TIDMAXI
RNS Number : 5056J
Axiom European Financial Debt Fd Ld
24 August 2021
24 August 2021
Axiom European Financial Debt Fund Limited
Half-Yearly Report and Unaudited Condensed Financial Statements
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
investment fund listed on the premium segment of the London Stock
Exchange, which offers investors exposure to a diversified portfolio
covering the European banking and financials sector subordinated
debt market, today announces its Half-Yearly Report and Unaudited
Condensed Financial Statements for the six months ended 30 June
2021.
Highlights
30 June 30 June 31 December
2021 (unaudited) 2020 2020
(unaudited) (audited)
Net assets GBP94,637,000 GBP81,366,000 GBP87,350,000
Net asset value ("NAV") per Ordinary
Share 103.03p 88.58p 95.10p
Share price 94.00p 88.00p 88.00p
Discount to NAV (8.76)% 0.65% (7.47)%
Profit/(loss) for the period GBP10,043,000 GBP(7,162,000) GBP1,577,000
Dividend per share declared in
respect of the period 3.00p 3.00p 6.00p
Total return per Ordinary Share
(based on NAV) ([1]) 11.49% -7.85% 1.73%
Total return per Ordinary Share
(based on share price) ([1]) 10.23% -3.19% 0.00%
Ordinary Shares in issue 91,852,904 91,852,904 91,852,904
([1]) Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
period with the NAV or share price, as applicable, plus dividends
paid, at the period end.
* Total returns for the six months were positive at
+11.49% (H1 FY20: -7.85%)
* Returns driven by five consecutive months of positive
performance February through June 2021
* Two quarterly dividend payments, each of 1.50p per
share, declared during the first half
* The Company expects to be able to continue to meet
its 6.00p dividend target for the year
* Asset class remains attractive underpinned by
positive market conditions and the Company remains
ideally placed to capture these opportunities
* Board remains committed to restarting the Company's
Placing Programme and improving the liquidity of the
shares
William Scott, Chairman, commented:
" The Company enjoyed an excellent first half with total shareholder
returns on a NAV basis of +11.49%. On a share price return basis,
the return was +10.23% as the rise in the share price lagged slightly
behind the increase in NAV per share and, as a consequence, the
share price discount to NAV per share widened marginally from
7.47% as at the end of December to 8.76% at the period end.
"The Company has declared two dividends in relation to the half-year
totalling 3.00p and the Company is therefore on track to meet
its target of at least 6.00p for the year.
"We look forward with renewed optimism for the market for regulatory
capital instruments issued by financial institutions in which
we operate and where we can benefit from the application of our
Investment Manager's specialist skills to a rich opportunity set
which is not easily accessible to more generalist managers."
Antonio Roman, Investment Manager, said:
"During the first half, extensive fiscal stimulus packages from
European Central Banks enabled consumers to save further, enhanced
liquidity and preserved corporate balance sheets and financing
conditions. This, together with the progress made in vaccination
campaigns across Europe, that led to the easing of various lockdown
restrictions and record consumer spending, created a very favourable
backdrop for bonds issued by financial institutions and helped
to drive our standout performance during the period.
"Looking ahead, policymakers will need to address both rising
financial stability risks and an uncertain outlook for the health
of businesses across the Eurozone. While this is complicated further
by the additional constraint of maintaining moderate issuance
spreads across European countries, we believe that there are plenty
of opportunities ahead despite these uncertainties.
"We anticipate lower but more flexible asset purchases, a tightening
of mortgage lending conditions, a shift in policies to support
businesses rather than consumers and, while interest margins remain
pressured by the excess of liquidity, the prospect of steeper
curves as inflationary pressures intensify, all of which will
support the ongoing performance of the fund.
"On the regulatory front, supervisors confirmed the alignment
of grandfathering periods for MREL and capital eligibility. The
EBA, in its fourth AT1 Monitoring Report, reminded banks that
all instruments within the same capital bucket, whether legacy
or new style, could not have different rankings in resolution.
Market activity was high, with calls at par and tenders from several
issuers, including BBVA, DZ Bank, RBI, NatWest, Nationwide and
Lloyds. We expect this trend to intensify as we approach the end
of the Basel III grandfathering period by December 2021 and continue
to see significant value in this legacy universe."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou PO Box 650 James Bavister
Gildas Surry 1(st) Floor, Royal Chambers Charles Hirst
Jerome Legras St Julian's Avenue Charlotte Anstey
St Peter Port
www.axiom-ai.com Guernsey axiom@mhpc.com
Tel: +44 20 3807 0670 GY1 3JX Tel: +44 7595 461
231
axiom@elysiumfundman.com
Tel: +44 1481 810 100
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://axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
A copy of the Company's Half-Yearly Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2021 will
shortly be available to view and download from the Company's website,
http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/
. Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
The following text is extracted from the Half-Yearly Report and
Unaudited Condensed Financial Statements of the Company for the
six months ended 30 June 2021:
Chairman's Statement
Results
The Company enjoyed an excellent first half with total shareholder
returns on a NAV basis of +11.49%. On a share price return basis,
the return was +10.23% as the rise in the share price lagged slightly
behind the increase in NAV per share and, as a consequence, the
share price discount to NAV per share widened marginally from
7.47% as at the end of December to 8.76% at the period end.
Overall, the Company reported a net profit after tax for the period
ended 30 June 2021 of GBP10.0 million (30 June 2020: loss of GBP7.2
million), representing earnings per Ordinary Share of 10.93p (30
June 2020: loss per Ordinary Share of 7.80p). The Company's NAV
at 30 June 2021 was GBP94.6 million (103.03p per Ordinary Share)
(31 December 2020: GBP87.4 million, 95.10p per Ordinary Share).
In part, performance was assisted by a continuation of the general
recovery in markets since the panic levels of March 2020 when
the financial markets struggled to price in the COVID-19 pandemic,
but it was also driven by an excellent performance from our Investment
Manager, Axiom Alternative Investments SARL, who were active and
able to use their key specialist skill set to exploit continuing
developments in the regulatory capital space among financial institutions.
Further details on the development of key market events and activity
in the portfolio are given in the Investment Manager's Report.
Dividends
The Company has declared two dividends in relation to the half-year
totalling 3.00p and the Company is therefore on track to meet
its target of at least 6.00p for the year.
Outlook
The first half of 2021 has continued the positive trend of the
end of 2020 both in terms of the global public health crisis and
the financial markets. The continued, successful, vaccine roll-out
has led to the tentative re-opening of borders in a number of
countries and a phased move to a "new normal" in business and
private lives. Different countries are moving at different rates
in large measure down to their relative progress on vaccination.
Sometimes there are set-backs but the trend is clear and, bar
some extremely adverse development, irreversible. Political and
economic realities dictate that it must be.
It could be said that the regulated financial sectors, especially
the banks, have been through the ultimate stress test as a consequence
of the COVID-19 crisis. Of course, some of the pain lies ahead
in the form of rising unemployment from some sectors where workers
will not necessarily be able to transition to the skill sets required
by those other sectors which have been the winners. Businesses
whose financial position has not been so robust may struggle to
survive the end of government support schemes and as a consequence,
non-performing loans are likely to tick up. Central banks appear
to understand this and, as several have openly said, they will
need to support the banks and the wider economy for some time
to come. De-stocking in supply chains and production disruptions
have led to some price pressures in commodities and intermediate
goods and a consequent presumption of rising inflation by some
market participants has been the catalyst for rising government
bond yields. However, the relationships between commodity prices,
general inflation and policy interest rates are more developed
and subtle than they were a generation or two ago. Short term
interest rates must inevitably normalise at some point but that
is not the same thing as a disruptive change to monetary policy.
Clearly, central banks will continue to be supportive and gradual
in managing the recovery.
That the European banking industry has recently passed very draconian
stress test assumptions from a starting point in the depth of
the pandemic public health crisis with no significant general
problems (apart from perhaps a single instance in Italy which
is in any event on a path to its own corporate solution) is a
testament to the capital resilience developed in the sector as
a result of the regulatory changes post the Global Financial Crisis
of 13 years ago.
We look forward with renewed optimism for the market for regulatory
capital instruments issued by financial institutions in which
we operate and where we can benefit from the application of our
Investment Manager's specialist skills to a rich opportunity set
which is not easily accessible to more generalist managers.
William Scott
Chairman
23 August 2021
Investment Manager's Report
1- Market Commentary
January
Bank stocks struggled to find a clear direction in January as
the resurgence of reflationary hopes after the Democrats won control
of the Senate was mitigated by the prospect of extended lockdowns
and the slow pace of vaccination rollouts. On the macro front,
the ECB maintained its monetary policy and reiterated its focus
on stimulus and the transmission channel to the real economy.
The SubFin widened slightly from 111bps to 118bps mainly due to
the political climate in Italy following the resignation of Prime
Minister Giuseppe Conte.
The start of the reporting season was quite upbeat. In the US,
better than expected results by the top 6 banks were driven by
the writeback of USD6 billion of COVID-19 provisions, bringing
the accumulated provisions down to USD40 billion for 2020. Investment
banks slowed down as expected in the quarter but were still up
in the year. In Europe, outperformance vs. consensus was driven
by better revenues and costs in retail in Spain, very strong wealth
and asset management results in Switzerland as well as bets on
cost of risk and new lending volumes for the Nordic banks.
There were a few consolidation and restructuring stories as well.
The planned exit of NatWest from Ireland continued to attract
interest from local competitors and private equity firms, such
as Permanent TSB and Lone Star. The appointment of Andrea Orcel
as head of UniCredit should accelerate the absorption of Monte
dei Paschi. In Germany, Commerzbank announced an aggressive restructuring
plan that aimed at a 30% reduction in headcount, coupled with
a reduction in the number of branches, half of which were to be
closed. In Spain, Unicaja and Liberbank finalised the terms for
their merger, creating the fifth largest bank in Spain with circa
EUR110 billion in assets.
