the "Premium Segment") on 15 October 2018 ("Admission"). Prior
to this, the Ordinary Shares traded on the Specialist Fund Segment
("SFS") of the London Stock Exchange.
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market, although instruments have
been, and may also in the future be, subscribed in the primary
market where the Investment Manager, Axiom Alternative Investments
SARL ("Axiom"), identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
For a more detailed description of the investment policy, please
see the Company's Prospectus, which is available on the Company's
section of the Investment Manager's website
( http://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2020:
Strategic Report
Chairman's Statement
Results
2020 was an extraordinary year by any standards, both in the real
world and in the financial markets. We have witnessed the most
significant global public health crisis in many decades - for
those of us in the UK, probably since the so-called 'Spanish Flu'
of 1918 to 1920 - beyond living memory. We have all followed developments
and will be very familiar with the 'lock-downs' and disruption
of normal society to a degree that we could not have imagined
only a year ago. The effects on industry and commerce have been
well-reported elsewhere: the UK, according to government statistics,
has suffered the worst contraction of output since 1709 with GDP
down 9.9% over the year. Within the headline numbers, some industries
- especially those dependent on the free circulation of people
- particularly travel, lodging and hospitality have been devastated
and survive only on significant governmental intervention - while
others which can transition to either home working to deliver
services remotely or to internet sales models have survived and,
in some instances, even thrived. The effect on public finances
has been similar in magnitude to that of the great world wars
of the twentieth century.
The Company invests in the capital instruments of European financial
institutions. One of the early interventions by sector regulators
was to force the suspension of equity dividends by banks and insurance
companies. This did not extend to the coupon payments on instruments
such as those in which the Company invests and so in our case,
no great loss of income was suffered. After a promising start
to the year, the immediate consequences of the considerable uncertainty
as the markets began to try to weigh the likely effects of the
pandemic were brutal market declines in the prices of most instruments.
The Company's total return in the first half of the year was -7.85%
as I reported at the Interim stage. I am pleased to say that the
second half was very much better with a total return of +10.75%,
to give a modest positive net result over this difficult year
of +1.73%. The recovery has been one of steady progress with positive
returns in eight of the nine months in the latter three quarters.
Further details on the development of key market events and activity
in the portfolio are given in the Investment Manager's report.
In aggregate, the Company reported a net profit after tax for
the year ended 31 December 2020 of GBP1.6 million (2019: profit
of GBP13.9 million), representing earnings per Ordinary Share
of 1.72p (2019: earnings of 15.21p) and the Company's NAV at 31
December 2020 was GBP87.4 million (95.10p per Ordinary Share)
(2019: GBP91.3 million, 99.38p per Ordinary Share).
As is often the case in the closed-ended fund sector, the recovery
in the Company's share price lagged the rise in NAV over the second
half of the year and hence, over the full year, the share price
discount to NAV widened slightly from 5.41% at the end of 2019
to 7.47% at the year end. Although the discount subsequently narrowed
back to roughly where it was at the start of 2020, the continued
strong recovery in early 2021 has now meant that it has widened
again to 10.33% as at the time of writing.
Dividends
As in prior years, the Company declared four dividends each of
1.50p per Ordinary Share in relation to the year: one was declared
after the balance sheet date and was paid on 26 February 2021
to Shareholders on the register at 6 February 2021. During the
period, actual payments of 6.00p were made, being the May, August
and November dividends of 1.50p each and the 1.50p dividend in
respect of the period ended 31 December 2019, which was paid on
28 February 2020.
Placing programme and fundraising
Shareholders will not be surprised that, given market events during
the year, circumstances were not conducive to placing further
shares. Nevertheless, we remain committed to expanding the size
of the Company to improve the return economics for Shareholders
by spreading the burden of the operational costs of the Company
over a larger asset base and also improving trading liquidity
in our shares. As markets continue to recover, we hope to make
progress in this regard. In this context we note that inflows
into the Investment Manager's open-ended funds have been good
in recent months and we hope to capitalise on that momentum when
circumstances permit.
One might be forgiven for thinking that the COVID-19 pandemic
is the only challenge facing the world. While it will remain a
significant matter for some time to come, there are grounds for
cautious optimism that it is becoming, for most countries, a manageable
health problem. At the time of writing, the rollout of mass vaccination
is beginning to abate the current wave of infections. New variants
will require a response of new vaccines and it may also be that
there will be modifications required to public behaviour for a
long time to come but, all the same, more and more of our economic
lives are normalising and will continue to do so. The financial
sector was already well-capitalised and resilient after the regulatory
capital measures introduced over a decade ago in the wake of the
global financial crisis of 2008 and 2009. After the suspension
of equity dividends almost a year ago as a prudential measure
by regulators, it is now even more well capitalised. In December
2020, the ECB's supervisory body said in a statement that: "a
continued prudent approach remains necessary, as the impact of
the pandemic on banks' balance sheets has not manifested itself
in full at a time when banks are still benefiting from several
public support measures, and considering that credit impairments
come with a temporal lag", while at the same time indicating that
the current moratorium on dividends is likely to come to an end
in September 2021.
A return to some level of equity dividends implies a relatively
secure outlook on the part of regulators for the higher tranches
of regulatory capital such as those in which the Company invests.
All of this serves to underline the view expressed at the Interim
Report stage that while there is likely to be a dispersion of
impacts and outcomes for different institutions and quite possibly
a rise in defaults by some borrowers, this should not have an
existential impact on most banking and other financial issuers.
Increased resilience was of course the core goal of the regulatory
capital changes over the past several years and the transition
to those new standards is part of what the Company was set up
to exploit. That transition has continued throughout 2020 and
will continue in the years to come.
There are, of course, other challenges: Brexit (an apparently
unresolved matter for the financial sector), the stressed state
of public finances and the implications of the latter for taxation,
monetary policy and the potential for inflation or deflation,
the climate emergency, the geopolitical tensions between strategic
blocs. Several of these are fundamentally political rather than
strictly economic matters although their consequences will be
profoundly felt economically and in the financial markets. In
short, we live in interesting times, as the old saying goes.
Our portfolio is well-positioned in terms of yield and duration
to deliver on our core investment objective and to continue the
recovery of returns since the first quarter of 2020. In a specialist
asset class such as that in which we invest, proactive investment
managers who have the appropriate specialist skills should enjoy
a competitive advantage. With Axiom AI as our Investment Manager,
we therefore remain positive and continue to believe the Company
is well positioned to capitalise on such opportunities and, once
again, we thank Shareholders for their continued support.
William Scott
Chairman
22 March 2021
(1) Net return has been calculated by comparing the NAV at the
start of the period with the NAV, plus dividends paid, at the
period end.
Investment Manager's Report
1- Market developments
January
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 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 Group 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, non-performing loans ("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 USD, Santander
4.375% 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 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.
Compared to the different asset classes, financial subordinated
debt emerged more resistant to the recessive impact of the COVID-19
epidemic.
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 crisis.
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 systemic 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), were 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") 6.125%
(USD700 million);
* SEB announced on 18 March 2020, the call of its AT1
(EUR1.1 billion);
* Lloyds announced on 31 March 2020 a tender offer at
109% on its Legacy T1, at 12% in USD;
* 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 3.375% 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 remained 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
continued 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 earnings 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 ECB 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 lockdown 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 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 6.125%), 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 9.375%.
July
The month of July was marked by the return of quasi lockdown in
different parts of the United States, where COVID-19 was rising
sharply, and by the increasing Sino-US tensions, which led to
consulate closures. The battery of exceptional measures put in
place by regulators and governments to deal with the pandemic
continued to reassure the markets, most recently with the difficult
agreement between countries on the European Recovery Fund ("ERF"),
a fund of EUR750 billion, including EUR390 billion in subsidies,
which was awaiting ratification by the European Parliament. Against
this backdrop, the SubFin continued to tighten, closing the month
at 152bps, more than 130bps tighter than its 280bps level at the
end of April 2020.
On the regulatory side, the ECB published the results of its 'Vulnerability
assessment' conducted on 86 banks, a specific COVID-19 stress
test which studied two scenarios, a standard and severe one, reaffirming
the solidity of the banks and an adequate level of capitalisation.
The cost of risk remains manageable.
Despite the increased provisions recorded in quarter 2 2020, European
banks surprised on the upside with their CET1 publications. NatWest
(ex-RBS) continued to make provisions for risks of 'economic uncertainty'
(+GBP2.1 billion in provisions) and reported a CET1 up to 17.2%.
Barclays, UBS and Deutsche Bank also maintained comfortable levels
of 14.2%, 13.3% and 12.8% respectively. The suspension of dividends,
which the ECB would re-examine in December 2020, contributed to
this increase, in addition to the 'CRR Quick Fix' regulatory changes
and exceptional support measures. The revenue trajectories diverged
among universal banks, the sharp drop in retail banking revenues
was partially counterbalanced by the rebound in market activities.
BNP Paribas posted an exceptional performance in the bond market
which beat most of the major Wall Street banks after having issued
a profit warning in the first quarter.
On the consolidation side, UBI's shareholders finally approved
the acquisition by Intesa Sanpaolo.
Finally, the CoCos' (AT1 and RT1) primary market remained active.
We can mention the issues of UBS (USD750 million at 5.125%), RBI
(EUR500 million at 6%), Commerzbank (EUR1.25 billion at 6.125%),
BBVA (EUR1 billion at 6%) and Rabobank (EUR1 billion at 4.375%).
August
August was once again shaped by an increase in COVID-19 cases
in multiple countries. The only notable macro event was Powell's
speech at Jackson Hole where he revealed a more flexible strategy
to meet the Fed's inflation and employment goals. In this context,
the SubFin continued to tighten, closing the month at 129bps,
more than 150bps tighter than its level at the end of April 2020.
Overall the latest earnings publications confirmed the key trends
that were observed in July: lower retail fees and NII but excellent
investment banking revenues, limited increases in NPL ratios with
managements guiding towards lower impairments overall in 2020
but with a high discrepancy in provisioning levels, and significantly
better than expected capital ratios supported by lower RWAs. A
few initial data points showed that ultimate default rates for
loans under moratoria should be between a few percentage points
for core countries up to over 20% for the riskiest jurisdictions
(e.g. Greece), with high dispersion within countries.
On the regulators' side, the EBA was expected to publish its opinion
on the treatment of legacy debt before the end of the year. The
calls of Credit Suisse low-trigger T2 and ABN 5.75% AT1 were announced
as expected.
Finally, the primary market remained active on CoCos (AT1 and
RT1) supported by good quarterly results. One can mention the
issues of Barclays (USD1.5 billion at 6.125%), Intesa Sanpaolo
in two tranches (EUR750 million at 5.875% and EUR750 million at
5.5%) and Credit Suisse (USD1.5 billion at 5.25%).
September
Despite September being full of adverse geopolitical events, financial
securities held out quite well: the developing COVID-19 outbreak,
the US presidential election, and Brussels' ultimatum to the UK
on Brexit. The SubFin index widened slightly by +9bps, reaching
138bps, after 5 consecutive months of tightening.
Jerome Powell, after revealing a more flexible strategy to meet
the Fed's inflation and employment goals in August, announced
that the Fed would not raise its rates until 2023, at the earliest.
This was another decision reasserting the FOMC's willingness to
see inflation exceed 2% first and foremost. In Europe, the new
tranche of TLTRO saw EUR175 billion of demand at the BCE on 24
September 2020.
On the regulator's side, during a speech in front of the European
Banking Federation, Andrea Enria reminded investors that the financial
sector had rules in place to deal with NPLs, more quickly and
effectively. He also reiterated authorities' support to banks
fighting against asset quality deterioration. In the US the Fed
extended the buyback and dividend cap it had previously introduced
until the end of the year. This had been expected and would apply
to any bank with more than USD100 billion in assets.
The market overreacted in September to anti-money laundering issues
from the banks' suspicious activity reports ("SARs") dating back
to the 2011-2016 period, at the behest of the Financial Crimes
Enforcement Network ("FinCEN") in the US.
On the consolidation side, the announced merger between Caixa
and Bankia was expected to create the first banking group in Spain.
In Italy, where Intesa was taking over UBI, BPER was preparing
the acquisition of more than 500 branches from Intesa before February
2021, financed by a EUR802 million capital increase. In France,
SocGen announced it was contemplating the potential merger of
its two retail networks, Soci é t é G é n é
rale and Credit du Nord, to extract synergies.
