Replacement Annual Financial Report -24-
April 30 2010 - 11:47AM
UK Regulatory
statement of financial position of Carador Plc is EUR3,218,870 (31 December 2008:
EUR5,102,659). The non-controlling interest in the consolidated statement of
comprehensive income of Gale Force 4 at 31 December 2009 is (EUR1,613,425) (31
December 2008: (EUR131,071)).
The consolidated statement of comprehensive income includes income and expense
relating to Gale Force 4 for the year to 31 December 2009. The statement of
financial position figures are as at 31 December 2009. The functional currency
of Gale Force 4 is US$; therefore the results of Gale Force 4 have been
translated in accordance with IAS 21 'The effects of changes in foreign exchange
rates'. This has resulted in an unrealised exchange loss on consolidation of
EUR1,273,311 (31 December 2008: (EUR996,677)), which is recorded within the
consolidated statement of changes in net assets attributable to participating
shareholders.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2009
13. INVESTMENT IN SUBSIDIARIES (continued)
Upon consolidation of Gale Force 4, a basis valuation difference arose between
the Company valuation of its investment in Gale Force 4 in the Company's
accounts and the valuation of the Gale Force 4 assets and liabilities in the
consolidated accounts. The Company's valuation, which is lower has been
determined using the valuation model described in Note 3. The Directors believe
it to be more prudent to carry the investment in Gale Force 4 at this value.
Subsequent to the year end, a portion of the Gale Force 4 investment was sold
and the sale price supports the valuation used by the Directors in the Company
accounts. The residual resulting from the basis difference was included in
financial liabilities in the consolidated statement of financial position.
Gale Force 4 has its offices at P.O. Box 1093GT, Boundary Hall, Cricket Square,
George Town, Grand Cayman, Cayman Islands.
14. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Introduction
Risk is inherent in the Company and group's activities but it is managed through
a process of ongoing identification, measurement and monitoring, subject to
risks limits and other controls. The process of risk management is critical to
the Company and group's continuing profitability. The Company and group are
exposed to market risk (which includes currency risk, interest rate risk and
other price risk), and credit risk arising from the financial instruments it
holds. Given the Company and group's permanent capital structure as a
closed-ended fund, it is not exposed to redemption risk. However the
consolidated financial instruments include investments in collateralised debt
obligations and derivative contracts traded over-the-counter which are not
traded in an organised public market and which may be illiquid. As a result,
the Company and group may not be able to promptly liquidate some of its
investments in these instruments at an amount close to its fair value in order
to meet its liquidity requirements or to respond to specific events such as
deterioration in the credit worthiness of any particular issuer. It may be
impossible to assess the exposure to risk in such circumstances.
Risk management structure
The Board of Directors is ultimately responsible for identifying and controlling
risks. The Investment Manager also carries out ongoing monitoring of the risk.
As a result, there are separate bodies for managing and monitoring risks at the
Company.
Risk measurement and reporting system
The Company's risks are measured using a method which reflects both the expected
loss likely to arise in normal circumstances and unexpected losses, which are an
estimate of the ultimate actual loss based on models. The models makes use of
the probabilities derived from historical experience, adjusted to reflect the
economic environment.
Monitoring and controlling risks is primarily performed based on limits
established by the Board. These limits reflect the business strategy and market
environment of the Company as well as the level of risk that the Company is
willing to accept. In addition, the Company monitors and measures the overall
risk bearing capacity in relation to the aggregate risk exposure across risks
type and activities.
Risk mitigation
The Company has investment guidelines that set out its overall business
strategies, its tolerance for risk and its general risk management philosophy
and has established processes to monitor and control economic hedging
transactions in a timely and accurate manner. The Company uses derivatives and
other instruments only in connection with its risk management activities, but
not for trading purposes.
Excessive risk concentration
Concentration arises when 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. Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular issuer, manager, asset class
or geographical location.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2009
14. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Excessive risk concentration (continued)
In order to avoid excessive concentration of risk, the Company's policies and
procedures include specific guidelines to focus on maintaining a diversified
portfolio. Identified concentration of credit risks are controlled and managed
accordingly.
Carador's investment guidelines specify, among others, that the Company must
invest in a minimum of 20 separate CDO equity, mezzanine and/or senior tranche
transactions with a maximum exposure per CDO investment, at the time of
investment, of 20% of the net asset value. The Company also limits its exposure
to CDOs managed by the same CDO portfolio manager to 15% of the net asset value,
at the time of investment. However, if the CDO portfolio manager is an affiliate
of the Investment Manager, this limit is increased to 60% of the net asset
value, at the time of investment. The concentration risk at 31 December 2009
and 31 December 2008 is disclosed within credit risk note 14.2.
14.1. Market risk
Market risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices and includes
interest rate risk, foreign currency risk and "other price risks", such as index
price risk. The Company uses derivative instruments to hedge the investment
portfolio against currency risk.
The Company's investments in collateralised debt obligations typically have no
significant assets other than the collateral. Accordingly, payments on the CDO
securities are payable solely from the cash flows from the collateral, net of
all management fees and other expenses. Payments to the Company as a holder of
equity notes and/or mezzanine notes are met only after payments due on the
senior notes (and, where appropriate, the mezzanine notes) have been made in
full.
The following table shows the securities held by the Company which are
susceptible to market risk arising from uncertainties about interest rates,
foreign currency fluctuation and future prices of the instruments.
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| | Company | Consolidated | Company | Consolidated |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| | 31 | 31 | 31 | 31 |
| | December | December | December | December |
| | 2009 | 2009 | 2008 | 2008 |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| | EUR | EUR | EUR | EUR |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| Financial | 32,410,659 | 305,629,706 | 58,036,009 | 252,811,063 |
| assets at | | | | |
| fair value | | | | |
+--------------+-------------------------------+-------------------------------+-------------------------------+------------------------------+
| Investments | 7,859,922 | | 12,311,214 | |
| in | | - | | - |
| subsidiaries | | | | |
| at fair | | | | |
| value | | | | |
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