On the regulatory front, the ECB published the results of its
Supervisory Review and Evaluation Process ("SREP") for 2021. It
kept capital requirements unchanged, leaving room for manoeuvre
for banks. The EBA published its scenarios for the upcoming stress
tests. The regulator validated the most aggressive shock assumptions
ever tested. In terms of GDP, a 12.9% downward deviation in GDP
was assumed compared to a 7.8% deviation in 2018. The review of
the restrictions on dividends was expected to take place following
the results of the stress tests, expected in July.
The clean-up of the Legacy stock continued on an ongoing basis.
The German bank DZ Bank announced on 12 January 2021 it would
call 8 Legacy instruments at par. BBVA was authorised to call
its CMS in advance. The regulatory capital infection risk (see
our note on this subject at https://axiom-ai.com/web/en/2020/10/22/analysis/
), as defined at the end of 2020 by the EBA and confirmed since
then by the PRA, prompted issuers to clean-up their Legacy instruments,
including those with the lowest coupons.
Finally, the primary market for Additional Tier 1 ("AT1") securities
remained active, with Abanca (EUR375 million at 6%), Standard
Chartered (USD1.25 billion at 4.75%) and Banco BPM (EUR400 million
at 6.5%) issuing the most notable deals.
February
Bank stocks outperformed the market in February on the back of
rising growth and inflation expectations. As investors started
to question the ability of central banks to maintain ultra low
rates for longer, banks were sought for their strong positive
sensitivity to a steepening of the curves. The SX7R index was
up by 15.76% vs. 1.67% for the SXXR. The SubFin index ended the
month flat at 118bps.
Results continued to exceed analysts' expectations with all major
banks but one reporting higher adjusted profits than expected.
On balance, net interest margins, commissions and provisions surprised
materially to the upside. HSBC unveiled a strategic update which
focused on growing the global markets and wealth management businesses
in Asia.
In Italy, Mario Draghi managed to secure support from the main
parties and started to outline key structural reforms, including
a revamp of corporate insolvency law, potentially leading to shorter
proceedings and ultimately lower non-performing loans ("NPLs")
for Italian banks. Political support for a merger between UniCredit
and Monte dei Paschi seemed strong.
On the M&A front, Aviva sold its French operations at a higher
price than expected (EUR3.2 billion). NatWest confirmed its intention
to exit Ireland, leading to a more concentrated local market.
AIB seemed interested in the SME loan portfolio while Permanent
TSB could buy its mortgage portfolio. In Austria, Bawag acquired
Depfa Bank, which specialises in real estate loans. In Greece,
Bank of Piraeus' CFO announced they were preparing a capital increase
of EUR1 billion.
The clean-up of Legacy bonds continued. UniCredit Bank Austria,
a subsidiary of UniCredit, announced on 19 February 2021 the call
of its Legacy BACA bonds, which were priced at 95. This was a
perfect illustration of infection risk as raised at the end of
2020 by the EBA and confirmed since by the UK regulatory authority
(the PRA) and by the transcription of BRRD 2 into French law.
This risk prompted issuers to recall numerous Legacy securities,
including those with the lowest coupons. Issuers were still working
on the interpretation of the EBA opinion and the preparation of
their Legacy processing plans, which had to be submitted before
31 March 2021.
Finally, UBS (USD1.5 billion at 4.375%) and BNP (USD1.25 billion
at 4.625%) came to issue AT1 securities on the primary market.
March
March was a good month for Financials, buoyed by hopes of higher
growth due to rapidly advancing vaccine campaigns in several countries.
This, combined with the Fed's announcement to let the bank leverage
exemption expire this month, resulted in further upward pressure
on rates, which reached 1.75% in March. Large US banks would have
to resume holding an additional layer of loss-absorbing capital
against US Treasuries and central bank deposits starting next
month. The SubFin, before the roll to the 35 series, tightened
from 117 to 94bps. The volatile episodes experienced by the Turkish
Lira, which had jumped more than 5% in mid-March, only to fall
back after President Erdogan fired the central bank governor had
a limited impact on prices.
Credit Suisse was back in the headlines after the collapse of
Archegos Capital, a highly leveraged US family office which defaulted
on margin calls. The poor handling of the fire sales combined
with stretched valuations, position concentration and lack of
risk limits on nominal exposures led to sizeable losses at the
bank. Though this event would certainly lead regulators to review
counterparty risk modelling practices, we would highlight that
banks did not take extensive losses on hedge fund exposures over
the COVID-19 sell-off last year, which should bring comfort over
their capacity to weather a future market stress.
Early indicators pointed to a very strong first quarter for investment
banks, driven by record fees from IPOs, SPACs and high-yield debt
issuance activity. We expected an excellent reporting season overall,
characterised by low defaults, provisions fine-tuning, further
build-up in CET1 as well as strong revenues from asset and wealth
management, insurance and capital markets.
On the M&A front, Amundi was emerging as the leading bidder for
Lyxor (EUR160 billion assets under management). Chubb, the world
largest publicly traded P&C insurer, made an offer for US commercial
specialist Hartford, which valued the transaction at USD23.4 billion.
Markets expected more M&A activity in Italy in the coming months,
involving a game of musical chairs around Banco BPM, BPER, BMPS
and UniCredit.
On the regulatory side, the latest consolidated EBA data for quarter
4 2020, showed capital ratios continuing to improve (+40bps to
15.5%). The NPL ratio, which declined by 20bps to 2.6%, also indicated
a continued trend of balance sheet strengthening.
In other notable news, the clean-up of the Legacy instruments
continued. Cofinoga (a subsidiary of BNP) announced on 15 March
2021 the call at par of its CFNG float legacy, which was worth
95.16 at the previous day's close. NatWest announced a buyback
offer on legacy step-up securities with a make-whole, following
the offer from last October, providing a low premium exit option
for these securities, subject to rate volatility.
April
April was another good month for the financial sector, buoyed
by good results and signals of inflationary pressure. The SubFin
index remained unchanged, closing at 108bps.
Following the heavy losses related to the Archegos bankruptcy,
Credit Suisse issued CHF1.7 billion of mandatory convertibles
to shore up its CET1 ratio to around 13%. The Swiss bank also
had to deal with losses related to the residual exposure of CSAM
funds to Greensill amounting to about CHF4.8 billion.
Previously reported results were generally good, including Deutsche
Bank and Sabadell. In terms of pre-tax profit, all banks beat
the consensus. For the third quarter in a row, provisions were
moderate with some reversals. Stage 2 and stage 3 ratios were
generally lower. Investment banking activity was strong, particularly
in equity trading, high-yield and equity capital markets activities.
We expect these trends to continue to drive positive earnings
per share revisions.
On the regulatory side, the Bank of England is proposing a consultation
on the CRR regulations to simplify the standard approach for smaller
banks.
After Cofinoga and NatWest last month, Deutsche Bank announced
the call at par of one of its Legacy bonds, which was paying a
variable coupon (CMS formula). This was increasing the call probability
for its other two SPVs. Soci é t é G é n é
rale announced the call of a perpetual "discounted" bond as well
as the introduction of a call option on its TMO bond. These operations
were part of the trend of Legacy bond buybacks that had been accelerating
over the previous few months as the end of the Basel II to Basel
III transition period for banks approached.
May
Red hot consumer demand, expanding vaccine coverage and growing
unease over the inflation trajectory fuelled the reflation trade
further in May. European banks outperformed, with the SX7R delivering
+5.83% vs. +3.09% for the SXXR. The 10-year French government
bond rose above 0.2%. Risk assets performed very well, especially
AT1s which returned to their all-time highs. Central banks reiterated
that they were in control of the situation. The SubFin remained
unchanged, closing at 108bps.
In Italy, the government requested an extension of tax benefits
for M&A transactions. Unipol strengthened its position in Banca
Popolare di Sondrio, increasing the chances of a merger between
BPER and Sondrio. Generali expressed its interest in buying Cattolica
di Assicurazioni in a deal valuing the latter at EUR1.5 billion.
On the NPL front, Intesa sold EUR4 billion of NPLs to Bain. In
Greece, Alpha Bank was considering a capital increase following
the lead of Piraeus Bank.
On the regulatory front, the transition period under MREL was
aligned with that under the CRR2 directive, which was expected
to simplify analysis when considering eligibility. We saw the
first Regulatory par call, exercised on an AT1 by Cr é dit
Agricole.
Among other notable news, the clean-up of the Legacy instruments
stock continued despite the disappointment on UniCredit Euribor
cashes +450bps. The Italian bank announced on 20 May 2021 its
decision not to pay a coupon, arguing that the financial year
2020 statutory loss registered at group level allowed them to
take such a course of action despite the payment of a dividend.
This unexpected decision was contrary to what was announced during
the quarterly results investor call and resulted in a drop in
the Cashes instruments of about 10 points. To address infection
risk, Jyske Bank obtained the authorisation from its regulator
to call 2 perpetuals with a CMS coupon. NatWest exercised the
call option on a Tier 2 ("T2").
In the primary market, Permanent TSB and Fidelidade issued new
T2s. In AT1s, we noted the issuances of Danske Bank (USD750 million
at 4.375%), Santander (USD1 billion at 4.750%) and SocGen (USD1
billion at 4.750%).
June
Financial credit markets extended their upward trajectory throughout
the month of June as central banks maintained their accommodating
rhetoric. To quote Beno ît Coeuré, a former member of
the ECB's executive board, "[Central banks] must prepare to support
the economy for a long time". The SubFin index closed at 102bps.