Finally, issuers continued to call their regulatory securities
which were no longer efficient as capital. The tender by NatWest
(ex-RBS) on its long-call bonds 7.648% and 6.425% was well received
by bond holders with respectively 83% and 64% take-up. The primary
market continued to see new AT1 issuances with Julius Baer (USD350
million at 4.875%), BAWAG Group (EUR175 million at 5.125%), Commerzbank
(EUR500 million at 6.5%) and Svenska Handelsbanken in two tranches
(USD500 million at 4.375% and USD500 million at 4.75%).
October
After a new round of lockdowns for several European countries,
endless Brexit negotiations and uncertainty about the presidential
elections in the US, the SubFin index widened by +10bps reaching
154bps. Financial debt continued to hold up well, on the back
of a set of solid quarterly results that beat expectations.
The majority of the quarterly results exceeded expectations mainly
due to lower than expected provisions, rising capital ratios and
lower than expected RWAs. Based on their good fundamentals, several
issuers such as Santander and Erste announced their intentions
to pay dividends for 2019. Indeed, Rabobank would pay a distribution
of additional certificates equal to approximately EUR1.625 per
certificate to compensate investors for the four missed quarterly
distributions. These announcements remained conditional on the
withdrawal of the ECB's ban on distributions, which was expected
to be reconsidered in December.
On the regulatory side, the EBA published its long-awaited opinion
on Legacy instruments on 21 October 2020. The opinion was very
clear on the need to clean up the stock of Legacy bonds as soon
as possible. Depending on the instruments, three options were
presented to manage the so called 'inflection risk', i.e. the
risk of the legal and regulatory rankings being completely mixed
up, which could threaten eligibility:
* Option 1: redemption of the bonds when a call date
was available or bond buyback;
* Option 2: modification of the terms and conditions of
the bonds;
* Option 3: in exceptional cases, when options 1 and 2
were not available, keeping the bonds but without
using them as capital or MREL. The general philosophy
of the EBA's opinion was clear, and should accelerate
the number of calls and buybacks but, as always with
Legacy bonds, the devil was in the detail and some
caveats would apply. The Company's investment adviser
has published its analysis on the matter, available
via
https://mailchi.mp/axiom-ai.com/axiom-monthly-report-2616092
.
Finally, issuers continued calling their regulatory securities
that were no longer eligible as capital or no longer economically
viable. AIB announced the call of its AT1 Opco and Santander of
its USD prefs with a floor whose coupon non-payment mechanism
could have been an obstacle to the resumption of dividend payments.
Rabobank announced a buyback offer on its 6.91% bond callable
in 2038. Finally, the primary market saw the first RT1 issued
in Italy by UnipolSai (EUR500 million at 6.375%). At the beginning
of the month, Caixa Bank (EUR750 million at 5.875%), Nykredit
(EUR500 million at 4.125%), Cr é dit Agricole (EUR750 million
at 4%) and Quintet Private Bank Europe SA (EUR125 million at 7.5%)
issued on the market.
November
Financial stocks performed strongly in November, driven by announcements
of effective and readily available vaccines and the results of
the US elections. In the UK, the departure of Dominic Cummings,
one of the government's toughest Brexiteers, heralded a close
trade agreement. The SubFin tightened 50bps to 113bps marking
a record one-month change.
The rally was also supported by new adjustments to state aid plans
and the anticipation of new support measures by the ECB expected
on 10 December 2020, notably for the banking sector.
The excellent results of the banks in the third quarter also came
as a positive surprise. Asset quality was stable, profits exceeded
expectations by more than 30% and capital ratios reached record
levels with more than 15% of average CET1. We believed that the
positive news on the roll-out of vaccines would lead to a gradual
resumption of dividend distributions in 2021. The ECB would decide
in December 2020 on the lifting of its ban, which was expected
to be a strong catalyst for the financial sector.
Continued consolidation and cost reduction were boosting the sector
and offered further upside potential. Targets were cheaper, capital
was abundant and difficult to distribute: all reasons to engage
in synergy-generating operations. Of note was the departure of
Jean-Pierre Mustier from UniCredit, which should enable the acquisition
of Monte dei Paschi, and the OPA (public offering to buy) launched
on Credito Valtellinese by the Cr é dit Agricole group. On
the insurance side, Intact, Canada's leading property and casualty
insurer, announced the acquisition of British insurer RSA. Finally,
BBVA announced the sale of its US subsidiary to PNC for USD11.6
billion. This capital was expected to be reallocated to buyout
operations in Europe, for example on Sabadell.
On the regulatory side, on 16 November the PRA published its CFO
Letter (a letter to the CFOs of English banks), which took up
the EBA's recommendations of 21 October on the need to clean up
the stock of 'Legacy' instruments as soon as possible. This publication,
from a direct supervisor, had a positive impact on the universe
of UK discounted or 'disco' bonds. On the same day, Lloyds announced
an exchange offer with a premium of almost 6 points on three legacy
'long calls' bonds with step-ups (7.281%, 7.881% and 13%). Also
noteworthy was the tender by Novo Banco on its senior Cayman bonds
which had a positive impact on their prices.
Finally, the primary market saw the first RT1 issued in Germany
by Allianz (two issues of 1.250 million at 2.625% in EUR and 3.5%
in USD) and in AT1 format we saw Soci é t é G é
n é rale (USD1.5 billion at 5.375%), Erste Bank (EUR750 million
at 4.250%) and Permanent TSB (EUR125 million at 7.875%).
December
Financial stocks ended the year on a high note, posting solid
performance, driven mainly by the Brexit agreement concluded in
the last few days of the year. This agreement still seemed a long
way off at the beginning of December when the lack of any significant
progress, coupled with the status quo in the negotiations on the
US stimulus plan, did not encourage major risk taking. The indices
tightened very slightly over the month (SubFin from 113bps to
111bps), the main movement being on the cash side.
The rally was also supported by the gradual resumption of dividend
distributions announced by the ECB for 2021 with a limit set at
15% of 2019-20 profits and 20 points of CET1 until 30 September.
In the UK, the PRA ran some stress tests on banks before deciding
on distributions. These should not exceed the higher of the following
two amounts: 20bps of RWAs at the end of 2020 or 25% of cumulative
earnings over eight quarters covering 2019 and 2020.
Overall, capital markets activity ended quarter 4 2020 on solid
footing for most banks with revenues of this division still running
ahead of consensus suggesting potential for upward revisions of
quarter 4 EPS. This positive earnings trend came alongside a continued
reduction in the stock of NPLs, as shown by Sabadell, UniCredit
and Banco BPM in December 2020. Consolidation and cost reduction
also continued in the financial sector. The merger of Unicaja
and Liberbank in Spain was formalised and was expected to create
the number 5 in the national banking sector once regulatory approvals
were obtained. Political pressure was also mounting in Italy for
Monte dei Paschi to be acquired by UniCredit.
On the regulatory side, the transposition of BRRD2 in France did
not go in the direction of the issuers and left the risk of infection
unresolved, which further reinforced the interest in cleaning
up the stock of 'Legacy' instruments (you can see our note on
this subject on the following link: European Banking Authority
Opinion on Legacy instruments ). BBVA announced in mid-December
the call at par of three of its legacy securities. These redemptions
confirmed the interest of issuers to clean their legacy securities'
stock in the context of the transition period to Basel III. On
the insurers' side, the year began with greater regulatory clarity
following the publication by EIOPA of its analysis on Solvency
II, which reflected the regulator's confidence in the sector.
Finally, the primary market for AT1 securities remained open.
HSBC (USD1.5 billion at 4.6%) and Credit Suisse (USD1.5 billion
at 4.5%) came to seize the right conditions to issue.
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 adding
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 FinecoBank
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 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 FinecoBank,
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 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 variations 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 benefited 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 preference shares, which together
with legacy PIBS represented 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.
July
As the flows and volatility slowed down into the summer lull and
the quarter 2 earnings season, the Company did a limited number
of trades.
In Liquid Relative Value, it reduced its exposure to UBI AT1 following
the convergence with Intesa's AT1 from 160bps to 60bps. In Less
Liquid Relative Value, it started building a small position on
a legacy bond issued by the Opco entity of a small but profitable
UK lender. In Midcap Origination, it reduced its Shawbrook AT1
exposure by switching into the newly issued T2 and added on Onesavings
AT1.
The Company kept a moderate cash gearing of less than 108% with
8% cash.
August
In the context where positive fundamentals appeared to be fully
valued, the Company took profit on positions in the Liquid Relative
Value bucket on recent issues like BKIR 7.5% at 106.75 (bought
at 100 mid May) and CS 5.25% AT1, and added on Aareal Bank in
Germany whose AT1 should be called at the next call date in April
2021. The Company sold its holding in ICG seniors and in Spain,
it switched part of its holding in Ibercaja into Abanca.
In the Restructuring bucket, the Company reduced its holding in
Cajama realising gains from its purchase at 77 in mid April 2020.
Finally, in Midcap Origination, the Company took part in the inaugural
issue of 9.625% Contingent Capital Deferred Shares by Ecology
Building Society, a small size lender with a differentiated and
resilient business model focusing on sustainable real estate.
The Company continued to reduce its cash gearing and its cash
investments were down to 100% of NAV.
September
The Company continued to reduce its risk profile selectively with
net cash gearing decreasing to 97% of NAV.
In Liquid Relative Value, the Company reduced its holdings on
Italian and Spanish names and added two German AT1s and switched
its BAWAG Group exposure into the newly issued AT1.
In Less Liquid Relative Value, the Company reduced its holdings
in one UK disco and two fixed perpetuals to increase its exposure
to a legacy T1 issued by OneSavings Bank's Opco entity.
In Restructuring, the Company sold its position on Monte dei Paschi
T2s before the new issuance, hence protecting its gains on the
bond.
Finally, following a short seller's attack on the German specialist
lender Grenke Leasing, the Company took advantage of the volatility
by deploying circa 1% on senior bonds at significant discounts.
October
In the absence of any clear direction for valuations, the Company
reduced portfolio risk by selling some discos into the EBA opinion
publication in Less Liquid Relative Value, while adding on its
Cofinga holding at a yield to call of more than 10% (in Special
Situations).
The Company redeployed risks selectively in Liquid Relative Value
on UnipolSai's inaugural RT1, Banco BPM and Aareal Bank AT1s.
In Restructuring, the Company sourced some short-dated T2s issued
by the first portfolio company of Gamalife insurance consolidator
while increasing its holding of Cajamar T2.
Finally, in Midcap Origination the Company subscribed to the inaugural
AT1 issue by Quintet Private bank at an attractive yield of 7.5%
in EUR.
November
In what was a supportive environment for the banking sector, the
Company followed the momentum by taking part in the new AT1 issues
from NatWest Group and Permanent TSB.
In Less Liquid Relative Value, the Company added on some legacy
preference shares whose impediment to resolution was reinforced
by the PRA CFO Letter and the LIBOR discontinuation.
In Restructuring the Company reduced its risk in UniCredit, following
the announcement of the CEO leaving, and, in Special Situations,
it switched out of Banco BPM, as Cr é dit Agricole preferred
to acquire Cr é dito Valtellinese, and re-initiated a position
on Monte dei Paschi.
Towards the end of the month, the Company reduced its risk on
AT1s in Liquid Relative Value and Midcap Origination.
The Company closed the month with a light gearing of 105.9% and
cash available of 9.1%.
December
While the Company realised some gains (Monte bonds sold above
91), it remained fully invested by adding on, in its Restructuring
sub-strategy, T2s issued by Gamalife (600bps to December 2022),
Piraeus and Bank of Cyprus.
In Less Liquid Relative Value, the Company took a rare first loss
exposure on a defensive basket of financials limited to 12 months.
Finally, in Midcap Origination, the Company reduced its exposure
to eSure bonds at 107, having purchased them mid-2019 just below
101.
The Company closed the month with a slightly higher gearing of
107% and a reduced cash allocation of 3%; constructively positioned
in these conducive market conditions.