Andr é a Enria pointed to a rapid lifting of the ECB's cap
on banks' dividend payments. An official announcement was expected
on 23 July 2021. Following comforting stress test results, American
banks were allowed to resume normal distributions, which led to
spectacular announcements like that of Morgan Stanley which doubled
its dividend and disclosed an ambitious share buyback programme
of USD12 billion.
On the regulatory front, the EBA published its "monitoring report"
with an important section on Legacy instruments. In short, the
EBA advised banks not to simultaneously recognise within the T2
bucket both old T1 instruments that could still qualify as T2,
and genuine T2 instruments. They argued that all instruments within
the same capital sleeve should have the same ranking in resolution.
This was very positive for the Legacy bond asset class, as recalls
by issuers of old T1 instruments were increasingly likely. NatWest
made a tender offer in May 2021 on several Legacy securities with
a premium of around 5 points. Despite the premium, the offer had
very little success (only 15% contributed) as investors valued
the high yield to perpetuity in a liquidity-rich world.
The primary market continued to be active with T1 issues from
MACIF (first issue of RT1), Commerzbank, NatWest and UniCredit.
Consolidation of the sector continued both in France, with the
takeover of the French HSBC network by My Money Bank (motivated
by the search for critical size which would relaunch its activity
under the new CCF brand), and in Ireland, with the sale by Permanent
TSB of its corporate loan portfolio to AIB (Allied Irish Bank).
On a more exotic note, the Basel Committee started to impose a
full capital charge on any crypto investment by banks (for EUR1
invested, EUR1 of capital was required).
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued
by European financial institutions, predominantly legacy T1s,
T2s, and AT1s across five sub-strategies:
* Liquid Relative Value: instruments issued by large
and strong quality institutions, with significant
liquidity. These can be purchased on either primary
or secondary markets.
* Less Liquid Relative Value: instruments issued by
large and strong quality institutions, with limited
liquidity due to past tenders or complex features
(secondary market).
* Restructuring: instruments issued by institutions in
preparation or implementation of a restructuring
process (secondary market).
* Special Situations: instruments issued by entities in
run-off, under a merger process or split between
several entities (secondary market).
* Midcap Origination: instruments issued by small
institutions or small subsidiaries of larger
institutions (primary market).
3- Company Activity
January
The Company realised gains in Liquid Relative Value and Less Liquid
Relative Value to add part of the proceeds to Restructuring and
Midcap Origination. The Company took profits on AT1s issued by
FinecoBank, Permanent TSB and Aareal, as well as on MunRe and
Sainsbury Bank T2s. The Company increased its size in French-based
My Money Bank (formerly GE Money) as well as British lenders The
Co-Operative Bank and Shawbrook. The Company also bought some
of the recently issued Abanca AT1 in the secondary market below
par. In Midcap Origination, the Company sold its exposure in Van
Lanschot. In the insurance legacy space, it sold its Ageas Fresh
and Fortis Cashes. Finally, the Company added a limited allocation
to a basket of European bank equities to take advantage of attractive
valuations and positive momentum.
The Company closed the month with a slightly higher gearing of
109% and a slightly higher cash allocation of 4%, constructively
positioned in these conducive market conditions while maintaining
liquidity.
February
In what was a supportive environment for the Italian financial
sector, the Company followed the momentum by taking part in a
new T2 issue from Italian life insurer Amissima Vita with a 7%
coupon in Euros.
In Restructuring, the Company took a significant exposure to Grenke
AG senior bonds after the sell-off related to the departure of
the COO. The bonds had partially recovered since as additional
disclosure reassured investors. The Company remained invested
as Axiom AI were strongly convinced default risk was very remote
and that any loss would be fully recovered. The Company sold BCP's
AT1s due to the risk stemming from adverse legal developments
regarding FX loans extended by its Polish subsidiary.
In Midcap Origination, the Company took profits on eSure and Ecclesiastical
Insurance and added to its exposure to Nottingham Building Society's
PIBS.
March
The Company took advantage of attractive flows to make adjustments
to the Restructuring strategy. It reduced its exposure to Piraeus
Bank T2s after the bonds rallied on the back of the announcement
of the Sunrise risk reduction plan. The Company took profit on
Just Group T2s, sold Virgin Money short call AT1s and built a
small position on NDB T2s. The Company bought Provident Financial
seniors after the group reported its intention to cap losses in
its doorstep lending subsidiary through a Scheme of Arrangement
or an administrative wind-down if necessary. Both scenarios were
highly unlikely to lead to material losses at the group level.
April
In Restructuring, the Company took advantage of positive news
flows around the payment of the Contingent Capital Agreement to
sell long-dated Novo Banco seniors and reduce portfolio duration.
It participated in the tender of Bank of Cyprus EUR9.25 2027 T2s
at a 1.5pt premium.
In Midcap Origination, the Company took part in the first AT1
issuance for Kommunalkredit, a small IG-rated Austrian bank specialising
in infrastructure finance and lending to the public sector.
The Company also added to its Legacy sleeve as the regulatory
calendar around resolution and infection risk accelerated. It
bought IKB discos, BNP TMOs and UniCredit Cashes.
May
In Restructuring, the Company took some profits on Grenke seniors
following the issue of an unqualified audit opinion by KPMG. The
Company took part in a first T2 issue from Fidelidade, a leading
Portuguese insurer. It added to Anacap as NPL collection trends
remained robust in Europe. Finally, the Company closed its position
in Provident Financial Seniors following the adverse Court ruling
on Amigo's scheme of arrangement.
In Liquid Relative Value, after the May coupon was unexpectedly
skipped, the Company closed its position in Unicredit Cashes at
a loss as it could no longer trust that the management would not
try to activate the conversion clause in the future.
June
In Restructuring, the Company continued to reduce its exposure
to Grenke senior bonds as the credit normalised. It added to its
Piraeus T2 ahead of the issuance of their new AT1. Finally, the
Company increased its allocation to West Bromwich CCDS, betting
on further coupon increases.
In Liquid Relative Value, the Company bought OTP's SPV-issued
legacies, the Opus securities, which combined a decent yield to
perpetuity with early take-out optionality.
4 - Portfolio (as at 30 June
2021)
Strategy allocation (as a %
of total net assets)*
Liquid Relative Value 10.7%
Less Liquid Relative
Value 19.3%
Restructuring 37.0%
Special Situations 1.0%
Midcap Origination 30.2%
Denomination (as a % of total
net assets)*
EUR 51.6%
GBP 45.7%
USD 1.0%
Portfolio Breakdown (as a % of total net assets)*
By securities external By country
rating
A 0.0% UK 45.1%
BBB 8.9% Germany 13.3%
BB 23.1% France 8.5%
B 11.0% Italy 6.6%
Below B 10.2% Ireland 5.4%
NR 43.4% Austria 4.9%
Portugal 3.8%
By maturity Greece 3.5%
<1 year 12.5% Denmark 2.7%
1-3 27.7% Canada 1.9%
3-5 30.1% Netherlands 1.9%
5-7 3.2% Spain 1.2%
7-10 1.3% Luxembourg 1.0%
>10 23.5% South Africa 0.3%
By subordination
Additional Tier 1 34.1%
Legacy Tier 1 27.1%
Tier 2 16.2%
Senior 14.4%
Equity 8.1%
* Splits adjusted for single assets
5 - Company metrics (as at 30 June 2021)
Share price and NAV information
Share price (mid) (GB pence) 94.00
NAV per share (daily) (GB pence) 103.03
Dividends paid over last 12 months
(GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP mn) 86.342
Total net assets (GBP mn) 94.637
Premium/(Discount) (8.76)%
Portfolio information 30 June 2021 31 December 30 June
2020 2020
Modified duration 4.87 4.54 4.20
Sensitivity to credit 5.64 5.51 6.00
Positions 80 85 89
Average price 109.27 104.56 98.84
Running yield 6.11% 5.76% 6.50%
Yield to perpetuity(1) 7.03% 6.67% 7.69%
Yield to call(2) 7.06% 8.51% 10.81%
Gross Assets 114.6% 113.4% 120.0%
Net gearing = (Gross assets -
Collateral) / Net assets 107.6% 107.0% 108.0%
Investments / Net Assets 101.6% 104.0% 101.0%
Cash 6.0% 3.0% 7.0%
Collateral 7.0% 6.4% 12.0%
Net Repo / Net Assets 12.6% -0.1% -2.1%
CDS / Net Assets 76.6% 56.7% 56.2%
Net Return(3)
1 month 3 months 6 months 1 year 3 years(4) Since launch(4)
1.27% 5.14% 11.49% 23.09% 8.08% 5.76%
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
2021 -0.16 3.78 2.45 2.15 1.65 1.27 11.49
(1) The yield to perpetuity is the yield of the portfolio with
the hypothesis that securities are not reimbursed and kept to
perpetuity. (2) The yield to call is the yield of the portfolio
at the anticipated reimbursement date of the bonds. (3) Net return
has been calculated by comparing the NAV at the start of the period
with the NAV, plus dividends paid, at the period end. Past performance
does not guarantee future results. (4) Annualised performance.
6- Outlook
During the first half, extensive fiscal stimulus packages from
European Central Banks enabled consumers to save further, enhanced
liquidity and preserved corporate balance sheets and financing
conditions. This, together with the progress made in vaccination
campaigns across Europe, that led to the easing of various lockdown
restrictions and record consumer spending, created a very favourable
backdrop for bonds issued by financial institutions and helped
to drive our standout performance during the period.