4- Portfolio (as at 31 December 2020)
Strategy allocation (as a % of total net assets)(1)
Liquid Relative
Value 12.4%
Less Liquid Relative
Value 23.2%
Restructuring 26.7%
Special Situations 11.0%
Midcap Origination 27.6%
Denomination (as a % of total net assets)(1)
EUR 57.6%
GBP 41.8%
USD 1.4%
Portfolio Breakdown (as a % of total net assets)
By Securities External Rating(1) By country(1)
BBB 20.3% UK 41.8%
BB 32.6% Germany 11.6%
B 12.2% France 8.6%
below B 7.7% Italy 5.2%
NR 33.9% Portugal 5.0%
Austria 4.7%
By maturity(1) Ireland 4.5%
<1 year 8.1% Netherlands 4.5%
1-3 years 29.4% Belgium 4.3%
3-5 years 30.9% Spain 3.2%
5-7 years 9.7% Denmark 2.9%
7-10 years 4.1% Greece 1.9%
>10 years 18.6% Cyprus 1.0%
Luxembourg 0.9%
By subordination(1)
Additional Tier
1 37.9%
Legacy Tier 1 36.6%
Tier 2 15.0%
Senior 1.4%
(1) Splits adjusted for single assets
5- Company metrics (as at 31 December 2020)
Share price and NAV
Share price (mid) (GB pence) 88.00
NAV per share (daily) (GB
pence) 95.10
Dividends paid over last
12 months (GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP
mn) 80.83
Total net assets (GBP mn) 87.35
Premium / (Discount) (7.47)%
Portfolio information 31 December 31 December
2020 2019
Modified duration 4.54 4.53
Sensitivity to credit 5.51 5.51
Positions 85 93
Average price(1) 104.56 105.63
Running yield 5.76% 5.36%
Yield to perpetuity(2) 6.67% 6.51%
Yield to call(3) 8.51% 6.26%
Gross Assets 113.4% 117.0%
Net gearing = (Gross assets -
Collateral) / Net assets 107.0% 112.4%
Investments / Net Assets 104.0% 105.8%
Cash 3.0% 6.7%
Collateral 6.4% 4.6%
Net Repo / Net Assets -0.1% 4.9%
CDS / Net Assets 56.7% 64.6%
Net Return(4)
1 month 3 months 6 months 1 year 3 years(5) Since launch(5)
1.48% 7.13% 10.75% 1.73% 2.69% 4.60%
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 1.90 1.88 -0.32 0.53 5.03 1.48 1.73
(1) Bonds only. (2) The yield to perpetuity is the yield of the
portfolio converted in GBP with the hypothesis that securities
are not reimbursed and kept to perpetuity.(3) The yield to call
is the yield of the portfolio converted in GBP at the anticipated
reimbursement date of the bonds. (4) 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. (5) Annualised performance.
6- NAV evolution
Share price Share price
Date NAV (mid) NAV + dividends (mid) + dividends
05/11/2015 97.97 101.50 97.97 101.50
27/11/2015 98.19 101.50 98.19 101.50
31/12/2015 96.74 101.50 96.74 101.50
29/01/2016 92.85 101.50 92.85 101.50
26/02/2016 88.24 101.25 88.59 101.60
24/03/2016 91.39 96.50 91.74 96.85
29/04/2016 92.45 96.50 92.80 96.85
27/05/2016 93.87 95.50 95.22 96.85
30/06/2016 92.02 95.50 93.37 96.85
29/07/2016 94.62 93.50 95.97 94.85
26/08/2016 94.72 94.50 97.57 97.35
30/09/2016 94.52 95.50 97.37 98.35
28/10/2016 96.47 95.50 99.32 98.35
25/11/2016 93.43 93.50 97.78 97.85
31/12/2016 95.21 92.50 99.56 96.85
31/01/2017 97.75 92.50 102.10 96.85
28/02/2017 97.01 95.00 103.01 101.00
31/03/2017 98.10 100.50 104.10 106.50
28/04/2017 100.07 99.50 106.07 105.50
31/05/2017 100.29 101.50 107.79 109.00
30/06/2017 98.88 97.50 106.38 105.00
31/07/2017 100.72 97.50 108.22 105.00
31/08/2017 99.80 96.00 108.80 105.00
29/09/2017 101.56 98.00 110.56 107.00
31/10/2017 104.32 98.25 113.32 107.25
30/11/2017 104.19 102.50 114.69 113.00
31/12/2017 104.43 105.25 114.93 115.75
31/01/2018 107.69 108.50 118.19 119.00
28/02/2018 105.44 107.00 117.44 119.00
29/03/2018 103.38 106.00 115.38 118.00
30/04/2018 104.56 105.50 116.56 117.50
31/05/2018 96.95 102.50 110.45 116.00
30/06/2018 95.84 102.50 109.34 116.00
31/07/2018 97.37 102.00 110.87 115.50
31/08/2018 94.64 98.75 109.64 113.75
28/09/2018 96.94 97.00 111.94 112.00
31/10/2018 95.45 94.00 110.45 109.00
30/11/2018 91.39 93.00 107.89 109.50
31/12/2018 90.08 88.00 106.58 104.50
31/01/2019 93.11 90.00 109.61 106.50
28/02/2019 93.72 89.50 111.72 107.50
29/03/2019 93.99 86.50 111.99 104.50
30/04/2019 96.37 90.50 114.37 108.50
31/05/2019 93.34 92.50 112.84 112.00
30/06/2019 95.48 92.75 114.98 112.25
31/07/2019 95.77 87.50 115.27 107.00
30/08/2019 94.99 84.00 115.99 105.00
30/09/2019 95.91 84.25 116.91 105.25
31/10/2019 98.04 89.50 119.04 110.50
30/11/2019 98.28 90.50 120.78 115.00
31/12/2019 99.38 94.00 121.88 116.50
31/01/2020 101.36 94.00 123.86 116.50
28/02/2020 98.98 92.00 122.98 116.00
31/03/2020 79.23 75.00 103.23 99.00
30/04/2020 83.38 76.50 107.38 100.50
29/05/2020 84.95 73.50 110.45 99.00
30/06/2020 88.58 88.00 114.08 113.50
31/07/2020 90.26 86.00 115.76 111.50
31/08/2020 90.46 79.00 117.46 106.00
30/09/2020 90.17 80.00 117.17 107.00
30/10/2020 90.65 87.50 117.65 114.50
30/11/2020 93.71 81.50 122.21 110.00
31/12/2020 95.10 88.00 123.60 116.50
7- Outlook
The pandemic has resulted in a constructive backdrop for bonds
issued by financial institutions as central banks provided significant
support measures such as cheap funding and capital relief. On
top of these measures, fiscal and monetary support in the form
of government guaranteed loans and direct transfers helped contain
the economic impact while lowering the stress on corporates and
smaller businesses. Despite their profitability suffering from
the continuing low interest rate environment, European banks stand
as very attractive in the current market context for bond investors.
Corporate bonds with a BB+ rating currently offer c.2% income
whereas a BB+ bank bond offers a far more attractive c.4%.
Tougher regulation since the GFC made financial institutions less
profitable but more solvent and thus better able to pay back the
capital and income on the bonds they have issued. The progressive
roll-out of Basel IV will further strengthen the solvency of the
sector. In parallel, we see profitability trending higher due
to tailwinds from M&A, restructuring and digitalisation. We believe
that continued consolidation and cost efficiency improvements
in 2021 should boost the sector and provide further upside potential.
During lockdown, bank customers, and banks themselves, were able
to see the advantages of online banking. We believe the crisis
will expedite the digitalisation of banks, leading to cost and
efficiency advantages.
As seen earlier this year, rising inflation expectations should
provide a welcome relief to interest rate margin pressures and
improve the ability of customers to repay their loans. This positive
interest rate sensitivity should drive bank and insurance equities
higher while mitigating the impact on subordinated capital. In
addition, financial bonds often display short fixed coupon periods
and generally reset to a variable index periodically. This can
result in an incentive for issuers to repay early, in addition
to the regulatory features of the bonds, or market perception
concerns. Recent issuer activity confirms that despite continued
macro-economic uncertainty, regulators are still actively encouraging
banks to recycle their legacy instruments ahead of the December
2021 grandfathering deadline: at the end of 2020, NatWest and
Lloyds announced tenders with generous premia on their legacy
with long dated calls, while DZ Bank, Unicredit and BNP Paribas
just announced the call of their SPV legacies at par.
The Company continues to be ideally placed, with its closed-ended
format and its range of investment sub-strategies, to capture
the opportunities arising in the sector, from liquid to less liquid
instruments, from small to large issuers, from legacy to new formats,
and from senior to equity capital instruments.
Gildas Surry Antonio Roman
Axiom Alternative Investments Axiom Alternative Investments
SARL SARL
22 March 2021 22 March 2021
Investment Portfolio as at 31 December 2020
GBP'000 % of NAV
Investments in capital instruments at fair value
through profit or loss
Bonds
Cofinga Funding Two LP 1.050% Perp 2,776 3.18
OneSavings Bank PLC 9.125% 05/25/22 2,535 2.90
FinecoBank SPA 5.875% Perp 2,475 2.83
Shawbrook Group PLC 7.875% Perp 2,466 2.82
Just Group PLC 8.125% 10/26/29 2,293 2.62
Lloyds Bank PLC 13.000% Perp 2,176 2.49
Promontia MMB SASu 8.000% Perp 2,128 2.44
Coventry Building Society 12.125% Perp 2,109 2.41
Commerzbank AG 6.125% Perp 2,106 2.41
Van Lanschot NV 6.750% Perp 2,060 2.36
Permanent TSB PLC 8.625% Perp 1,982 2.27
BNP Paribas Fortis SA 1.459% Perp 1,881 2.15
OneSavings Bank PLC 4.599% Perp 1,865 2.14
CYBG PLC 8.750% Perp 1,861 2.13
eSure Group PLC 6.750% 12/19/24 1,757 2.01
Ageasfinlux SA 0.833% Perp 1,737 1.99
NIBC Bank NV 6.000% Perp 1,676 1.92
Volksbank Wien AG 7.750% Perp 1,652 1.89
Banco de Credito Social Cooperativo SA 7.750% 06/07/22 1,602 1.83
Deutsche Bank AG 7.125% Perp 1,464 1.68
Quintet Private Bank Europe SA 7.500% Perp 1,451 1.66
Piraeus Bank SA 9.750% 06/26/24 1,431 1.64
Saxo Bank A/S 8.125% Perp 1,431 1.64
Aareal Bank AG 6.849% Perp 1,429 1.64
Bank of Scotland PLC 13.625% Perp 1,332 1.53
International Personal Finance PLC 9.750% 11/12/25 1,256 1.44
Jupiter Fund Management PLC 5.875% Perp 1,242 1.42
IKB Deutsche Industriebank AG 4.000% 01/31/28 1,232 1.41
Bank of Scotland PLC 7.281% Perp 1,226 1.40
UnipolSai Assicurazioni SpA 6.375% Perp 1,170 1.34
Banco Comercial Portugues SA 9.250% Perp 1,105 1.27
Gamalife - Cia de Seguros de Vida SA 1.659% 12/19/22 1,104 1.26
Novo Banco SA 3.500% 02/19/43 1,061 1.21
BA-CA Finance Cayman Ltd 0.000% Perp 1,042 1.19
Skipton Building Society 12.875% Perp 1,019 1.17
Saxo Bank A/S 5.500% 07/03/29 962 1.10
Grenke Finance PLC 1.625% 04/05/24 932 1.07
Abanca Corp Bancaire SA 7.500% Perp 929 1.06
BAWAG Group AG 5.125% Perp 913 1.04
Bank of Ireland 13.375% Perp 861 0.99
Virgin Money UK PLC 8.000% Perp 815 0.93
Bank of Cyprus PLC 9.250% 01/19/27 805 0.92
IKB Funding Trust I 0.962% Perp 767 0.88
TSB Group Holdings PLC 7.875% Perp 744 0.85
Caixa Economica Montepio Geral 5.000% Perp 720 0.82
Bank of Scotland PLC 9.375% Perp 675 0.77
Cassa di Risparmio di Asti SpA 9.250% Perp 668 0.77
HSB Group Inc 1.147% 07/15/27 666 0.76
Novo Banco SA Luxembourg 0.000% 04/16/46 654 0.75
AnaCap Financial Europe SA 5.000% 08/01/24 633 0.73
Grenke Finance PLC 1.500% 04/09/21 627 0.72
Novo Banco SA 02/12/49 601 0.69
Lloyds Bank PLC 0.308% Perp 542 0.62
Sainsburys Bank PLC 6.000% 11/23/27 519 0.59
Louvre Bidco SAS 5.375% 09/30/24 519 0.59
Grenke Finance PLC 1.000% 04/05/23 491 0.56
GNB Cia de Securos de Vida SA 2.959% Perp 472 0.54
Newcastle Building Society 10.750% Perp 469 0.54
Metro Bank PLC 9.500% 10/08/25 461 0.53
Shawbrook Group PLC 9.000% 10/10/30 451 0.52
National Westminster Bank PLC 11.500% Perp 444 0.51
Natwest Group PLC 5.125% Perp 418 0.48
Nationwide Building Society 2.488% Perp 313 0.36
West Bromwich Building Society 2.000% Perp 276 0.32
RZB Finance Jersey III Ltd 0.000% Perp 275 0.31
Leeds Building Society 13.375% Perp 271 0.31
Ecology Building Society 9.625% Perp 266 0.31
Ulster Bank Ireland DAC 11.750% Perp 208 0.24
National Westminster Bank PLC 11.500% Perp 196 0.22
Alpha Group Jersey Ltd 1.312% Perp 182 0.21
Banco Popular Espanol SA 8.000% 07/29/21 - -
Banco Popular Espanol SA 8.250% 10/19/21 - -
Popular Capital SA Perp - -
Popular Capital SA 6.000% Perp - -
------------ ------------
78,877 90.30
Other capital instruments
National Westminster Bank PLC 9.000% Perp 1,262 1.44
Bank of Ireland 12.625% Perp 722 0.83
RSA Insurance Group PLC 7.375% Perp 664 0.76
Lloyds Banking Group PLC 9.750% Perp 641 0.73
Ecclesiastical Insurance Group PLC 8.625% Perp 481 0.55
Standard Chartered PLC 7.375% Perp 406 0.47
Standard Chartered PLC 8.250% Perp 297 0.34
Santander UK PLC 8.625% Perp 116 0.13
------------ ------------
4,589 5.25
------------ ------------
Total investments in capital instruments at fair
value through profit or loss 83,466 95.55
Derivative financial assets at fair value through
profit or loss
Sale and repurchase agreement in respect of Royal
Bank of Scotland Group PLC 0.563% Perp 1,313 1.50
Sale and repurchase agreement in respect of Stichting
AK Rabobank Certificaten 0.000% Perp 1,047 1.20
Sale and repurchase agreement in respect of Stichting
AK Rabobank Certificaten 0.000% Perp 1,037 1.19
Sale and repurchase agreement in respect of Soci
é t é G é n é rale SA 0.335%
Perp 480 0.55
GBP/EUR foreign currency forward 415 0.48
GBP/USD foreign currency forward 360 0.41
Markit iTraxx Europe Subordinated Financial Index
12/20/21 135 0.16
BNP Paribas SA Senior CDS 12/20/26 133 0.15
Markit iTraxx Europe Subordinated Financial Index
06/20/22 93 0.11
Lloyds Bank PLC Senior CDS 06/20/22 55 0.06
Standard Chartered Bank Senior CDS 12/20/21 40 0.05
Markit iTraxx Europe Subordinated Financial Index
12/20/25 25 0.03
Danske Bank A/S Subordinated CDS 12/20/23 21 0.02
ING Bank NV Subordinated CDS 12/20/21 21 0.02
Intesa Sanpaola SpA Senior CDS 12/20/21 21 0.02
Lloyds Bank PLC Subordinated CDS 12/20/21 20 0.02
Intesa Sanpaolo SpA Subordinated CDS 12/20/21 16 0.02
Markit iTraxx Europe Subordinated Financial Index
12/20/21 10 0.01
CDS option in respect of Markit iTraxx Europe Senior
Financial Index 12/20/25 10 0.01
UniCredit SpA Subordinated CDS 12/20/22 5 0.01
------------ ------------
Derivative financial assets at fair value through
profit or loss 5,257 6.02
Derivative financial liabilities at fair value through
profit or loss
Sale and repurchase agreement in respect of Shawbrook
Group PLC 7.875% Perp (1,980) (2.27)
Sale and repurchase agreement in respect of Cofinga
Funding Two LP 1.050% Perp (1,644) (1.88)
Sale and repurchase agreement in respect of FinecoBank
SPA 5.875% Perp (1,504) (1.72)
Sale and repurchase agreement in respect of Van
Lanschot NV 6.750% Perp (1,355) (1.55)
Sale and repurchase agreement in respect of Just
Group PLC 8.125% 10/26/29 (1,285) (1.47)
Sale and repurchase agreement in respect of Volksbank
Wien AG 7.750% Perp (1,144) (1.31)
Sale and repurchase agreement in respect of CYBG
PLC 8.750% Perp (1,037) (1.19)
Sale and repurchase agreement in respect of BNP
Paribas Fortis SA 1.459% Perp (851) (0.98)
Sale and repurchase agreement in respect of NIBC
Bank NV 6.000% Perp (810) (0.93)
Sale and repurchase agreement in respect of Louvre
Bidco SAS 5.375% 09/30/24 (571) (0.65)
United Kingdom of Great Britain and Northern Ireland
Senior CDS 06/20/23 (66) (0.08)
Lloyds Banking Group PLC Senior CDS 06/20/22 (51) (0.06)
Lloyds Banking Group PLC Senior CDS 06/20/22 (30) (0.03)
CDS option in respect of Markit iTraxx Europe Senior
Financial Index 12/20/25 (3) (0.00)
------------ ------------
Derivative financial liabilities at fair value through
profit or loss (12,331) (14.12)
Related party fund investments
Axiom Global CoCo UCIT ETF USD-hedged 3,011 3.45
Axiom Global CoCo UCIT ETF GBP-hedged 1,089 1.25
Axiom Equity Class Z 666 0.76
------------ ------------
Related party fund investments 4,766 5.46
Other assets and liabilities
Short position in respect of Royal Bank of Scotland
Group PLC 0.563% Perp (1,360) (1.55)
Short position in respect of Soci é t é
G é n é rale SA 0.335% Perp (521) (0.60)
Collateral accounts for derivative financial instruments
at fair value through profit or loss 5,905 6.76
Cash and cash equivalents 4,297 4.92
Other receivables and prepayments 1,995 2.28
Other payables and accruals (2,134) (2.44)
Bank overdrafts (1,650) (1.89)
Collateral accounts for derivative financial instruments
at fair value through profit or loss (340) (0.39)
------------ ------------
Other assets and liabilities 6,192 7.09
------------ ------------
Net assets 87,350 100.00
------------ ------------
Principal Risks and Uncertainties
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 Board
has carried out a robust assessment of the Company's emerging
and principal risks and the key risks faced by the Company, along
with controls employed to mitigate those risks, are set out below.
Macroeconomic risk
Adverse changes affecting the global financial markets and economy
as a whole, and in particular European financial debt markets,
may have a material negative impact on the performance of the
Company's investments. In addition, the Company's non-Pounds Sterling
investments may be affected by fluctuations in currency exchange
rates. Prices of financial and derivative instruments in which
the Company invests are subject to significant volatility due
to market risk.
The Company may use derivatives, including options, short market
indices, credit default swaps ("CDS"), and others, to mitigate
market-related downside risk, but the Company is not committed
to maintaining market hedges at any time.
The Company has a systematic hedging policy with respect to currency
risk. Subject only to the availability of suitable arrangements,
the assets denominated in currencies other than Pounds Sterling
are hedged by the Company (to a certain extent) by using currency
forward agreements to buy or sell a specified amount of Pounds
Sterling on a particular date in the future.
Historically, foreign exchange hedging has undermined many closed-ended
investment funds, as a result of sharp movements in the foreign
exchange rates leaving large hedging losses which could not be
met as assets were illiquid and banks were under severe balance
sheet strain and could not offer forbearance on facilities in
breach. The Company is exposed to foreign exchange hedging risks
(see note 24) but this risk is mitigated by the following: - Based
on the worst case scenario observed in monthly spot movements
in the past 10 years, our worst case expected hedging loss on
expiry would be 4.33% of NAV; - Our portfolio trading liquidity
is such that it would take one day, in normal circumstances, to
liquidate sufficient assets to meet such an anticipated worst
case loss; and - In "stressed" markets, we estimate it would take
three days to raise such liquidity.
COVID-19 Pandemic
The effect of COVID-19 has been profound with the UK, which according
to government statistics, is facing its worst contraction in output
for over 300 years. The impact on some sectors has been devastating
whilst others have thrived. 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 further
future "waves" and variants of the COVID virus and it will be
some time before the pandemic can be declared "over".
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
targeted longer-term refinancing operations ("TLTROs"), and are
granted a significant relief in their capital requirements through
the capital requirements regulation ("CRR") quick fix and in their
risk-weighted assets ("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.
At the height of the lockdowns in Guernsey, the UK, France and
Luxembourg, the Administrator and Investment Manager showed that
they were able to work remotely without any significant negative
impact on the Company's operations.
The impact of the various vaccines has yet to be seen, but there
is light at the end of the COVID-19 pandemic tunnel, and it is
expected that (as vaccine programmes are rolled out globally)
the risk to the Company from the pandemic will continue to decrease
throughout 2021.
Brexit
The UK left the EU on 31 January 2020, and the subsequent 11 month
transition period ended on 31 December 2020. The UK's ongoing
relationship with the EU is now governed by the EU Withdrawal
Agreement and a Trade and Cooperation Agreement ("TCA") agreed
on 24 December 2020. The end of the transition period and the
certainty of there being a TCA in place has reduced the risk that
the uncertainty of Brexit created. However, although the immediate
uncertainty arising from Brexit has reduced, the impact over the
next three years of Brexit on European financial securities is
yet to be seen.
Investment risk
There are certain risks associated with the Company's investment
activities that are largely a result of the Company's investment
policy (e.g. a portfolio concentrated on European financial debt)
and certain investment techniques which are inherently risky (e.g.
short selling).
There are numerous risks associated with having a concentrated
portfolio and the primary risk management tool used by the Company
is the extensive research performed by the Investment Manager
prior to investment, along with the ongoing monitoring of a position
once held in the Company's portfolio. The Board reviews portfolio
concentration and receives a detailed overview of the portfolio
positions quarterly, and more frequently if necessary.
Counterparty risk
The Company has credit and operational risk exposure to its counterparties
which will require it to post collateral to support its obligations
in connection with forwards and other derivative instruments.
Cash pending investment or held on deposit will also be held with
counterparties. The insolvency of a counterparty would result
in a loss to the Company which could be material.
In order to mitigate this risk the Company seeks to trade only
with reputable counterparties that the Investment Manager believes
to be creditworthy. The Investment Manager negotiates its International
Swaps and Derivatives Association ("ISDA") agreements to include
bilateral collateral agreements. In addition, cash held is only
with financial institutions with short term credit ratings of
A-1 (Standard & Poor's) or P-1 (Moody's) or better.
Exposure to counterparties is monitored by the Investment Manager
and reported to the Board each quarter.
Credit risk
The Company may use leverage to meet its investment objectives.
The Company will also use forward contracts to hedge its non-Pounds
Sterling assets. In order to do this, it will need to have in
place credit lines with one or more financial institutions. Due
to market conditions or other factors, credit lines may be withdrawn
and it might not be possible to put in place alternative arrangements.
As such, the ability to meet the Company's investment objective
and/or hedging strategy may not be met. The Investment Manager
monitors the use of credit lines and reports to the Board each
quarter.
Share price risk
The Company is exposed to the risk that its shares may trade at
a significant discount to NAV or that the market in the shares
will be illiquid. To mitigate this risk the Company increased
the frequency of the publication of its NAV to daily and has retained
the Broker to maintain regular contact with existing and potential
shareholders. In addition, the Company may instigate a share buyback
programme in an attempt to reduce the discount. The Board monitors
the trading activity of the shares on a regular basis and addresses
the premium/discount to NAV at its regular quarterly meetings.
From 1 January 2020 to 31 December 2020, the Company's shares
traded at an average discount to NAV of 8.29% (2019: 6.26% discount
to NAV). The premium rose to 3.60% on 18 March 2020 as markets
dropped following the rapid spread of COVID-19, which resulted
in most European countries being put into lockdown. Tumultuous
trading conditions continued, resulting in the price of the Company's
shares falling to a discount to NAV of 17.03% on 5 June 2020,
which coincided with the easing of lockdown restrictions in many
European countries and the expansion of measures put in place
by regulators and governments. At the year end the shares traded
at a 7.47% discount to NAV (2019: 5.41% discount). The level of
discount continues to be monitored by all parties with a view
to introducing methods to improve the position, if necessary.
Regulatory risk
Brexit may, in time, lead to divergence in regulatory regimes
between the UK and the EU and may create additional investment
and trading opportunities. However, in a process which is yet
to be determined, it is too early to fully appreciate what these
opportunities will be or when they will present themselves.
Changes in laws or regulations, or a failure to comply with these,
could have a detrimental impact on the Company's operations. Prior
to initiating a position, the Investment Manager considers any
possible legal and regulatory issues that could impact the investment
and the Company. The Company's advisers and service providers
monitor regulatory changes on an ongoing basis, and the Board
is apprised of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Reputational risk
Reputational damage to the Company or the Investment Manager as
a result of negative publicity could adversely affect the Company.