Pent-up demand is, however, clashing with limited availability
of raw materials, low inventories, inflexible supply chains and
lower willingness to work, as evidenced by record high delivery
times and backlogs as well as discrepancies between job openings
and unemployment rates. In addition, acceleration in monetary
aggregates was causing financial stability concerns, with housing
markets posting dramatic price increases, especially in the US.
These developments have put inflation risk in the spotlight again,
causing volatility in the rates markets. 10 year treasuries yields
climbed from +0.94% to +1.44%.
Supply-side worries are unlikely to disappear soon. The cost of
managing the COVID-19 disruptions will remain elevated, while
new production capacity will take years to emerge. Though job
market imbalances will start to normalise with the phasing-out
of exceptional benefits, record savings and changes in lifestyle
preferences will likely result in a slow convergence to lower
employment rates. As a result, economic growth is likely to be
constrained and lag inflation.
Looking ahead, policymakers will need to address both rising financial
stability risks and an uncertain outlook for the health of businesses
across the Eurozone. While this is complicated further by the
additional constraint of maintaining moderate issuance spreads
across European countries, we believe that there are plenty of
opportunities ahead despite these uncertainties.
We anticipate lower but more flexible asset purchases, a tightening
of mortgage lending conditions, a shift in policies to support
businesses rather than consumers and, while interest margins remain
pressured by the excess of liquidity, the prospect of steeper
curves as inflationary pressures intensify, all of which will
support the ongoing performance of the fund.
On the regulatory front, supervisors confirmed the alignment of
grandfathering periods for MREL and capital eligibility. The EBA,
in its fourth AT1 Monitoring Report, reminded banks that all instruments
within the same capital bucket, whether legacy or new style, could
not have different rankings in resolution. Market activity was
high, with calls at par and tenders from several issuers, including
BBVA, DZ Bank, RBI, NatWest, Nationwide and Lloyds. We expect
this trend to intensify as we approach the end of the Basel III
grandfathering period by December 2021 and continue to see significant
value in this legacy universe.
Gildas Surry Antonio Roman
Axiom Alternative Investments Axiom Alternative Investments
SARL SARL
23 August 2021 23 August 2021
Principal Risks
Risk is inherent in the Company's activities, but it is managed
through an ongoing process of identifying and assessing risks
and ensuring that appropriate controls are in place. The key risks
faced by the Company, are set out below:
* macroeconomic risk;
* investment risk;
* counterparty risk;
* credit risk;
* share price risk;
* regulatory risk; and
* reputational risk.
Further details of each of these risks and how they are mitigated
are discussed in the Principal Risks section of the Strategic
Report within the Company's Annual Report for the year ended 31
December 2020. The Board believes that these risks are applicable
to the six month period ended 30 June 2021 and the remaining six
months of the current financial year.
The COVID-19 pandemic was considered to be a risk to the global
economy when the 31 December 2020 Strategic Report was released
and it was very early in the vaccine roll-out. 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. The
Investment Manager continues to monitor the effect on issuers
of investment instruments to ensure that the Company is as well-placed
as it can be to maintain its objective and to exploit the opportunities
that the evolving situation will continue to present. As a result,
the operations of the Company are and will be kept under constant
review to ensure the Company's liquid resources will be sufficient
to cover any working capital requirements.
On behalf of the Board.
William Scott
Chairman
23 August 2021
Statement of Directors' Responsibilities
The Directors are responsible for preparing the unaudited half-yearly
report and condensed financial statements, which have not been
audited or reviewed by an independent auditor, and which include
the Chairman's Statement, Investment Manager's Report and Statement
of Principal Risks and Uncertainties) together with the unaudited
interim financial statements are required to:
* prepare the unaudited half-yearly financial
statements in accordance with Disclosure and
Transparency Rules ("DTR") 4.2.4R and International
Accounting Standard 34, Interim Financial Reporting,
as adopted by the United Kingdom;
* include a fair review of the information required by
DTR 4.2.7R, being important events that have occurred
during the period and their impact on the unaudited
half-yearly report and condensed financial statements
and a description of the principal risks and
uncertainties for the remaining six months of the
financial year; and
* include a fair review of information required by DTR
4.2.8R, being related party transactions that have
taken place during the period which have had a
material effect on the financial position or
performance of the Company.
The Directors confirm that the unaudited half-yearly report and
condensed financial statements comply with the above requirements.
On behalf of the Board.
William Scott
Chairman
23 August 2021
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 30 June 2021
Period from Period from
1 January 1 January
2021 to 30 2020 to 30
June 2021 June 2020
Note (unaudited) (unaudited)
GBP'000 GBP'000
Income
Capital instrument income 2,600 2,520
Credit default swap income 417 343
Bank interest receivable 3 13
------------ ------------
Total income 3,020 2,876
------------ ------------
Investment gains and losses on investments
held at fair value through profit or
loss
Realised gains/(losses) on disposal of
capital instruments and other investments 13 4,998 (775)
Movement in unrealised gains/(losses)
on capital instruments and other investments 13 1,504 (3,968)
Realised gains/(losses) on derivative
financial instruments 16 2,268 (655)
Movement in unrealised losses on derivative
financial instruments 16 (51) (3,064)
------------ ------------
Total investment gains and losses 8,719 (8,462)
------------ ------------
Expenses
Loss on foreign currency (595) (886)
Investment management fee 8a (435) (377)
Performance fee 8a (406) -
Administration fee 8b (65) (65)
Directors' fees 8f (47) (47)
Interest payable and similar charges 9 (13) (75)
Other expenses 10 (135) (126)
------------ ------------
Total expenses (1,696) (1,576)
------------ ------------
Profit/(loss) for the period attributable
to the Owners of the Company 10,043 (7,162)
------------ ------------
Earnings/(loss) per Ordinary Share -
basic and diluted 12 10.93p (7.80)p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 June 2021
Period from Period from
1 January 1 January
2021 to 30 2020 to 30
June 2021 June 2020
Note (unaudited) (unaudited)
GBP'000 GBP'000
Distributable reserves and total:
At 1 January 2021 87,350 91,284
Profit/(loss) for the period 10,043 (7,162)
Contributions by and distributions to
Owners
Dividends paid 6 (2,756) (2,756)
------------ ------------
At 30 June 2021 94,637 81,366
------------ ------------
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Financial Position
as at 30 June 2021
As at As at
30 June 31 December
2021 2020 (audited)
Note (unaudited)
GBP'000 GBP'000
Assets
Investments in capital instruments 13,
at fair value through profit or loss 17 89,030 83,466
Other investments at fair value through 13,
profit or loss 17 3,987 4,766
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 7,153 5,905
Derivative financial assets at fair
value through profit or loss 16 1,018 5,257
Other receivables and prepayments 15 2,446 1,995
Cash and cash equivalents 5,933 4,297
------------ ------------
Total assets 109,567 105,686
------------ ------------
Current liabilities
Derivative financial liabilities
at fair value through profit or loss 16 (12,467) (12,331)
Short positions covered by reverse
sale and repurchase agreements 13 - (1,881)
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 (506) (340)
Other payables and accruals 18 (1,733) (2,134)
Bank overdrafts (224) (1,650)
------------ ------------
Total liabilities (14,930) (18,336)
------------ ------------
Net assets 94,637 87,350
------------ ------------
Share capital and reserves
Share capital 19 - -
Distributable reserves 94,637 87,350
------------ ------------
Total equity holders' funds 94,637 87,350
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 20 103.03p 95.10p
These unaudited condensed half-yearly financial statements were
approved by the Board of Directors on 23 August 2021 and were
signed on its behalf by:
William Scott John Renouf
Chairman Director
23 August 2021 23 August 2021
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Cash Flows
for the six months ended 30 June 2021
Period from Period from
1 January 1 January
2021 to 2020 to 30
30 June June 2020
2021 (unaudited)
Note (unaudited)
GBP'000 GBP'000
Cash flows from operating activities
Net profit/(loss) before taxation 10,043 (7,162)
Adjustments for:
Foreign exchange movements 595 886
Total investment (gains)/losses at fair
value through profit or loss (8,719) 8,462
Capital instrument income (2,600) (2,520)
CDS income (417) (343)
Interest on sale and repurchase agreements (9) 52
Cash flows relating to financial instruments:
Payment to collateral accounts for derivative
financial instruments 14 (1,082) (5,357)
Purchase of investments at fair value
through profit or loss (57,686) (26,431)
Sale of investments at fair value through
profit or loss 57,880 33,529
Premiums received from selling credit
default swap agreements 16 274 3,871
Premiums paid on buying credit default
swap agreements 16 (83) (3,715)
Purchase of foreign currency derivatives 16 (89,754) (109,100)
Close-out of foreign currency derivatives 16 92,111 108,614
Purchase of bond futures 16 - (1,320)
Sale of bond futures 16 - 1,314
Proceeds from sale and repurchase agreements 16 19,378 26,056
Payments to open reverse sale and repurchase
agreements 16 - (4,763)
Payments for closure of sale and repurchase
agreements 16 (19,232) (27,600)
Proceeds from closure of reverse sale
and repurchase agreements 16 3,898 4,782
Opening of short positions - 2,752
Closure of short positions (1,932) (2,315)
Opening of options 16 - -
Closure of options 16 - -
Cash paid during the period for interest (1,078) (804)
Cash received during the period for interest 4,188 4,208
Cash received during the period for dividends 180 135
------------ ------------
Net cash inflow from operating activities
before working capital changes 5,955 3,231
Increase in other receivables and prepayments (15) (1)
Increase in other payables and accruals 473 98
------------ ------------
Net cash inflow from operating activities 6,413 3,328
Cash flows from financing activities
Dividends paid 6 (2,756) (2,756)
------------ ------------
Net cash outflow from financing activities (2,756) (2,756)
------------ ------------
Increase in cash and cash equivalents
* 3,657 572
------------ ------------
Cash and cash equivalents brought forward 2,647 6,102
Effect of foreign exchange on cash and
cash equivalents (595) (886)
------------ ------------
Cash and cash equivalents carried forward
* 5,709 5,788
------------ ------------
* Cash and cash equivalents at the start of the period and at the
period end includes bank overdrafts that are repayable on demand
and form an integral part of the Company's cash management.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Notes to the Unaudited Condensed Half-Yearly Financial Statements
for the six months ended 30 June 2021
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Law on 7 October 2015 with registered number
61003. Its Ordinary Shares were admitted to trading on the Premium
Segment of the main market of the London Stock Exchange and to
the premium listing segment of the FCA's Official List on 15 October
2018 (prior to this, the Ordinary Shares traded on the SFS of
the London Stock Exchange).