To address this risk, the Company has engaged a public relations
firm to monitor media coverage and actively engage with media
sources as necessary. The Board also receives updates from the
Broker and the Investment Manager on a quarterly basis and considers
measures to address concerns as they arise.
Environmental, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed
by other organisations. Therefore, the Company does not combust
fuel and does not have any greenhouse gas emissions to report
from its operations, nor does it have direct responsibility for
any other emission producing sources.
Environmental, Social and Governance ("ESG") Policy
The Board believes that all companies have a duty to consider
their impact on the community and the environment. The Directors,
Administrator, Company Secretary and external auditor are all
based in Guernsey and Board meetings are held in Guernsey, thus
negating the need for long commutes or flights to/from Board meetings,
and thereby minimising the negative environmental impact of travel
to/from Board meetings.
When making investment decisions, the Investment Manager uses
three main mechanisms to integrate ESG criteria:
* Its in-house database and tools dedicated to ESG, as
described in its ESG policy which is available on
their website
https://axiom-ai.com/web/en/regulatory-information/
);
* Engagement with management or investor relations
teams to get additional information; and
* Information published in annual reports or other
regulatory filings (such as TCFD or sustainability
reports).
Axiom AI's Investment Committee is ultimately responsible for
the progress of ESG integration by the investment teams, under
the supervision of Axiom AI's Executive Committee.
In addition to the ESG policy, Axiom AI maintains an exclusion
list. Investments in securities issued by a firm on that exclusion
list are prohibited. If a name is added to the exclusion list
and the securities are already in the portfolios, the portfolio
manager must divest the securities, in a way that is not harmful
to holders (no fire sale). The list is mainly based on the lists
established by recognized key players, such as the Norwegian government
pension fund. The list was introduced in order to formalise the
Investments Manager's desire not to invest in any company engaged
in activities that do not correspond to our values and our requirements
in terms of sustainable development. Companies can be excluded,
for example because they produce controversial weapons, such as
the ones covered by the Ottawa and Oslo Conventions (anti-personnel
mines, cluster munitions). This list is regularly reviewed and
amended.
Gender Diversity
The Board of Directors of the Company currently comprises three
male Directors. Further information in relation to the Board's
policy on diversity can be found in the Directors' Remuneration
Report (in the Annual Report and Financial Statements).
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs")
to help assess the Company's performance against its objectives.
Further information regarding the Company's performance is provided
in the Chairman's Statement and the Investment Manager's Report.
Dividends per Ordinary Share
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company announced dividends of GBP5,511,000 (6.00p per Ordinary
Share) for the year ended 31 December 2020 (2019: 6.00p per Ordinary
Share) (see note 6 for further details). The Company has met the
6.00p dividend per share target each year since inception and
expects to continue to be able to pay out dividends of this level
in the future.
NAV and total return
In line with the Prospectus, the Company is targeting a net total
return on invested capital of approximately 10% p.a. over a seven
year period.
The Company achieved a total return of 1.73% in the year ended
31 December 2020 (2019: +16.98%). The total return from inception
to 31 December 2020 was 4.60% p.a., which is below the long term
target return of 10% p.a. net of operating expenses. Although,
the future rate of return and dividends cannot be guaranteed,
together with the Investment Manager, the Board believes that
the Company's long-term target return will be achievable in the
future.
The Board regularly monitors the premium/discount of the price
of the Ordinary Shares to the NAV per share. Should the discount
of share price to NAV become unacceptable to the Board, the Company
may buy back some of its shares. Accordingly, the Board puts forward
a proposal to Shareholders at the Annual General Meeting to renew
the authority to buy back shares.
At 31 December 2020 the share price was 88.00p (2019: 94.00p),
a 7.47% discount to NAV (2019: 5.41% discount).
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard
to the matters set out in Section 172(1)(a) to (f) of the Companies
Act 2006. Although, as a Guernsey company, the Company is not
required to directly comply with the Companies Act 2006, Section
172 is considered as a requirement of the AIC Code of Corporate
Governance with which the Company complies (see the Corporate
Governance Report (in the Annual Report and Financial Statements)
for further details).
The Board considers the needs of a number of stakeholders when
considering the long-term future of the Company. The key stakeholders
with which the Board has liaised during the year ended 31 December
2020 were:
* Shareholders; and
* Key service providers.
Shareholders
The Company's significant Shareholders at the year end can be
found in the Directors' Report (in the Annual Report and Financial
Statements).
When making principal decisions it is considered imperative to
analyse the views of the Company's investors, to ensure that there
may continue to be a supply of capital enabling the Company to
continue to expand its shareholder base, realise its potential
for growth and achieve its long-term investment objective (as
disclosed in the Overview and Investment Strategy). The key performance
indicators, detailed above, have been considered on an ongoing
basis as part of the Board's decision making process.
Details of how the Director's communicate with Shareholders can
be found in the Corporate Governance Report (in the Annual Report
and Financial Statements).
Other than the routine engagement with investors regarding strategy
and performance, Board composition and absence of a nomination
committee were discussed with investors. Following these discussions,
the Board considered its current size and structure in detail
and concluded that it was not currently appropriate to expand
the Board or establish additional committees beyond the introduction
of formal Management Engagement and Nomination and Remuneration
Committees although this would be kept under review.
Key service providers
Details of the Company's key service providers can be found in
the material contracts section of the Directors' Report (in the
Annual Report and Financial Statements).
The key service providers, including the Investment Manager, are
fundamental to the Company's ability to continue in the same state
as any changes could disrupt the expected timeliness of information
provided to the markets. In turn this would be likely to have
a detrimental impact on the Company's reputation. Reputational
risk is discussed further in the Principal Risks and Uncertainties.
The Board considers the performance of the Investment Manager
to be imperative to the success of the Company and therefore,
reviews the performance of the Investment Manager at each Board
meeting. The Investment Manager and Administrator provide the
Board with documentation for consideration at the meetings to
assist with their review of performance and the Investment Manager
also provides a verbal report to the Board. The Directors raise
any queries they have at these meetings with the Investment Manager
to help ensure the successful implementation of the investment
objective and success of the Company.
The Board has continuous access to all of the Company's key service
providers and has open two-way communication with them. Key aspects
of discussion with these service providers, other than those regarding
Company performance and strategy, were in respect of fees payable
to these providers.
Following these discussions, no fee arrangements were amended
in the year ended 31 December 2020.
William Scott
Chairman
22 March 2021
Statement of Comprehensive Income
for the year ended 31 December 2020
Year ended Year ended
31 December 31 December
Note 2020 2019
GBP'000 GBP'000
Income
Capital instrument income 4,975 4,445
Credit default swap income 581 600
Bank interest receivable 15 7
------------ ------------
Total income 5,571 5,116
------------ ------------
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 15 (200) 1,179
Movement in unrealised gains on capital
instruments and other investments 15 958 4,815
Realised losses on derivative financial
instruments 18 (713) (439)
Movement in unrealised (losses)/gains
on derivative financial instruments 18 (1,346) 5,299
------------ ------------
Total investment gains and losses (1,301) 10,854
------------ ------------
Expenses
Loss on foreign currency (1,307) (603)
Investment management fee 8a (753) (796)
Other expenses 12 (267) (279)
Interest payable and similar charges 11 (139) (51)
Administration fee 8b (132) (128)
Directors' fees 8f (95) (95)
Performance fee 8a - (136)
------------ ------------
Total expenses (2,693) (2,088)
------------ ------------
Profit for the year attributable to
the Owners of the Company 1,577 13,882
------------ ------------
Earnings per Ordinary Share: basic
and diluted 14 1.72p 15.21p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
The Company does not have any income or expenses that are not
included in profit for the year. Therefore, the profit for the
year is also the total comprehensive income for the year.
The accompanying notes form an integral part of these financial
statements.
Statement of Changes in Equity
for the year ended 31 December 2020
Distributable
reserves and
Note total
GBP'000
Opening balance at 1 January 2019 76,976
Profit for the year ended 31 December
2019 13,882
Contributions by and distributions to
Owners
Ordinary Shares issued 21 5,941
Share issue costs (100)
Dividends paid 6 (5,415)
------------
At 31 December 2019 91,284
Profit for the year ended 31 December
2020 1,577
Contributions by and distributions to
Owners
Dividends paid 6 (5,511)
------------
At 31 December 2020 87,350
------------
The share capital has not been presented separately in the above
Statement of Changes in Equity as the Ordinary Shares have no
par value, and hence the share capital is GBPnil.
The accompanying notes form an integral part of these financial
statements.
Statement of Financial Position
as at 31 December 2020
As at As at
Note 31 December 31 December
2020 2019
GBP'000 GBP'000
Assets
Investments in capital instruments
at fair value through profit or 15,
loss 19 83,466 85,924
Other investments at fair value 15,
through profit or loss 19 4,766 7,764
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 5,905 4,999
Derivative financial assets at fair
value through profit or loss 18 5,257 3,909
Other receivables and prepayments 17 1,995 1,625
Cash and cash equivalents 4,297 6,102
------------ ------------
Total assets 105,686 110,323
------------ ------------
Current liabilities
Derivative financial liabilities
at fair value through profit or
loss 18 (12,331) (16,434)
Short positions covered by reverse 15,
sale and repurchase agreements 19 (1,881) (1,336)
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 (340) (803)
Other payables and accruals 20 (2,134) (466)
Bank overdrafts (1,650) -
------------ ------------
Total liabilities (18,336) (19,039)
------------ ------------
Net assets 87,350 91,284
------------ ------------
Share capital and reserves
Share capital 21 - -
Distributable reserves 87,350 91,284
------------ ------------
Total equity holders' funds 87,350 91,284
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 22 95.10p 99.38p
These financial statements were approved by the Board of Directors
on 22 March 2021 and were signed on its behalf by:
John Renouf
Director
William Scott 22 March 2021
Chairman
22 March 2021
The accompanying notes form an integral part of these financial
statements.
Statement of Cash Flows
for the year ended 31 December 2020
Year ended Year ended
31 December 31 December
Note 2020 2019
GBP'000 GBP'000
Cash flows from operating activities
Net profit before taxation 1,577 13,882
Adjustments for:
Foreign exchange movements 1,307 603
Total investment losses/(gains) at fair
value through profit or loss 1,301 (10,854)
Capital instrument income (4,975) (4,445)
CDS income (581) (599)
Interest on sale and repurchase agreements 88 2
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts
for derivative financial instruments 16 (1,369) 4,727
Purchase of investments at fair value
through profit or loss (62,114) (65,848)
Sale of investments at fair value through
profit or loss 68,071 63,417
Premiums received from selling credit
default swap agreements 18 4,293 1,658
Premiums paid on buying credit default
swap agreements 18 (4,511) (2,982)
Purchase of foreign currency derivatives 18 (204,876) (324,487)
Close-out of foreign currency derivatives 18 204,573 325,345
Purchase of bond futures 18 (1,751) (2,336)
Sale of bond futures 18 1,735 1,384
Proceeds from sale and repurchase agreements 18 34,679 63,360
Payments to open reverse sale and repurchase
agreements 18 (11,999) (2,678)
Payments for closure of sale and repurchase
agreements 18 (38,953) (64,283)
Proceeds from closure of reverse sale
and repurchase agreements 18 9,329 3,694
Opening of short positions 10,157 3,374
Closure of short positions (8,002) (3,609)
Opening of options (29) -
Cash paid during the year for interest (1,651) (819)
Cash received during the year for interest 6,986 5,290
Cash received during the year for dividends 225 228
------------ ------------
Net cash inflow from operating activities
before working capital changes 3,531 4,024
Decrease in other receivables and prepayments 2 11
Decrease in other payables and accruals (170) (137)
------------ ------------
Net cash inflow from operating activities 3,363 3,898
Cash flows from financing activities
Proceeds from issue of Ordinary Shares - 5,941
Share issue costs paid 23 - (165)
Dividends paid 6 (5,511) (5,415)
------------ ------------
Net cash (outflow)/inflow from financing
activities (5,511) 361
------------ ------------
(Decrease)/increase in cash and cash
equivalents (2,148) 4,259
Cash and cash equivalents brought forward 6,102 2,446
Effect of foreign exchange on cash and
cash equivalents (1,307) (603)
------------ ------------
Cash and cash equivalents carried forward
* 2,647 6,102
------------ ------------
* Cash and cash equivalents at the year end includes bank overdrafts
that are repayable on demand and form an integral part of the
Company's cash management.
The accompanying notes form an integral part of these financial
statements.
Notes to the Financial Statements
for the year ended 31 December 2020
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Companies (Guernsey) Law, 2008 on 7 October
2015 with registered number 61003. Its Ordinary Shares were admitted
to trading on the Premium Segment of the main market of the London
Stock Exchange and to the premium listing segment of the FCA's
Official List on 15 October 2018 (prior to this, the Ordinary
Shares traded on the Specialist Fund Segment ("SFS") of the London
Stock Exchange).
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company will focus primarily
on investing in the secondary market although instruments may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company will invest its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company
for the year ended 31 December 2020. The comparative figures stated
were for the year ended 31 December 2019. These financial statements
have been prepared in accordance with International Financial
Reporting Standards ("IFRS"), as adopted by the European Union.
These financial statements are presented in Sterling, which is
also the Company's functional currency (please see notes 3b and
4i for further details). All amounts are rounded to the nearest
thousand.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its cash resources, income
stream and Level 1 investments, the Directors have a reasonable
expectation that the Company has adequate resources to continue
in operational existence for the foreseeable future and do not
consider there to be any threat to the going concern status of
the Company (see the going concern section and viability statement
in the Directors' Report (in the Annual Report and Financial Statements)
for further information). Therefore, the financial statements
have been prepared on a going concern basis.
c) Basis of measurement
The financial statements have been prepared on a historical cost
basis, except for certain financial instruments, which are measured
at fair value through profit or loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses.
Judgements made by management in the application of IFRS that
have a significant effect on the financial statements and estimates
with a significant risk of material adjustment are discussed in
note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, capital instrument income and credit default swap
income is recognised on an accruals basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 31 December 2020
were GBP1/EUR1.1185, GBP1/US$1.3670, GBP1/DKK8.3263, GBP1/CA$1.7422
and GBP1/SGD1.8061 (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 it in the near
term; or
* On initial recognition, it is part of a portfolio of
identified financial instruments that are managed
together and for which, there is evidence of a recent
actual pattern of short-term profit-taking; or
* It is a derivative (except for a derivative that is a
financial guarantee contract or a designated and
effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured
at amortised cost or measured at fair value through profit or
loss on the basis of both:
* The business model for managing the financial assets;
and
* The contractual cash flow characteristics of the
financial asset.
A financial asset is measured at fair value through profit or
loss if:
* Its contractual terms do not give rise to cash flows
on specified dates that are solely payments of
principal interest ("SPPI") on the principal amount
outstanding; or
* It is not held within a business model whose
objective is either to collect contractual cash flows,
or to both collect contractual cash flows and sell;
or
* At initial recognition, it is irrevocably designated
as measured at fair value through profit or loss when
doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would
otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on
different bases.
The Company includes in this category:
* Instruments held for trading. This category includes
equity instruments and debt instruments which are
acquired principally for the purpose of generating a
profit from short-term fluctuations in price. This
category also includes derivative financial assets at
fair value through profit or loss.
* Debt instruments. These include investments that are
held under a business model to manage them on a fair
value basis for investment income and fair value
gains.
Financial liabilities
A financial liability is measured at fair value through profit
or loss if it meets the definition of held for trading.
The Company includes in this category, derivative contracts in
a liability position and equity and debt instruments sold short
since they are classified as held for trading.
Derivative financial instruments, including credit default swap
agreements, foreign currency forward contracts, bond future contracts
and sale and repurchase agreements are recognised initially, and
are subsequently measured at, fair value. Sale and repurchase
agreements are recognised at fair value through profit or loss
as they are generally not held to maturity and so are held for
trading. Derivative financial instruments are classified as assets
when their fair value is positive or as liabilities when their
fair value is negative. Derivative assets and liabilities arising
from different transactions are offset only if the transactions
are with the same counterparty, a legal right of offset exists,
and the parties intend to settle the cash flows on a net basis.
These financial instruments are classified at fair value through
profit or loss upon initial recognition on the basis that they
are part of a group of financial assets which are managed and
have their performance evaluated on a fair value basis, in accordance
with investment strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that
require delivery of assets within the time frame generally established
by regulation or convention in the marketplace are recognised
on the trade date, i.e. the date that the Company commits to purchase
or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either: (a) the Company has transferred substantially
all the risks and rewards of the asset; or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement)
and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the
asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the Statement of Financial Position
at fair value. All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets
which are classified at fair value through profit or loss, at
fair value. Subsequent changes in the fair value of those financial
instruments are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or loss. Interest
and dividends earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities
at fair value through profit or loss
The Company records its transactions in investments and the related
revenue and expenses on a trade date basis. Unrealised gains and
losses comprise changes in the fair value of financial instruments
at the period end. These gains and losses represent the difference
between an instrument's initial carrying amount and disposal amount,
or cash payment on, or receipts from derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are reported net by
counterparty in the Statement of Financial Position, provided
that a legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
e) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair
value through profit or loss comprise cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
f) Receivables and prepayments
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category other short-term receivables.
g) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held
to maturity are carried at cost. Cash and cash equivalents are
defined as cash in hand, demand deposits and short-term, highly
liquid investments readily convertible to known amounts of cash
and subject to insignificant risk of changes in value.
h) Payables and accruals
Trade and other payables are carried at payment or settlement
amounts. When payables are received in currencies other than the
reporting currency, they are carried forward, translated at the
rate prevailing at the year end date.
i) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as
a deduction from equity.
When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable
costs, is recognised as a deduction from equity. Repurchased shares
that are classified as Treasury Shares are presented as a deduction
from equity. When Treasury Shares are sold or subsequently reissued,
the amount received is recognised as an increase in equity and
the resulting surplus or deficit is transferred to/from retained
earnings.
Funds received from the issue of Ordinary Shares are allocated
to share capital, to the extent that they relate to the nominal
value of the Ordinary Shares, with any excess being allocated
to distributable reserves.
j) Distributable reserves
All income and expenses, foreign exchange gains and losses and
investment gains and losses of the Company are allocated to the
distributable reserve.
k) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the year end.
Earnings per share is calculated by dividing the earnings for
the year by the weighted average number of Ordinary Shares in
issue during the year.
l) Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the
previous financial period. The Company adopted the following new
and amended relevant IFRS in the period:
IFRS Financial Instruments: Disclosures (amendments regarding
7 pre-replacement issues in the context of the IBOR reform)
IFRS Financial Instruments (amendments regarding pre-replacement
9 issues in the context of the 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 these accounting standards did not have any effect
on the Company's Statement of Financial Position or equity.
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 do not anticipate that they would have
a material impact on the Company's financial statements in the
period of initial application.
Effective
date
IFRS Financial Instruments (amendments resulting 1 January
9 from Annual Improvements to IFRS Standards 2018-2020) 2022
IAS 1 Presentation of Financial Statements (amendments 1 January
regarding the classification of liabilities) 2022
IAS 37 Provisions, Contingent Liabilities and Contingent 1 January
Assets (amendments regarding the costs to include 2022
when assessing whether a contract is onerous)
4. Use of judgements and estimates
The preparation of the Company's financial statements requires
the Directors to make judgements, estimates and assumptions that
affect the reported amounts recognised in the financial statements
and disclosure of contingent liabilities. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. However, uncertainty about these
assumptions and estimates could result in outcomes that could
require a material adjustment to the carrying amount of the asset
or liability in future periods.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised, if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgement which had a significant
effect on the amounts recognised in the financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although the majority of the Company's underlying
assets are held in currencies other than Sterling, because the
Company's capital is raised in Sterling, expenses are paid in
Sterling and the Company hedges substantially all of its foreign
currency risk back to Sterling, the Directors consider Sterling
to be the Company's functional currency.
The Directors do not consider there to be any other judgements
that have had a significant impact on the financial statements.
Estimates and assumptions
The Company based its reporting date assumptions and estimates
on parameters available when the financial statements were approved.
However, existing circumstances and assumptions about future developments
may change due to market changes or circumstances arising beyond
the control of the Company. Such changes are reflected in the
assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 19.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes and no segmental
reporting is required. The financial results of this segment are
equivalent to the results of the Company as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company has declared the following dividends during the year
ended 31 December 2020:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 5,511 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2020 (1,378) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,378 1.50p
------------ ------------
Dividends declared in respect
of the year 5,511 6.00p
------------ ------------
The Company declared the following dividends during the year ended
31 December 2019:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 5,415 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2019 (1,282) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,378 1.50p
------------ ------------
Dividends declared in respect
of the year 5,511 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the year a total of GBP5,511,000 (2019: GBP5,415,000) was
incurred in respect of dividends, none of which was outstanding
at the reporting date. The fourth dividend declared out of the
profits for the year of GBP1,378,000 had not been provided for
at 31 December 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
advisors and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 31 December 2020, the Company had holdings in the following
investments which were managed by the Investment Manager:
31 December 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 3,011 35 2,984 2,898
Axiom Global CoCo UCIT ETF GBP-hedged 10 1,000 1,089 20 2,000 2,092
Axiom Equity Class Z 500 467 666 - - -
Axiom Contingent Capital - Class
E - - - 2,450 2,462 2,774
During the year, the Company:
* purchased 500 units in Axiom Equity Class Z for
GBP467,000;
* sold 2,450 units in Axiom Contingent Capital - Class
E for GBP2,150,000, realising a loss of GBP312,000;
and
* sold 10 units in Axiom Global CoCo UCIT ETF
GBP-hedged for GBP1,033,000, realising a gain of
GBP33,000.
During the year ended 31 December 2019, the Company:
* purchased 70 units in UC AXI Global CoCo Bonds UCITS
for GBP6,040,000;
* purchased 35 units in Axiom Global CoCo UCIT ETF
USD-hedged for GBP2,985,000;
* purchased 20 units in Axiom Global CoCo UCIT ETF
GBP-hedged for GBP2,000,000;
* sold 669 units in Axiom Contingent Capital - Class E
for GBP703,000, realising a gain of GBP31,000; and
* sold 70 units in UC AXI Global CoCo Bonds UCITS for
GBP6,679,000, realising a gain of GBP639,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement
with Axiom under which the Company receives investment advice
and management services.
Management fee
Under the terms of the Investment Management Agreement, a management
fee is paid to the Investment Manager quarterly in arrears. The
quarterly fee is calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to GBP250 million, 1% per annum
of NAV;
ii. where NAV is greater than GBP250 million but less than or
equal to GBP500 million, 1% per annum of NAV on the first GBP250
million and 0.8% per annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million, 0.8% per annum
of NAV, in each case, plus applicable VAT.
In respect of the management fee calculation above, any related
party holdings are deducted from the NAV.
If in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company (excluding management
fees, performance fees, interest charged on sale and repurchase
agreements, bank charges and withholding tax) during such quarter
exceed an amount equal to one-quarter of 1.5% of the average NAV
of the Company during such quarter (such amount being a "Quarterly
Expenses Excess"), then the management fee payable in respect
of that quarter shall be reduced by the amount of the Quarterly
Expenses Excess, provided that the management fee shall not be
reduced to an amount that is less than zero and no sum will be
payable by the Investment Manager to the Company in respect of
the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceed an
amount equal to 1.5% of the average NAV of the Company during
such accounting period (such amount being an "Annual Expenses
Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Annual Expenses Excess.
If such reduction would not fully eliminate the Annual Expenses
Excess (the amount of any such shortfall being a "Management Fee
Deduction Shortfall"), the Investment Manager shall pay to the
Company an amount equal to the Management Fee Deduction Shortfall
(a "Management Fee Deduction Shortfall Payment") as soon as is
reasonably practicable.
During the year, a total of GBP753,000 (2019: GBP796,000) was
incurred in respect of Investment Management fees, of which GBP185,000
was payable at the reporting date (2019: GBP189,000).
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess and Annual Expenses Excess for the
year was GBP12,000 (2019: GBP2,000), and at 31 December 2020 the
Quarterly Expenses Excess and Annual Expenses Excess which could
be payable to the Investment Manager in future periods was GBP737,000
(2019: GBP725,000) (see note 27).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return
("TSR") where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the average number of
shares in issue during the period from 5 November 2015 to the
end of the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited accounts
of the Company.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
At 31 December 2020, a performance fee of GBP1,000 (2019: GBP136,000)
was payable by the Company in respect of the year ended 31 December
2019. No performance fee was payable in respect of the year ended
31 December 2020. During the year, the Company paid the Investment
Manager GBP135,000, in settlement of the 2019 performance fee,
50% of which was subsequently used to purchase 81,141 shares in
the Company.
b) Administrator and Company Secretary
Elysium has been appointed by the Company to provide day to day
administration services to the Company, to calculate the NAV per
share as at the end of each calendar month and to provide company
secretarial functions required under the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of GBP110,000 per annum, which is
subject to an annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding year. In
addition, the Company pays the Administrator a fee for work undertaken
in connection with the daily NAV, subject to a maximum aggregate
amount of GBP10,000 per annum.