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market although instruments may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present
the results of the Company for the six months ended 30 June 2021.
These unaudited condensed half-yearly financial statements have
been prepared in accordance with the Disclosure and Transparency
Rules of the FCA and International Accounting Standard 34, Interim
Financial Reporting, as adopted by the United Kingdom.
The unaudited condensed half-yearly financial statements for the
period ended 30 June 2021 have not been audited or reviewed by
the Company's auditors and do not constitute statutory financial
statements. They have been prepared on the same basis as the Company's
annual financial statements.
These unaudited condensed half-yearly financial statements were
authorised for issuance by the Board of Directors on 23 August
2021.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its cash resources, income
stream and Level 1 investments, the Directors have a reasonable
expectation that the Company has adequate resources to continue
in operational existence for the foreseeable future and do not
consider there to be any threat to the going concern status of
the Company. Therefore, the unaudited condensed half-yearly financial
statements have been prepared on a going concern basis.
c) Basis of measurement
These unaudited condensed half-yearly financial statements have
been prepared on a historical cost basis, except for certain financial
instruments, which are measured at fair value through profit or
loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses.
Judgements made by management in the application of IFRS that
have a significant effect on the unaudited condensed half-yearly
financial statements and estimates with a significant risk of
material adjustment are discussed in note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, bond income and credit default swap income is recognised
on a time-proportionate basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 30 June 2021 were
GBP1/EUR1.1667, GBP1/US$1.3831, GBP1/DKK8.6744, GBP1/CA$1.7145
and GBP1/SGD1.8605 (31 December 2020: GBP1/EUR1.1185, GBP1/US$1.3670,
GBP1/DKK8.3263, GBP1/CA$1.7422 and GBP1/SGD1.8061).
c) Taxation
Investment income is recorded gross of applicable taxes and any
tax expenses are recognised through the Statement of Comprehensive
Income as incurred.
d) Financial assets and liabilities
The financial assets and liabilities of the Company are investments
in capital instruments at fair value through profit or loss, other
investments at fair value through profit or loss, collateral accounts
for derivative financial instruments, cash and cash equivalents,
other receivables, derivative financial instruments and other
payables.
In accordance with IFRS 9, the Company classifies its financial
assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities as discussed
below.
In applying that classification, a financial asset or financial
liability is considered to be held for trading if:
* It is acquired or incurred principally for the
purpose of selling or repurchasing in the near term;
or
* On initial recognition, it is part of a portfolio of
identified financial instruments that are managed
together and for which, there is evidence of a recent
actual pattern of short-term profit-taking; or
* It is a derivative (except for a derivative that is a
financial guarantee contract or a designated and
effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured
at amortised cost or measured at fair value through profit or
loss on the basis of both:
* The business model for managing the financial assets;
and
* The contractual cash flow characteristics of the
financial asset.
A financial asset is measured at fair value through profit or
loss if:
* Its contractual terms do not give rise to cash flows
on specified dates that are solely payments of
principal interest ("SPPI") on the principal
outstanding amount; or
* It is not held within a business model whose
objective is either to collect contractual cash flows,
or to both collect contractual cash flows and sell;
or
* At initial recognition, it is irrevocably designated
as measured at fair value through profit or loss when
doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would
otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on
different bases.
The Company includes in this category:
* Instruments held for trading. This category includes
equity instruments and debt instruments which are
acquired principally for the purpose of generating a
profit from short-term fluctuations in price. This
category also includes derivative financial assets at
fair value through profit or loss.
* Debt instruments. These include investments that are
held under a business model to manage them on a fair
value basis for investment income and fair value
gains.
Financial liabilities
A financial liability is measured at fair value through profit
or loss if it meets the definition of held for trading.
The Company includes in this category, derivative contracts in
a liability position and equity and debt instruments sold short
since they are classified as held for trading.
Derivative financial instruments, including credit default swap
agreements, foreign currency forward contracts, bond future contracts
and sale and repurchase agreements are recognised initially, and
are subsequently measured at, fair value. Sale and repurchase
agreements are recognised at fair value through profit or loss
as they are generally not held to maturity and so are held for
trading. Derivative financial instruments are classified as assets
when their fair value is positive or as liabilities when their
fair value is negative. Derivative assets and liabilities arising
from different transactions are offset only if the transactions
are with the same counterparty, a legal right of offset exists,
and the parties intend to settle the cash flows on a net basis.
These financial instruments are classified at fair value through
profit or loss upon initial recognition on the basis that they
are part of a group of financial assets which are managed and
have their performance evaluated on a fair value basis, in accordance
with investment strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that
require delivery of assets within the time frame generally established
by regulation or convention in the marketplace are recognised
on the trade date, i.e. the date that the Company commits to purchase
or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement)
and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the
asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the Statement of Financial Position
at fair value. All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets
which are classified at fair value through profit or loss, at
fair value. Subsequent changes in the fair value of those financial
instruments are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or loss. Interest
and 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 the legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
e) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair
value through profit or loss comprises cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
f) Receivables and prepayments
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category other short-term receivables.
g) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held
to maturity are carried at cost. Cash and cash equivalents are
defined as cash in hand, demand deposits and short-term, highly
liquid investments readily convertible to known amounts of cash
and subject to insignificant risk of changes in value.
h) Payables and accruals
Trade and other payables are carried at payment or settlement
amounts. When payables are received in currencies other than the
reporting currency, they are carried forward, translated at the
rate prevailing at the period end date.
i) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as
a deduction from equity.
When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable
costs, is recognised as a deduction from equity. Repurchased shares
that are classified as Treasury Shares are presented as a deduction
from equity. When Treasury Shares are sold or subsequently reissued,
the amount received is recognised as an increase in equity and
the resulting surplus or deficit is transferred to/from retained
earnings.
Funds received from the issue of Ordinary Shares are allocated
to share capital, to the extent that they relate to the nominal
value of the Ordinary Shares, with any excess being allocated
to distributable reserves.
j) Distributable reserves
All income and expenses, foreign exchange gains and losses and
realised investment gains and losses of the Company are allocated
to the distributable reserve.
k) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the period end.
Earnings per share is calculated by dividing the earnings for
the period by the weighted average number of Ordinary Shares in
issue during the period.
l) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the
previous financial year. The Company adopted the following new
and amended relevant IFRS in the period:
IFRS Financial Instruments: Disclosures - amendments regarding
7 pre-placement issues in the context of the IBOR reform
IFRS Financial Instruments - amendments regarding pre-placement
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
IAS 39 Financial Instruments: Recognition and Measurement - amendments
regarding replacement issues in the context of the IBOR
reform
The adoption of the above standards did not have an impact on
the financial position or performance of the Company.
m) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the
date of these financial statements. Any standards that are not
deemed relevant to the operations of the Company have been excluded.
The Directors have chosen not to early adopt these standards and
interpretations and they expect that they would not have a material
impact on the Company's financial statements in the period of
initial application.
Effective date
IFRS Financial Instruments - amendments resulting 1 January 2022
9 from Annual Improvements to IFRS Standards
2018-2020
IAS 1 Presentation of Financial Statements - amendments 1 January 2023
regarding the classification of liabilities
IAS 8 Accounting Policies, Changes in Accounting 1 January 2023
Estimates and Errors - amendments regarding
the definition of accounting estimates
IAS 37 Provisions, Contingent Liabilities and Contingent 1 January 2022
Assets - amendments regarding the costs to
include when assessing whether a contract is
onerous
4. Use of judgements and estimates
The preparation of the Company's unaudited condensed half-yearly
financial statements requires the Directors to make judgements,
estimates and assumptions that affect the reported amounts recognised
in the unaudited condensed half-yearly financial statements and
disclosure of contingent liabilities. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. However, uncertainty about these
assumptions and estimates could result in outcomes that could
require a material adjustment to the carrying amount of the asset
or liability in future periods.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised, if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgement which had a significant
effect on the amounts recognised in the unaudited condensed half-yearly
financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although the majority of the Company's underlying
assets are held in currencies other than Sterling, because the
Company's capital is raised in Sterling, expenses are paid in
Sterling and the Company hedges substantially all of its foreign
currency risk back to Sterling the Directors consider Sterling
to be the Company's functional currency.