During the year, a total of GBP132,000 (2019: GBP128,000) was
incurred in respect of Administration fees of which GBP33,000
(2019: GBP32,000) was payable at the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") has been appointed
to act as Corporate Broker ("Broker") for the Company, in consideration
for which the Company pays Winterflood an annual retainer fee
of GBP35,000 per annum.
For the year to 31 December 2020, the Company incurred Broker
fees of GBP37,000 (2019: GBP37,000) of which GBP6,000 was payable
at the year end date (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 year, a total of GBP20,000 (2019: GBP19,000) was incurred
in respect of Registrar fees, of which GBP3,000 was payable at
31 December 2020 (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 year, a total of GBP39,000 (2019: GBP34,000) was incurred
in respect of depositary fees, of which GBP6,000 was payable at
the reporting date (2019: GBP13,000).
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent fee from the Company in respect of the provision of certain
accounting services which will, subject to a minimum monthly fee
of EUR2,500, be calculated by reference to the following tiered
sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP40,000 (2019: GBP42,000) was
incurred in respect of valuation agent fees paid to CACEIS Bank
Luxembourg, of which GBP10,000 was payable at 31 December 2020
(2019: GBP14,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum (2019: GBP35,000),
John Renouf (Chairman of the Audit Committee) is paid GBP32,500
per annum (2019: GBP32,500), and Max Hilton is paid GBP27,500
per annum (2019: GBP27,500).
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the year, a total of GBP95,000 (2019: GBP95,000) was incurred
in respect of Directors' fees, none of which was payable at the
reporting date (2019: GBPnil). No bonus or pension contributions
were paid or payable on behalf of the Directors.
9. Key management and employees
Other than the Non-Executive Directors, the Company has had no
employees since its incorporation.
10. Auditor's remuneration
Grant Thornton was appointed to act as the Company's external
auditor with effect from 19 August 2020, replacing the Company's
previous auditor EY.
For the year ended 31 December 2020, total fees charged by Grant
Thornton, together with amounts accrued at 31 December 2020, amounted
to GBP37,000 (2019 total fee payable to EY: GBP43,000), all of
which related to audit services. As at 31 December 2020, GBP22,000
was due to Grant Thornton (2019: GBP30,000 due to EY).
11. Interest payable and similar charges
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Bank interest 41 48
Interest payable on sale and repurchase
agreements 88 2
Commission 10 1
------------ ------------
139 51
------------ ------------
12. Other expenses
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
PR expenses 41 43
Valuation agent fees 40 42
Depositary fees (note 8e) 39 34
Other expenses 38 53
Audit fees (note 10) 37 43
Broker fees (note 8c) 37 37
Registrar fees (note 8d) 20 19
Legal fees 15 8
------------ ------------
267 279
------------ ------------
13. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
14. Earnings per Ordinary Share
The earnings per Ordinary Share of 1.72p (2019: earnings of 15.21p)
is based on a profit attributable to owners of the Company of
GBP1,577,000 (2019: profit of GBP13,882,000) and on a weighted
average number of 91,852,904 (2019: 91,256,658) Ordinary Shares
in issue since 1 January 2020. There are no dilutive shares and
there is no difference between the basic and diluted earnings
per share.
15. Investments at fair value through profit or loss
Movements in gains/(losses) in the year
31 December 2020 31 December 2019
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in capital
instruments 925 340 1,265 4,575 467 5,042
Other investments (3) (279) (282) 402 670 1,072
Short positions covered
by reverse sale and
repurchase agreements 36 (261) (225) (162) 42 (120)
------------ ------------ ------------ ------------ ------------ ------------
958 (200) 758 4,815 1,179 5,994
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December 31 December
2020 2019
GBP'000 GBP'000
Investments in capital instruments 83,466 85,924
Other investments 4,766 7,764
Short positions covered by reverse sale
and repurchase agreements (1,881) (1,336)
------------ ------------
Investments at fair value through profit
or loss 86,351 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 31 December 2020, the Company had fourteen (2019: ten) open
sale and repurchase agreements, including four (2019: one) reverse
sale and repurchase agreements (see note 18). The reverse sale
and repurchase agreements were open ended and were used to cover
the sale of capital instruments (the short positions noted above).
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short positions) at 31 December
2020 was GBP19,582,000 (2019: GBP19,596,000). The fair value net
of the short positions was GBP17,701,000 (2019: GBP18,260,000).
16. Collateral accounts for derivative financial instruments at
fair value through profit or loss
31 December 31 December
2020 2019
GBP'000 GBP'000
JP Morgan 4,896 3,660
Credit Suisse 599 585
Goldman Sachs International 410 754
CACEIS Bank France - -
------------ ------------
5,905 4,999
CACEIS Bank France - negative balance (340) (803)
------------ ------------
Net balance on collateral accounts held
by brokers 5,565 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 derivatives
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation under the derivatives.
17. Other receivables and prepayments
31 December 31 December
2020 2019
GBP'000 GBP'000
Accrued capital instrument income receivable 1,468 1,591
Due from sale of capital instrument 484 -
Interest due on credit default swaps 26 15
Prepayments 17 15
Interest due on collateral held by brokers - 4
------------ ------------
1,995 1,625
------------ ------------
18. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The International Swaps and Derivatives Association ("ISDA") establishes
the nature of the credit event and such events include bankruptcy
and failure to meet payment obligations when due.
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Opening balance 1,016 (2,419)
Premiums received from selling credit default
swap agreements (4,293) (1,658)
Premiums paid on buying credit default
swap agreements 4,511 2,982
Movement in unrealised (losses)/gains in
the year (465) 1,972
Realised (losses)/gains in the year (321) 139
------------ ------------
Outstanding asset due on credit default
swaps 448 1,016
------------ ------------
Credit default swap assets at fair value
through profit or loss 595 1,398
Credit default swap liabilities at fair
value through profit or loss (147) (382)
------------ ------------
Outstanding asset due on credit default
swaps 448 1,016
------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Statement of Comprehensive Income
as it has been incurred or received. At the year end, GBP26,000
(2019: GBP15,000) of interest on credit default swap agreements
was due to the Company.
Collateral totalling GBP5,905,000 (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.
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Opening balance 1,219 (1,329)
Purchase of foreign currency derivatives 204,876 324,487
Closing-out of foreign currency derivatives (204,573) (325,345)
Movement in unrealised (losses)/gains in
the year (444) 2,548
Realised (losses)/gains in the year (303) 858
------------ ------------
Net assets on foreign currency forwards 775 1,219
------------ ------------
Foreign currency forward assets at fair
value through profit or loss 775 1,219
Foreign currency forward liabilities at
fair value through profit or loss - -
------------ ------------
Net assets on foreign currency forwards 775 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.
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Opening balance - (7)
Purchase of bond futures 1,751 2,336
Sale of bond futures (1,735) (1,384)
Movement in unrealised gains in the year - 88
Realised losses in the year (16) (1,033)
------------ ------------
Balance payable on bond futures - -
------------ ------------
Bond future assets at fair value through
profit or loss - -
Bond future liabilities at fair value through
profit or loss - -
------------ ------------
Balance payable on bond futures - -
------------ ------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement one party in
the agreement acts as a borrower of cash, using a security held
as collateral, and the other party in the agreement acts as a
lender of cash. Almost any security may be employed in the sale
and repurchase agreement. Interest is paid by the borrower for
the benefit of having funds to use until a specified date on which
the effective loan needs to be repaid.
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Opening balance (14,760) (14,955)
Opening of sale and repurchase agreements (34,679) (63,360)
Opening of reverse sale and repurchase
agreements 11,999 2,678
Closing-out of sale and repurchase agreements 38,953 64,283
Closing-out of reverse sale and repurchase
agreements (9,329) (3,694)
Movement in unrealised (losses)/gains in
the year (415) 691
Realised losses in the year (73) (403)
------------ ------------
Total liabilities on sale and repurchase
agreements (8,304) (14,760)
------------ ------------
Sale and repurchase assets at fair value
through profit or loss 3,877 1,292
Sale and repurchase liabilities at fair
value through profit or loss (12,181) (16,052)
------------ ------------
Total liabilities on sale and repurchase
agreements (8,304) (14,760)
------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Statement of Comprehensive Income as it has been incurred.
At 31 December 2020 GBPnil (2019: GBPnil) interest on sale and
repurchase agreements was payable by the Company.
Options
An option offers the buyer the opportunity to buy or sell an underlying
asset at a stated price within a specified timeframe.
Year ended Year ended
31 December 31 December
2020 2019
GBP'000 GBP'000
Opening balance - -
Opening of options 29 -
Movement in unrealised losses in the year (22) -
Realised losses in the year - -
------------ ------------
Balance receivable on options 7 -
------------ ------------
Option assets at fair value through profit
or loss 10 -
Option liabilities at fair value through
profit or loss (3) -
------------ ------------
Balance receivable on options 7 -
------------ ------------
Offsetting of derivative financial instruments
The Company presents the fair value of its derivative assets and
liabilities on a gross basis, no such assets or liabilities have
been offset in the Statement of Financial Position. Certain derivative
financial instruments are subject to enforceable master netting
arrangements, such as ISDA master netting agreements, or similar
agreements that cover similar financial instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised capital
instruments and short position(s) which could be offset under
the applicable derivative agreements (as described above) as at
31 December 2020:
Effect of remaining
rights of offset
that do not meet
the criteria for
Amounts Net amount offsetting in
Gross carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Derivatives 5,257 - 5,257 (1,792) 3,465
Collateral accounts
for derivative
financial instruments
(note 16) 5,905 - 5,905 (147) 5,758
------------ ------------ ------------ ------------ ------------
Total assets 11,162 - 11,162 (1,939) 9,223
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (12,331) - (12,331) 11,760 (571)
Collateral accounts
for derivative
financial instruments
(note 16) (340) - (340) - (340)
------------ ------------ ------------ ------------ ------------
Total liabilities (12,671) - (12,671) 11,760 (911)
------------ ------------ ------------ ------------ ------------
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) as at
31 December 2019:
Effect of remaining
rights of offset
that do not meet
the criteria for
Amounts Net amount offsetting in
Gross carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Derivatives 3,909 - 3,909 (1,292) 2,617
Collateral accounts
for derivative
financial instruments
(note 16) 4,999 - 4,999 (352) 4,647
------------ ------------ ------------ ------------ ------------
Total assets 8,908 - 8,908 (1,644) 7,264
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (16,434) - (16,434) 16,404 (30)
Collateral accounts
for derivative
financial instruments
(note 16) (803) - (803) - (803)
------------ ------------ ------------ ------------ ------------
Total liabilities (17,237) - (17,237) 16,404 (833)
------------ ------------ ------------ ------------ ------------
19. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At 31 December 2020, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Traded/listed capital instruments at
fair value through profit or loss 83,018 448 - 83,466
Other investments at fair value through
profit or loss (note 7) 4,766 - - 4,766
Credit default swap assets - 595 - 595
Credit default swap liabilities - (147) - (147)
Other derivative financial assets - 4,662 - 4,662
Other derivative financial liabilities - (12,184) - (12,184)
Short positions covered by sale and
repurchase agreements - (1,881) - (1,881)
------------ ------------ ------------ ------------
87,784 (8,507) - 79,277
------------ ------------ ------------ ------------
At 31 December 2019, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Traded/listed capital instruments at
fair value through profit or loss 83,460 2,464 - 85,924
Other investments at fair value through
profit or loss (note 7) 2,092 5,672 - 7,764
Credit default swap assets - 1,398 - 1,398
Credit default swap liabilities - (382) - (382)
Other derivative financial assets - 2,511 - 2,511
Other derivative financial liabilities - (16,052) - (16,052)
Short position covered by sale and repurchase
agreement - (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, sale
and repurchase agreements and options. 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.
The options were valued using the relevant options prices curve.
Transfers between levels
Transfers between levels during the year are determined and deemed
to have occurred at each financial reporting date. There were
no investments classified as Level 3 during the year, and no transfers
between levels in the year. See notes 15, 16 and 18 for movements
in instruments held at fair value through profit or loss.