The Directors do not consider there to be any other judgements
which have had a significant impact on the unaudited condensed
half-yearly financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the unaudited condensed half-yearly financial statements
were approved. However, existing circumstances and assumptions
about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such
changes are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 17.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes 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 declared the following dividends during the period
ended 30 June 2021:
Total dividend declared
in respect of earnings Amount per Ordinary
in the period Share
Period from Period from Period Period from
1 January 1 January from 1 1 January
2021 to 2020 to January 2020 to
30 June 30 June 2021 to 30 June
2021 (unaudited) 2020 (unaudited) 30 June 2020 (unaudited)
2021 (unaudited)
GBP'000 GBP'000 pence Pence
Dividends declared and paid
in the period 2,756 2,756 3.00 3.00
Less, dividend declared in
respect of the prior period
that was paid in the period (1,378) (1,378) (1.50) (1.50)
Add, dividend declared out
of the profits for the period
but paid after the period
end: 1,378 1,378 1.50 1.50
------------ ------------ ------------ ------------
Dividends declared in respect
of the period 2,756 2,756 3.00 3.00
------------ ------------ ------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the period a total of GBP2,756,000 (30 June 2020: GBP2,756,000)
was incurred in respect of dividends, none of which was outstanding
at the reporting date. The second dividend of GBP1,378,000 in
respect of the earnings during the period had not been provided
for at 30 June 2021 as, in accordance with IFRS, it was not a
liability of the Company at that date.
7. Related parties
Details of the relationships between the Company and its related
parties, being the Investment Manager and the Directors are disclosed
in notes 8a and 8f.
Details of the relationships between the Company and its other
advisers and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 30 June 2021, the Company had holdings in the following
investments which were managed by the Investment Manager:
30 June 2021 31 December 2020
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Global CoCo UCIT ETF
USD-hedged 35 2,984 3,096 35 2,984 3,011
Axiom Equity Class Z 500 467 891 500 467 666
Axiom Global CoCo UCIT ETF
GBP-hedged - - - 10 1,000 1,089
During the period, the Company sold 10 units in Axiom Global CoCo
UCIT ETF GBP-hedged for GBP1,106,000, realising a gain of GBP106,000.
During the period ended 30 June 2020, the Company sold 2,450 units
in Axiom Contingent Capital - Class E for GBP2,150,000, realising
a loss of GBP312,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement
with Axiom under which the Company receives investment advice
and management services.
Management fee
Under the terms of the Investment Management Agreement, a management
fee is paid to the Investment Manager quarterly in arrears. The
quarterly fee is calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to GBP250 million, 1% per annum
of NAV;
ii. where NAV is greater than GBP250 million but less than or
equal to GBP500 million, 1% per annum of NAV on the first GBP250
million and 0.8% per annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million, 0.8% per annum
of NAV, in each case, plus applicable VAT.
In respect of the management fee calculation above, any related
party holdings are deducted from the NAV.
If in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company (excluding management
fees, performance fees, interest charged on sale and repurchase
agreements, bank charges and withholding tax) during such quarter
exceed an amount equal to one-quarter of 1.5% of the average NAV
of the Company during such quarter (such amount being a "Quarterly
Expenses Excess"), then the management fee payable in respect
of that quarter shall be reduced by the amount of the Quarterly
Expenses Excess, provided that the management fee shall not be
reduced to an amount that is less than zero and no sum will be
payable by the Investment Manager to the Company in respect of
the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceed an
amount equal to 1.5% of the average NAV of the Company during
such accounting period (such amount being an "Annual Expenses
Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Annual Expenses Excess.
If such reduction would not fully eliminate the Annual Expenses
Excess (the amount of any such shortfall being a "Management Fee
Deduction Shortfall"), the Investment Manager shall pay to the
Company an amount equal to the Management Fee Deduction Shortfall
(a "Management Fee Deduction Shortfall Payment") as soon as is
reasonably practicable.
During the period, a total of GBP435,000 (30 June 2020: GBP377,000)
was incurred in respect of Investment Management fees, of which
GBP228,000 (31 December 2020: GBP185,000) was payable at the reporting
date.
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall Payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess for the period was GBP7,000 (30
June 2020: GBP16,000 of the Expenses Excess was paid to the Investment
Manager). At 30 June 2021, the Quarterly Expenses Excess and Annual
Expenses Excess which could be payable to the Investment Manager
in future periods was GBP744,000 (31 December 2020: GBP737,000)
(see note 25).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return
("TSR") where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the number of shares
in issue during the period from 5 November 2015 to the end of
the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited annual
accounts.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
At 30 June 2021, a performance fee of GBP406,000 was payable in
respect of the period then ended (31 December 2020: GBP1,000 was
payable in respect of the year ended 31 December 2019 and was
due at 31 December 2020, and no performance fee was payable in
respect of the six months ended 30 June 2020 or the year ended
31 December 2020). During the period, the Company paid the Investment
Manager GBP1,000, in settlement of the remainder of the 2019 performance
fee, which was subsequently used to purchase shares in the Company.
b) Administrator and Company Secretary
Elysium Fund Management Limited has been appointed by the Company
to provide day to day administration services to the Company,
to calculate the NAV per share as at the end of each calendar
month and to provide company secretarial functions required under
the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of GBP110,000 per annum, which is
subject to an annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding year. In
addition, the Company pays the Administrator a fee for any work
undertaken in connection with the daily NAV, subject to a maximum
aggregate amount of GBP10,000 per annum.
During the period, a total of GBP65,000 (30 June 2020: GBP65,000)
was incurred in respect of Administration fees and GBP33,000 (31
December 2020: GBP33,000) was payable to the Administrator at
the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") has been appointed
to act as Corporate Broker ("Broker") for the Company, for which
the Company pays Winterflood an annual retainer fee of GBP35,000
per annum.
For the period ended 30 June 2021, the Company incurred Broker
fees of GBP19,000 (30 June 2020: GBP18,000) of which GBP6,000
was payable at the period end date (31 December 2020: GBP6,000).
d) Registrar
Link Market Services (Guernsey) Limited is Registrar of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled
to receive from the Company certain annual maintenance and activity
fees, subject to a minimum fee of GBP5,500 per annum.
During the period, a total of GBP10,000 (30 June 2020: GBP10,000)
was incurred in respect of Registrar fees, of which GBP3,000 was
payable at 30 June 2021 (31 December 2020: GBP3,000).
e) Depositary
CACEIS Bank France has been appointed by the Company to provide
depositary, settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum
annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis point fee charge
based on the country of settlement and the value of the assets;
and
iii. an administration fee on each transaction, together with
various other payment/wire charges on outgoing payments.
During the period, a total of GBP17,000 (30 June 2020: GBP21,000)
was incurred in respect of depositary fees, and GBP14,000 (31
December 2020: GBP6,000) was payable to the Depositary at the
reporting date.
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent fee from the Company in respect of the provision of certain
accounting services which will, subject to a minimum monthly fee
of EUR2,500, be calculated by reference to the following tiered
sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP22,000 (30 June 2020: GBP20,000)
was incurred in respect of fees paid to CACEIS Bank Luxembourg,
of which GBP32,000 was payable at 30 June 2021 (31 December 2020:
GBP10,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum, John Renouf
(Chairman of the Audit Committee) is paid GBP32,500 per annum,
and Max Hilton is paid GBP27,500 per annum.
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the period, a total of GBP47,000 (30 June 2020: GBP47,000)
was incurred in respect of Directors' fees, of which GBPnil (31
December 2020: GBPnil) was payable at the reporting date. No bonus
or pension contributions were paid or payable on behalf of the
Directors.
9. Interest payable and similar charges
Period from Period from
1 January 1 January
2021 to 30 2020 to 30
June 2021 June 2020
(unaudited) (unaudited)
GBP'000 GBP'000
Bank interest 22 23
Interest payable on sale and repurchase
agreements (9) 52
------------ ------------
13 75
------------ ------------
10. Other expenses
Period from Period from
1 January 1 January
2021 to 30 2020 to 30
June 2021 June 2020
(unaudited) (unaudited)
GBP'000 GBP'000
PR expenses 30 20
Valuation agent fees (note 8e) 22 20
Broker fees (note 8c) 19 18
Audit fees 18 21
Depositary fees (note 8e) 17 21
Registrar fees (note 8d) 10 10
Other expenses 19 16
------------ ------------
135 126
------------ ------------
11. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
12. Earnings per Ordinary Share
The earnings per Ordinary Share of 10.93p (30 June 2020: loss
of 7.80p) is based on a profit attributable to owners of the Company
of GBP10,043,000 (30 June 2020: loss of GBP7,162,000) and on a
weighted average number of 91,852,904 (30 June 2020: 91,852,904)
Ordinary Shares in issue since 1 January 2021. There is no difference
between the basic and diluted loss per share.
13. Investments at fair value through profit or loss
Movements in gains/(losses) in the period
30 June 2021 (unaudited) 30 June 2020 (unaudited)
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in
capital
instruments 1,272 4,955 6,227 (3,691) (811) (4,502)
Other investments 220 106 326 (303) (312) (615)
Short positions
covered
by reverse sale and
repurchase
agreements 12 (63) (51) 26 348 374
------------ ------------ ------------ ------------ ------------ ------------
1,504 4,998 6,502 (3,968) (775) (4,743)
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December
2020
30 June 2021
(unaudited) (audited)
GBP'000 GBP'000
Investments in capital instruments 89,030 83,466
Other investments 3,987 4,766
Short positions covered by reverse
sale and repurchase agreements - (1,881)
------------ ------------
Investments at fair value through profit
or loss 93,017 86,351
------------ ------------
Investments in capital instruments at fair value through profit
or loss comprise mainly of investments in bonds, and also preference
shares, structured notes and other securities that have a similar
income profile to that of bonds. The other investments at fair
value through profit or loss consist of investments in open ended
funds managed by the Investment Manager (see note 7) to obtain
diversified exposure on bank equities.
As at 30 June 2021, the Company had eleven (31 December 2020:
fourteen) open sale and repurchase agreements, and no (31 December
2020: four) reverse sale and repurchase agreements (see note 16).
The previously held 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 30 June
2021 was GBP25,831,000 (31 December 2020: GBP19,582,000). The
fair value net of the short positions as at 31 December 2020 was
GBP17,701,000.