20. Other payables and accruals
31 December 31 December
2020 2019
GBP'000 GBP'000
Due for purchase of capital instrument 1,833 -
Investment management fee (note 8a) 185 189
Administration fee (note 8b) 33 32
Audit fees (note 10) 22 30
Other accruals 16 31
Share issue costs 14 14
Valuation agent fees (note 8e) 10 14
Depositary fees (note 8e) 6 13
Broker fee (note 8c) 6 6
Accrued interest payable on capital instrument
short positions 5 -
Registrar fees (note 8d) 3 1
Performance fee (note 8a) 1 136
------------ ------------
2,134 466
------------ ------------
21. Share capital
31 December 2020 31 December 2019
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
4 February 2019 6,400,880 92.81p 5,941
------------
Shares in issue as at 31 December
2019, 31 December 2020 and 22 March
2021 91,852,904
The Ordinary Shares carry the right to receive all dividends declared
by the Company. Shareholders are entitled to all dividends paid
by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled
to all of the surplus assets of the Company. Shareholders will
be entitled to attend and vote at all general meetings of the
Company and, on a poll, will be entitled to one vote for each
Ordinary Share held.
22. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to owners of the Company of GBP87,350,000 (2019:
GBP91,284,000), and on 91,852,904 (2019: 91,852,904) Ordinary
Shares in issue at the year end.
The net asset value of 95.10p per Ordinary Share disclosed in
these financial statements is 0.16p lower than the net asset value
of 95.26p per Ordinary Share announced on 5 January 2021 as a
result of a GBP146,000 under-accrual in the original net asset
value. This under-accrual did not affect any other NAVs per Ordinary
Share that were announced in the year.
23. Changes in liabilities arising from financing activities
The Company did not raise any capital from the placing of new
shares in the year. In the year ended 31 December 2019, the Company
raised GBP5,941,000 through the placing of 6,400,880 new Ordinary
Shares of no par value. In 2019 share issue costs of GBP100,000
were incurred in relation to the placings, and at the year end
GBP14,000 of the issue costs were outstanding. Taking into account
the movement in share issue costs outstanding, the 2019 cash flows
in relation to share issue costs were GBP165,000.
24. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or
geographical location. Concentrations of risk arise when a number
of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged
in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic, political or other conditions. Concentrations
of liquidity risk may arise from the repayment terms of financial
liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations
of foreign exchange risk may arise if the Company has a significant
net open position in a single foreign currency, or aggregate net
open positions in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investment,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, unlisted
open ended funds, and bond futures at fair value through profit
or loss (notes 15, 18 and 19) are exposed to price risk and it
is not the intention to mitigate the price risk.
At 31 December 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 +/- GBP4,318,000 (2019: +/- GBP4,618,000). The
fair value of financial instruments exposed to price risk at 31
December 2020 was GBP86,351,000 (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 year. At the year end,
the Company held the following foreign currency forward contracts:
31 December 2020
Maturity date Amount to be Amount to be purchased
sold
21 January 2021 EUR43,000,000 GBP38,889,000
21 January 2021 US$10,500,000 GBP8,047,000
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
At the year end a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as
follows:
Investments
at fair
value Foreign
through currency
profit Cash and forward
or loss Receivables cash equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2020
Euro 45,147 936 1,665 47,748 (38,473) 9,275
US Dollars 4,694 2 2,632 7,328 (7,687) (359)
Danish Krone - - - - - -
Canadian Dollars - - - - - -
Singaporean Dollars - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
49,841 938 4,297 55,076 (46,160) 8,916
------------ ------------ ------------ ------------ ------------ ------------
31 December 2019
Euro 41,044 1,024 1,156 43,224 (41,060) 2,164
US Dollars 8,746 34 1,118 9,898 (9,200) 698
Danish Krone - - 832 832 (827) 5
Canadian Dollars - - - - - -
Singaporean Dollars - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
49,790 1,058 3,106 53,954 (51,087) 2,867
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 31 December 2020, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 31 December 2020 would have decreased/increased
by GBP446,000 (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 GBP59,355,000 (2019: GBP61,945,000),
cash and cash equivalents, net of overdrafts, of GBP2,647,000
(2019: GBP6,102,000), collateral account balances of GBP5,565,000
(2019: GBP4,196,000) and short positions of GBP1,881,000 (2019:
GBP1,336,000) were the only interest bearing financial instruments
subject to variable interest rates at 31 December 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 year would
have been +/-GBP309,000 (2019: +/-GBP352,000).
Variable Non-interest
Fixed interest interest bearing Total
31 December 2020 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 16,001 59,355 12,876 88,232
Cash and cash equivalents - 4,297 - 4,297
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 5,905 - 5,905
Derivative financial assets
at fair value through profit
or loss 4,472 - 785 5,257
Other receivables - - 1,995 1,995
------------ ------------ ------------ ------------
Total financial assets 20,473 69,557 15,656 105,686
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (1,650) - (1,650)
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - (340) - (340)
Derivative financial liabilities
at fair value through profit
or loss (12,328) - (3) (12,331)
Short positions covered by sale
and repurchase agreements - (1,881) - (1,881)
Other payables and accruals - - (2,134) (2,134)
------------ ------------ ------------ ------------
Total financial liabilities (12,328) (3,871) (2,137) (18,336)
------------ ------------ ------------ ------------
Total interest sensitivity gap 8,145 65,686 13,519 87,350
------------ ------------ ------------ ------------
Variable Non-interest
Fixed interest interest bearing Total
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 13,822 61,945 17,920 93,687
Cash and cash equivalents - 6,102 - 6,102
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 4,999 - 4,999
Derivative financial assets
at fair value through profit
or loss 2,690 - 1,219 3,909
Other receivables - - 1,621 1,621
------------ ------------ ------------ ------------
Total financial assets 16,512 73,046 20,760 110,318
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - - - -
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - (803) - (803)
Derivative financial liabilities
at fair value through profit
or loss (16,434) - - (16,434)
Short positions covered by sale
and repurchase agreements - (1,336) - (1,336)
Other payables and accruals - - (466) (466)
------------ ------------ ------------ ------------
Total financial liabilities (16,434) (2,139) (466) (19,039)
------------ ------------ ------------ ------------
Total interest sensitivity gap 78 70,907 20,294 91,279
------------ ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and
non-interest bearing capital instruments of GBP28,877,000 (2019:
GBP31,742,000) at 31 December 2020 would increase/decrease by
+/-GBP656,000 (0.74%) (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 31 December 2020, credit risk arose principally from investment
in capital instruments of GBP83,466,000 (2019: GBP85,924,000),
cash and cash equivalents of GBP4,297,000 (2019: GBP6,102,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP5,905,000 (2019: GBP4,999,000),
foreign currency forward assets of GBP775,000 (2019: GBP1,219,000)
and investments in sale and repurchase assets of GBP3,877,000
(2019: GBP1,292,000). The Company seeks to trade only with reputable
counterparties that the Investment Manager believes to be creditworthy.
The credit rating of cash and collateral counterparties is sufficient
that no expected credit loss or provision for impairment is considered
necessary.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 31 December 2020, the capital instrument rating
profile of the portfolio was as follows:
31 December 31 December
2020 2019
Percentage Percentage
A - -
BBB 20.07 19.22
BB 32.28 38.33
B 12.11 9.15
Below B 7.56 8.21
No rating 27.98 25.09
------------ ------------
100.00 100.00
------------ ------------
The investments without a credit rating correspond to issuers
that are not rated by an external rating agency. Although no external
rating is available, the Investment Manager considers and internally
rates the credit risk of these investments, along with all other
investments. The internal risk score is based on the Investment
Manager's fundamental view (stress test, macro outlook, solvency,
liquidity risk, business mix, and other relevant factors) and
is determined by the Investment Manager's risk committee. The
risk grades are mapped to an external Baseline Credit Assessment,
and any discrepancy of more than two notches is monitored closely.
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or
P-1 (Moody's) to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty as to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse, JP Morgan and Goldman Sachs, all
rated A+. At 31 December 2020, the overall net exposure to these
counterparties was 5.11% (2019: 7.01%) of NAV. The collateral
held at each counterparty is disclosed in note 16.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 31 December 2020
was low since the ratio of cash and cash equivalents (net of overdrafts)
to unmatched liabilities was 17:1 (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 31 December
2020 2019
Percentage Percentage
Less than 1 year 7.99 4.91
1 to 3 years 29.24 36.37
3 to 5 years 30.62 27.85
5 to 7 years 9.62 7.80
7 to 10 years 4.15 6.47
More than 10 years 18.38 16.60
------------ ------------
100.00 100.00
------------ ------------
As at 31 December 2020, the Company's liquidity profile was such
that 67.4% of capital instruments were realisable within one day
(2019: 66.5%), 29.5% was realisable within one week (2019: 33.5%)
and the remaining 3.1% was realisable within one month (2019:
nil). As at the year end, the Company's liabilities fell due as
follows:
31 December 31 December
2020 2019
Percentage Percentage
1 to 3 months 93.55 54.99
3 to 6 months - -
6 to 12 months - -
1 to 3 years 6.45 15.73
3 to 5 years - 29.28
------------ ------------
100.00 100.00
------------ ------------
25. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 31 December 2020 the Company had
fourteen (2019: ten) open sale and repurchase agreements, four
(2019: one) being reverse sale and repurchase agreements, committing
the Company to make a total repayment of GBP12,182,000 post the
year end (2019: GBP16,052,000). As a result of the reverse sale
and repurchase agreements the Company was due to receive GBP3,877,000
after the year end (2019: GBP1,292,000).
The raising of capital through the placing of shares forms part
of the capital management policy. See note 21 for details of the
Ordinary Shares issued since incorporation.
As disclosed in the Statement of Financial Position, at 31 December
2020 the total equity holders' funds were GBP87,350,000 (2019:
GBP91,284,000).
26. Capital commitments
The Company holds a number of derivative financial instruments,
which, by their very nature, give rise to capital commitments
post 31 December 2020. These are as follows:
* At 31 December 2020, the Company had sold twelve
(2019: fourteen) credit default swap agreements for a
total of GBP677,000 (2019: GBP931,000), each
receiving quarterly interest. The exposure of the
Company in relation to these agreements at the year
end date was GBP571,000 (2019: GBP1,096,000).
Collateral of GBP5,905,000 for these agreements was
held at 31 December 2020 (2019: GBP4,999,000).
* At the year end the Company had committed to two
(2019: five) foreign currency forward contracts dated
21 January 2021 to buy GBP46,936,000 (2019:
GBP52,306,000). At 31 December 2020, the Company
could have effected the same trades and purchased
GBP46,161,000 (2019: GBP51,087,000), giving rise to a
gain of GBP775,000 (2019: gain of GBP1,219,000).
* At the year end, the Company held ten (2019: nine)
open sale and repurchase agreements (this excludes
the four open reverse sale and repurchase agreements
(2019: one)) committing the Company to make a total
repayment of GBP12,255,000 (2019: GBP16,405,000).
27. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement,
as detailed in note 8a, should the Company's NAV reach a level
at which the TER reduced to less than 1.5% of the average NAV
in a future accounting period then the Quarterly Expenses Excess
and Annual Expenses Excess totalling GBP737,000 at 31 December
2020 (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.
For the GBP737,000 (2019: GBP725,000) Expenses Excess to start
becoming payable, the Company's NAV would need to increase by
c.7.5% from the 31 December 2020 NAV. For a significant amount
to become payable within the foreseeable future, the NAV would
have to increase considerably. The Directors consider that it
is possible, but not probable, that an increase in the NAV leading
to a significant payment of the Expenses Excess will be achieved
in the foreseeable future. Accordingly, the possible payment to
the Investment Manager has been treated as a contingent liability
in the financial statements.
There were no other contingent assets or contingent liabilities
in existence at the year end.
28. Events after the financial reporting date
On 25 January 2021, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 October 2020 to 31 December
2020, which (in accordance with IFRS) was not provided for at
31 December 2020, out of the profits for the year ended 31 December
2020 (note 6). This dividend was paid on 26 February 2021.
As described in the Chairman's Statement, Principal Risks and
Uncertainties and the Director's Report (in the Annual Report
and Financial Statements), the COVID-19 pandemic is a significant
risk to the global economy. The Company's net asset value in the
last year has been materially impacted by the volatility in the
investment markets due to the effects of the COVID-19 pandemic.
The situation continues to change rapidly, so the full impact
cannot yet be fully understood, but the Company will continue
to monitor the situation closely.
-- ENDS --
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