14. Collateral accounts for derivative financial instruments at
fair value through profit or loss
30 June 2021 31 December
(unaudited) 2020
(audited)
GBP'000 GBP'000
JP Morgan 6,842 4,896
Goldman Sachs International 202 410
Credit Suisse 109 599
------------ ------------
7,153 5,905
CACEIS Bank France - negative balance (506) (340)
------------ ------------
Net balance on collateral accounts held
by brokers 6,647 5,565
------------ ------------
With respect to derivatives, the Company pledges cash and/or other
liquid securities ("Collateral") to third parties as initial margin
and as variation margin. Collateral may be transferred either
to the third party or to an unaffiliated custodian for the benefit
of the third party. In the case where Collateral is transferred
to the third party, the third party pursuant to these derivative
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation in respect of the derivatives.
15. Other receivables and prepayments
30 June 31 December
2021 (unaudited) 2020
(audited)
GBP'000 GBP'000
Due from sale of capital instrument 1,188 484
Accrued capital instrument income receivable 1,187 1,468
Interest due on credit default swaps 39 26
Prepayments 32 17
------------ ------------
2,446 1,995
------------ ------------
16. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The International Swaps and Derivatives Association ("ISDA") establishes
the nature of the credit event and such events include bankruptcy
and failure to meet payment obligations when due.
Year ended
31 December
2020
Period Period
from 1 from 1
January January
2021 to 2020 to
30 June 30 June
2021 (unaudited) 2020 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance 448 1,016 1,016
Premiums received from selling credit
default swap agreements (274) (3,871) (4,293)
Premiums paid on buying credit default
swap agreements 83 4,021 4,511
Movement in unrealised losses in the
period (353) (861) (465)
Realised losses in the period (57) (28) (321)
------------ ------------ ------------
Outstanding (liabilities)/assets due
on credit default swaps (153) 277 448
------------ ------------ ------------
Credit default swap assets at fair
value through profit or loss 330 639 595
Credit default swap liabilities at
fair value through profit or loss (483) (362) (147)
------------ ------------ ------------
Outstanding (liabilities)/assets due
on credit default swaps (153) 277 448
------------ ------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Unaudited Condensed Statement of
Comprehensive Income as it has been incurred or received. At the
period end, GBP39,000 (31 December 2020: GBP26,000) of interest
on credit default swap agreements was due to the Company.
Collateral totalling GBP7,153,000 (31 December 2020: GBP5,905,000)
was held in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used to hedge the Company's
exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings. A foreign currency forward contract
is a commitment to purchase or sell a foreign currency on a future
date and at a negotiated forward exchange rate.
Period Period
from 1 from 1
January January
2021 to 2020 to
30 June 30 June
2021 (unaudited) 2020 (unaudited)
Year ended
31 December
2020
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 775 1,219 1,219
Purchase of foreign currency derivatives 89,754 109,100 204,876
Closing-out of foreign currency derivatives (92,111) (108,614) (204,573)
Movement in unrealised losses in the
period (104) (1,951) (444)
Realised gains/(losses) in the period 2,357 (486) (303)
------------ ------------ ------------
Net assets/(liabilities) on foreign
currency forwards 671 (732) 775
------------ ------------ ------------
Foreign currency forward assets at
fair value through profit or loss 688 126 775
Foreign currency forward liabilities
at fair value through profit or loss (17) (858) -
------------ ------------ ------------
Net assets/(liabilities) on foreign
currency forwards 671 (732) 775
------------ ------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to
purchase or sell bond futures for a predetermined price, with
payment and delivery of the bond future at a predetermined future
date.
Period Period
from 1 from 1
January January
2021 to 2020 to
30 June 30 June
2021 (unaudited) 2020 (unaudited)
Year ended
31 December
2020
(audited)
GBP'000 GBP'000 GBP'000
Opening balance - - -
Purchase of bond futures - 1,320 1,751
Sale of bond futures - (1,314) (1,735)
Movement in unrealised gains in the
period - - -
Realised losses in the period - (6) (16)
------------ ------------ ------------
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
31 December
2020
Period Period
from 1 from 1
January January
2021 to 2020 to
30 June 30 June
2021 (unaudited) 2020 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance (8,304) (14,760) (14,760)
Opening of sale and repurchase agreements (19,378) (26,056) (34,679)
Opening of reverse sale and repurchase
agreements - 4,763 11,999
Closing-out of sale and repurchase
agreements 19,231 27,600 38,953
Closing-out of reverse sale and
repurchase agreements (3,898) (4,782) (9,329)
Movement in unrealised gains/(losses)
in the period 385 (252) (415)
Realised losses in the period (3) (135) (73)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (11,967) (13,622) (8,304)
------------ ------------ ------------
Sale and repurchase assets at fair
value through profit or loss - 1,447 3,877
Sale and repurchase liabilities
at fair value through profit or
loss (11,967) (15,069) (12,181)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (11,967) (13,622) (8,304)
------------ ------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Unaudited Condensed Statement of Comprehensive Income
as it has been incurred. At 30 June 2021 GBPnil (31 December 2020:
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.
Period Period
from 1 from 1
January January
2021 to 2020 to
30 June 30 June
2021 (unaudited) 2020 (unaudited)
Year ended
31 December
2020
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 7 - -
Opening of options - - 29
Closure of options - - -
Movement in unrealised losses in the
period 22 - (22)
Realised losses in the period (29) - -
------------ ------------ ------------
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 Unaudited Condensed Statement of Financial
Position. Certain derivative financial instruments are subject
to enforceable master netting arrangements, such as ISDA master
netting agreements, or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised capital
instruments and short position(s) which could be offset under
the applicable derivative agreements (as described above):
Effect of remaining
rights of offset
that do not
Net amount meet the criteria
Amounts presented for offsetting
Gross offset in Unaudited in the Unaudited
carrying in accordance Condensed Condensed Statement
amount with Statement of Financial
before offsetting of Financial Position - Cash
offsetting criteria Position held as collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2021 (unaudited)
Financial
assets
Derivatives
(note 16) 1,018 - 1,018 - 1,018
Collateral
accounts
for
derivative
financial
instruments
(note 14) 7,153 - 7,153 (483) 6,670
------------ ------------ ------------ ------------ ------------
Total assets 8,171 - 8,171 (483) 7,688
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives
(note 16) (12,467) - (12,467) 11,324 (1,143)
Collateral
accounts
for
derivative
financial
instruments
(note 14) (506) - (506) - (506)
------------ ------------ ------------ ------------ ------------
Total
liabilities (12,973) - (12,973) 11,324 (1,649)
------------ ------------ ------------ ------------ ------------
31 December 2020 (audited)
Financial
assets
Derivatives
(note 16) 5,257 - 5,257 (1,792) 3,465
Collateral
accounts
for
derivative
financial
instruments
(note 14) 5,905 - 5,905 (147) 5,758
------------ ------------ ------------ ------------ ------------
Total assets 11,162 - 11,162 (1,939) 9,223
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives
(note 16) (12,331) - (12,331) 11,760 (571)
Collateral
accounts
for
derivative
financial
instruments
(note 14) (340) - (340) - (340)
------------ ------------ ------------ ------------ ------------
Total
liabilities (12,671) - (12,671) 11,760 (911)
------------ ------------ ------------ ------------ ------------
17. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At the period end, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level 2 Level Total
1 3
GBP'000 GBP'000 GBP'000 GBP'000
30 June 2021 (unaudited)
Listed capital instruments at fair
value through profit or loss 88,816 214 - 89,030
Other investments at fair value through
profit or loss (note 7) 3,987 - - 3,987
Credit default swap assets (note
16) - 330 - 330
Credit default swap liabilities (note
16) - (483) - (483)
Other derivative financial assets - 688 - 688
Other derivative financial liabilities - (11,984) - (11,984)
Short position covered by sale and - - - -
repurchase agreements
------------ ------------ ------------ ------------
92,803 (11,235) - 81,568
------------ ------------ ------------ ------------
31 December 2020 (audited)
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 (note
16) - 595 - 595
Credit default swap liabilities (note
16) - (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
------------ ------------ ------------ ------------
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 period are determined and
deemed to have occurred at each financial reporting date. There
were no investments classified as Level 3 during the period, and
no transfers between levels in the period. See notes 13, 14 and
16 for movements in instruments held at fair value through profit
or loss.
18. Other payables and accruals
30 June 31 December
2021 (unaudited) 2020
(audited)
GBP'000 GBP'000
Due on purchase of capital instruments 964 1,833
Performance fee (note 8a) 406 1
Investment management fee (note 8a) 228 185
Administration fee (note 8b) 33 33
Valuation agent fees (note 8e) 32 10
Audit fees 18 22
Other accruals 15 16
Share issue costs 14 14
Depositary fees (note 8e) 14 6
Broker fee (note 8c) 6 6
Registrar fee (note 8d) 3 3
Accrued interest payable on capital instrument
short position - 5
------------ ------------
1,733 2,134
------------ ------------
19. Share capital
30 June 2021 (unaudited) 31 December 2020 (audited)
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of no par
value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and fully
paid:
Ordinary Shares of no par
value 91,852,904 - 91,852,904 -
------------ ------------ ------------ ------------
Issued share capital
Number of
shares
------------
Shares in issue as at 30 June
2020, 31 December 2020, 30 June
2021 and 23 August 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.
20. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to owners of the Company of GBP94,637,000 (31 December
2020: GBP87,350,000), and on 91,852,904 (31 December 2020: 91,852,904)
Ordinary Shares in issue at the period end.
21. Changes in liabilities arising from financing activities
The Company did not raise any capital from the placing of new
shares in the period. At the period end GBP14,000 (31 December
2020: GBP14,000) of share issue costs in relation to previous
placings were outstanding, resulting in cash flows in relation
to share issue costs in the period of GBPnil (30 June 2020: GBPnil).
22. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
The market in which the Company participates is competitive and
rapidly changing.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or
geographical location. Concentrations of risk arise when a number
of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged
in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic, political or other conditions. Concentrations
of liquidity risk may arise from the repayment terms of financial
liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations
of foreign exchange risk may arise if the Company has a significant
net open position in a single foreign currency, or aggregate net
open position in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investments,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, unlisted
open ended funds and bond futures at fair value through profit
or loss (see notes 13, 16 and 17) are exposed to price risk and
it is not the intention to mitigate the price risk.
At 30 June 2021, 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
+/- GBP4,651,000 (31 December 2020: GBP4,318,000). The fair value
of financial instruments exposed to price risk at 30 June 2021
was GBP93,017,000 (31 December 2020: GBP86,351,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the period. At the period
end, the Company held the following foreign currency forward contracts:
30 June 2021 (unaudited)
Maturity date Amount to be Amount to be purchased
sold
29 July 2021 EUR52,000,000 GBP44,603,000
29 July 2021 US$7,000,000 GBP5,063,000
31 December 2020 (audited)
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
As at the period end a proportion of the net financial assets
of the Company were denominated in currencies other than Sterling,
as follows:
Investments
at fair
value Foreign
through Cash and currency
profit or cash forward
loss Receivables equivalents Exposure contracts Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2021 (unaudited)
Euro 40,573 1,858 5,539 47,970 (44,603) 3,367
US Dollar 4,275 11 (224) 4,062 (5,063) (1,001)
------------ ------------ ------------ ------------ ------------ ------------
44,848 1,869 5,315 52,032 (49,666) 2,366
------------ ------------ ------------ ------------ ------------ ------------
31 December 2020 (audited)
Euro 45,147 936 1,665 47,748 (38,473) 9,275
US Dollar 4,694 2 2,632 7,328 (7,687) (359)
------------ ------------ ------------ ------------ ------------ ------------
49,841 938 4,297 55,076 (46,160) 8,916
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 30 June 2021, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 30 June 2021 would have decreased/increased by GBP118,000
(31 December 2020: GBP446,000).
ii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP56,880,000 (31 December
2020: GBP59,355,000), cash and cash equivalents, net of overdrafts,
of GBP5,709,000 (31 December 2020: GBP2,647,000), collateral account
balances of GBP6,648,000 (31 December 2020: GBP5,565,000) and
short positions of GBPnil (31 December 2020: GBP1,881,000) were
the only interest bearing financial instruments subject to variable
interest rates at 30 June 2021. Therefore, if interest rates had
increased/decreased by 50 basis points, with all other variables
remaining constant, the change in the value of interest cash flows
of these assets in the period would have been GBP361,000 (31 December
2020: +/- GBP309,000).
Fixed Variable Non interest
interest interest bearing Total
30 June 2021 (unaudited) GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 21,631 56,880 14,506 93,017
Cash and cash equivalents - 5,933 - 5,933
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 7,153 - 7,153
Derivative financial assets at fair
value through profit or loss 1,018 - - 1,018
Other receivables - - 2,446 2,446
------------ ------------ ------------ ------------
Total financial assets 22,649 69,966 16,952 109,567
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (224) - (224)
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - (506) - (506)
Derivative financial liabilities
at fair value through profit or loss (12,450) - (17) (12,467)
Other payables and accruals - - (1,733) (1,733)
------------ ------------ ------------ ------------
Total financial liabilities (12,450) (730) (1,750) (14,930)
------------ ------------ ------------ ------------
Total interest sensitivity gap 10,199 69,236 15,202 94,637
------------ ------------ ------------ ------------
31 December 2020 (audited)
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
------------ ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and
non-interest bearing capital instruments of GBP36,137,000 (31
December 2020: GBP28,887,000) at 30 June 2021 would increase/decrease
by +/-GBP882,000 (0.95%) (31 December 2020: +/-GBP656,000 (0.74%))
if interest rates were to change by 50 basis points.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic
conditions, market expectations and its own views as to likely
movements in interest rates.
Although it has not done so to date, the Company may implement
hedging and derivative strategies designed to protect investment
performance against material movements in interest rates. Such
strategies may include (but are not limited to) interest rate
swaps and will only be entered into when they are available in
a timely manner and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy
of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has
entered into with the Company, resulting in a financial loss to
the Company.
At 30 June 2021, credit risk arose principally from investment
in capital instruments of GBP89,030,000 (31 December 2020: GBP83,466,000),
cash and cash equivalents of GBP5,933,000 (31 December 2020: GBP4,297,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP7,153,000 (31 December
2020: GBP5,905,000) and investments in sale and repurchase assets
of GBPnil (31 December 2020: GBP3,877,000). The Company seeks
to trade only with reputable counterparties that the Investment
Manager believes to be creditworthy.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 30 June 2021, the capital instrument rating profile
of the portfolio was as follows:
31 December
30 June 2021 2020
(unaudited) (audited)
Percentage Percentage
A - -
BBB 9.09 20.07
BB 23.52 32.28
B 11.22 12.11
Below B 10.38 7.56
No rating 45.79 27.98
------------ ------------
100.00 100.00
------------ ------------
The investments without a credit rating correspond to issuers
that are not rated by an external rating agency. Although no external
rating is available, the Investment Manager considers and internally
rates the credit risk of these investments, along with all other
investments. The internal risk score is based on the Investment
Manager's fundamental view (stress test, macro outlook, solvency,
liquidity risk, business mix, and other relevant factors) and
is determined by the Investment Manager's risk committee. The
risk grades are mapped to an external Baseline Credit Assessment,
and any discrepancy of more than two notches is monitored closely.
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or
P-1 (Moody's) to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse, JP Morgan and Goldman Sachs, all
rated A+. At 30 June 2021, the overall net exposure to these counterparties
was 5.84% of NAV (31 December 2020: 5.11%). The collateral held
at each counterparty is disclosed in note 14.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 30 June 2021 was
very low since the ratio of cash and cash equivalents (net of
overdrafts) to unmatched liabilities was 7:1 (31 December 2020:
17:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December
30 June 2021 2020
(unaudited) (audited)
Percentage Percentage
Less than 1 year 12.72 7.99
1 to 3 years 28.16 29.24
3 to 5 years 30.64 30.62
5 to 7 years 3.28 9.62
7 to 10 years 1.33 4.15
More than 10 years 23.87 18.38
------------ ------------
100.00 100.00
------------ ------------
As at 30 June 2021, the Company's liquidity profile was such that
63.7% of investments were realisable within one day (31 December
2020: 67.4%), 30.7% was realisable between two days and one week
(31 December 2020: 29.5%) and 3.9% was realisable between eight
days and one month (31 December 2020: 3.1%).
As at 30 June 2021, the Company's liabilities fell due as follows:
31 December
30 June 2021 2020
(unaudited) (audited)
Percentage Percentage
0 to 3 months 78.37 93.55
3 to 6 months 0.15 -
6 to 12 months - -
1 to 3 years 21.48 6.45
3 to 5 years - -
------------ ------------
100.00 100.00
------------ ------------
23. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 30 June 2021 the Company had eleven
(31 December 2020: fourteen) open sale and repurchase agreements,
none (31 December 2020: four) being reverse sale and repurchase
agreements, committing the Company to make a total repayment of
GBP11,967,000 post the period end (31 December 2020: GBP12,182,000).
As a result of the reverse sale and repurchase agreements the
Company was due to receive GBPnil after the period end (31 December
2020: GBP3,877,000).
The raising of capital through the placing programme forms part
of the capital management policy. See note 19 for details of the
Ordinary Shares issued since incorporation.
As disclosed in the Unaudited Condensed Statement of Financial
Position, at 30 June 2021, the total equity holders' funds were
GBP94,637,000 (31 December 2020: GBP87,350,000).
24. Capital commitments
The Company holds a number of derivative financial instruments
which, by their very nature, give rise to capital commitments
post 30 June 2021. These are as follows:
* At the period end, the Company had sold eleven credit
default swap agreements for a total of GBP910,000,
each receiving quarterly interest (31 December 2020:
twelve agreements for GBP677,000). The fair value of
these agreements at the period end date was
GBP(98,000) (31 December 2020: GBP571,000).
Collateral of GBP7,153,000 for these agreements was
held at 30 June 2021 (31 December 2020:
GBP5,905,000).
* At the period end the Company had committed to two
(31 December 2020: two) foreign currency forward
contracts dated 29 July 2021 (see note 22), giving
rise to a total loss of GBP671,000 (31 December 2020:
gain of GBP775,000).
* At the period end, the Company held eleven open sale
and repurchase agreements (31 December 2020: ten,
excluding the one open sale and repurchase agreement)
committing the Company to make a total repayment of
GBP12,279,000 (31 December 2020: GBP12,255,000).
25. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement,
as detailed in note 8a, should the Company's NAV reach a level
at which the TER reduced to less than 1.5% of the average NAV
in a future accounting period then the Quarterly Expenses Excess
and Annual Expenses Excess totalling GBP744,000 at 30 June 2021
(31 December 2020: GBP737,000) 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 a significant amount of the GBP744,000 (31 December 2020:
GBP737,000) Expenses Excess 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.
26. Events after the financial reporting date
On 19 July 2021, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 April 2021 to 30 June 2021,
out of the profits for the period ended 30 June 2021, which (in
accordance with IFRS) was not provided for at 30 June 2021 (see
note 6). This dividend will be paid on 27 August 2021.
-- ENDS --
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